Pittsburgh Needs to Do More to Encourage Entrepreneurship

A century ago, Pittsburgh was one of the most entrepreneurial regions in the nation, perhaps even in the world. Companies like Alcoa, H.J. Heinz, Mine Safety Appliances, PPG, U.S. Steel, and Westinghouse didn’t move here because of economic development marketing efforts, they were started here from scratch by entrepreneurs. Not only did they grow to become major employers in the Pittsburgh Region themselves, they spawned thousands of local jobs in supply firms.

Unfortunately, the Pittsburgh Region has now become one of the least entrepreneurial places in the country. Data released by the U.S. Census Bureau last summer show that in 2011 (the most recent data available), southwestern Pennsylvania had the second smallest rate of new business formation among the top 40 regions. (Only firms with paid employees are counted, not sole proprietorships.)

National research shows that business startups, not established firms, accounted for all of the net new jobs created in the U.S. between 1980 and 2005. The low rate of new business creation in southwestern Pennsylvania may be one important reason why our overall rate of job growth has been below other regions.

Despite many regional efforts to encourage entrepreneurship, the number of new businesses here has actually decreased significantly over the past two decades. In the late 1980s, nearly 4,000 new businesses per year were being created here, but that dropped to only 3,400 in the late 1990s, the second biggest reduction among the top 40 regions. From 2003-2006, new business starts here decreased to only 3,200, whereas business formation increased in most regions. And while business creation slowed dramatically everywhere during the recession, business starts declined more in Pittsburgh than in most regions, with only 2,300 businesses started here in 2011.

Starting a new firm is very risky. Many don’t survive, particularly during their first year. Although a higher proportion of firms started in Pittsburgh remain in business after one year than in most regions in the country, it’s hard to know whether this is because entrepreneurs here are more capable business leaders, because we do a better job of helping new businesses succeed, or because the businesses that are started here are lower risk ventures. Regardless, even the higher survival rate here isn’t enough to offset our much lower startup rate, and so the Pittsburgh Region has the third lowest rate of one-year old firms among the top 40 regions.

Many entrepreneurs start businesses that will never be large employers. That doesn’t mean they’re not important to the local economy; nationally, more than 1 in 6 workers are employed by a business with fewer than 20 employees. However, special attention is needed for the subset of startup firms with the potential to generate hundreds or thousands of jobs for the region’s economy.

These high-growth firms are likely to be in technology-based industries. The importance of new technology firms has been recognized by Pittsburgh Region leaders for over two decades, and many programs have been established to encourage life sciences, robotics, and other technology firms to start and expand here. However, a recent study by the Kauffman Foundation indicates that while these efforts may have had some impact, they have not made the Pittsburgh Region a leader in high-tech startups. The study found that in 2010, the Pittsburgh Region ranked only 28th among the top 40 regions in the rate of new high-tech business formation. While that’s an improvement over our ranking of 35th out of 40 in 1990, it still means Pittsburgh is in the bottom tier among major regions.

With its high quality of life and low cost of living, Pittsburgh should be a magnet for entrepreneurs, and with its world-class universities and R&D facilities, it should particularly be a magnet for technology entrepreneurs. However, the region does not have a reputation for being a good place to start a business; in fact, Pittsburgh almost never shows up on lists of “best places to start a business.” For example, Pittsburgh ranked 60th in Fortune Small Business magazine’s 2008 “Best Places to Live and Launch a Business,” and a 2013 national survey of 7,000 business owners conducted by Thumbtack.com gave the Pittsburgh Region a grade of D+ on “small business friendliness.” 

What should we do to encourage more entrepreneurship here?

Cut Red Tape: New businesses face many challenges in starting and expanding, but one of their biggest frustrations is often figuring out how to navigate the regulatory mazes created by municipal, county, state, and federal governments. Local and state government officials could go a long way toward improving the region’s reputation by cutting red tape in the areas that create the biggest problems for new businesses and publicizing the positive feedback from entrepreneurs.

Improve Access to Capital: One of the most critical issues almost every new business faces is finding adequate financial capital. Alcoa, for example, started in Pittsburgh because 125 years ago, inventor Charles Martin Hall couldn’t find capital in his home state of Ohio, but he received the $20,000 in seed capital he needed from Alfred E. Hunt and a small group of investors in Pittsburgh, and then received continued financing from Andrew Mellon.

The credit crunch during the recession has made it difficult for small businesses to get loans, particularly new businesses. The region’s biggest banks could do more to expand their small business lending, and federal programs and regulations should be revamped to facilitate small business lending by both banks and credit unions.

Most technology startup firms need equity capital, not loans. Modern-day technology firms have the same challenges that Hall had over a century ago – finding investors to provide the seed capital they need to get started. Pittsburgh is fortunate to have Innovation Works (www.innovationworks.org), a non-profit organization that has become the most active seed-stage investor in the region. Innovation Works invested $4.8 million in 91 local companies in 2012, and its early stage investments have positioned hundreds of startup firms to attract over $1.4 billion in additional investment from venture capitalists and other sources. We’re also fortunate to have BlueTree Allied Angels (www.bluetreealliedangels.com), a network of high net worth individuals that invest in early-stage companies. However, in order for more technology entrepreneurs with good business plans to get the investment and assistance they need, state and local leaders need to expand funding for Innovation Works (over 60% of Innovation Works’ funding comes from the Commonwealth of Pennsylvania), and more high net worth individuals need to join BlueTree’s angel investor network.

Buy Entrepreneurs’ Products and Services: Too many young firms have failed or have been forced to leave the region because they couldn’t find customers here. Both large businesses and individuals can help by buying the products and services local startup firms produce. You can find lists of many startup firms on the Innovation Works and BlueTree websites, and you can read about some of Pittsburgh’s entrepreneurs in the Post-Gazette’s series, “The Entrepreneurs” at www.post-gazette.com/business/2013/12/23/The-Entrepreneurs/stories/201312230161.

Pittsburghers can be justifiably proud of the region’s high rankings on quality of life, but we should be embarrassed by our low rankings as a place to start a business. As we start a new year, let’s resolve to make Pittsburgh one of the best places in the world for entrepreneurs.

(A shorter version of this post appeared as the Regional Insights column in the Sunday, January 5, 2014 edition of the Pittsburgh Post-Gazette.)