Published originally in the report released for the 2021 Colorado Business Economic Outlook by the Business Research Division, Leeds School of Business, University of Colorado Boulder
Innovators and entrepreneurs fuel sustainable economic vitality, and Colorado’s networks of innovation and entrepreneurship are recognized as among the most productive in the United States. Colorado is routinely ranked within the top ten states – often in the top five – for innovation and entrepreneurship. These attributes are especially important now as Colorado’s economy and communities face historic challenges from the surging COVID-19 pandemic. See list of select rankings at the end of this post.
Workforce and Quality of Life
Economists consider a wide variety of factors in determining state rankings for innovation and entrepreneurship. Workforce factors such as educational attainment, labor productivity, and tech employment are among the most commonly studied – much to Colorado’s benefit. Colorado has the nation's second-most highly educated workforce, with nearly forty-three percent of adults holding a bachelor’s degree or higher. Analysis by the U.S. Bureau of Labor Statistics shows the state tied for third in the latest annual growth in labor productivity. And Colorado has the fourth highest concentration of tech workers according to Cyberstates 2020 and was ranked third for projected growth in tech occupations between 2018 and 2028.
The quality of life in Colorado explains why most residents live and work here. The U.S. News & World Report’s annual ranking of the best places to live in the country can be debated endlessly, but it isn’t accidental that four of the top five cities on their 2020 list are in Colorado. It’s also worth noting that the state is the third most popular destination in the U.S. for mobile millennials according to SmartAsset.
Innovation and R&D
New ideas and innovations can spring from almost any inspiration or interaction. A well-understood source of innovation and another factor behind Colorado’s high rankings is the research and development conducted in the state’s universities and colleges. In the University of Colorado system alone, the faculty attracted more than $1.4 billion in research funding in fiscal year 2020. Colorado State University, Colorado School of Mines, University of Denver, and other institutions also manage multi-million-dollar R&D portfolios. This research produces innovations – often through multidisciplinary “productive collisions” in the terminology of CU Boulder Nobel Laureate Tom Cech – that entrepreneurs capitalize on through new startups.
An additional public-sector factor behind the state’s innovation and entrepreneurship rankings is the prominence of federally funded research labs in Colorado. With funding from multiple federal agencies such as NASA and the National Science Foundation, thirty-three labs in the state generated a $2.6 billion economic impact according to the most recent data available. Nearly one-third of the labs have active commercialization programs, which license R&D to spinoff companies and support public-private partnerships, among other strategies.
One more notable factor essential to Colorado innovation and entrepreneurship is private sector research and development. According to data from the National Science Foundation, private companies are the leading source of R&D funding and account for 73% of total R&D conducted in the nation. In Colorado, private sector R&D totaled $4.7 billion in the most recent data available, ranking the state twelfth in the U.S. for per capita funding.
Entrepreneurship and New Business Formation
The ideas, knowledge and innovations resulting from Colorado-based R&D are vital, but much of their impact on the economy derives from the interaction between the state’s innovation and entrepreneurial ecosystems. In Brad Feld’s 2020 book, The Startup Community Way, he and co-author Ian Hathaway emphasize that entrepreneurs are “essential in converting knowledge into economic value.” Entrepreneurs are the “change-agents” who realize the economic potential of R&D by launching startups, raising investment capital, and building a network of employees, customers, and suppliers.
High performing entrepreneurial ecosystems are fundamental to the formation of new businesses which are in turn essential to job creation and sustainable economic vitality. Data on net job creation by age of business from the U.S. Census Bureau shows that new businesses are responsible for almost all net new jobs in the economy every year. More established companies employ the greatest proportion of overall workers by far, but on average they do not add as many new jobs to the economy compared with new businesses.
Colorado has a high concentration of new businesses creating more jobs relative to other states in the country. The state had the fourth highest proportion of new and young businesses—those five years old and under—among all states over the past decade. The most recent data from the Ewing Marion Kauffman Foundation Indicators of Entrepreneurship show that Colorado is the highest-ranked state for net new jobs created per capita by businesses in their first year of existence.
New business formation in Colorado contributed significantly to the state’s economic recovery from the Great Recession. Based on data from the Colorado Department of Labor and Employment, the state saw a net loss of almost 3,000 Colorado businesses a year on average – more than 1.5% of all businesses – during the worst recession years from 2009 to 2011. Business formation then started growing again, and in each year from 2015 to 2019 an average of 6,300 net new businesses – or over 3% of all businesses – were created. It’s too early to know how the current COVID-19 recession will impact businesses statewide. Like Colorado’s recovery from the Great Recession, however, new business formation is likely to be a vital factor.
Innovation, Entrepreneurship, and COVID-19
The productivity of Colorado’s innovation and entrepreneurial ecosystems may be challenged now more than ever. COVID-19 is having a devastating impact on small businesses. The pandemic endangers startups and undermines the markets they serve, and even threatens the generation of new ideas and innovations derived from R&D. At this stage of the pandemic, there are more questions than answers to the challenges facing our economy.
Historical state rankings could seem irrelevant in the face of the radical economic impacts of the COVID-19 pandemic. But are past rankings meaningless? Or does the historic productivity of Colorado’s innovation and entrepreneurial ecosystems suggest that the state may be better positioned than most to respond to the challenges – and opportunities – arising from the pandemic?
Will the creativity, productivity, and collaborative spirit of Coloradans and their networks advance us toward a more resilient and more equitable future for the state and even the nation? Will the R&D conducted at Colorado universities, labs, and businesses continue to enable the commercialization of innovations by entrepreneurs? And will those entrepreneurs and the ecosystems they’re part of create new products, services, ways of doing business, and ways of living that address or even transcend the impacts of COVID-19?
There are reasons for cautious optimism about answers to these and other questions. As part of Colorado’s dynamic innovation and entrepreneurial networks, there are numerous programs and initiatives supporting entrepreneurs, their businesses, and their employees. At a statewide level, two notable examples among many are Energize Colorado and the growing multimillion dollar Gap Fund it launched this year, and the Colorado Small Business Development Center Network of the Colorado Office of Economic Development and International Trade. Both programs help entrepreneurs and small businesses respond to the impacts of the COVID-19 pandemic and work toward recovery from them.
There are even more programs and initiatives to support small businesses across Colorado’s individual communities. Even as they face challenges of their own, many city and county governments have created COVID-related financial assistance funds and revamped regulations to accommodate new ways of doing business. Local nonprofit agencies face uncertain futures, too, but have risen to the challenge of supporting individuals and families impacted by COVID-19.
Startup and small business accelerators and mentorship programs are pivoting to better serve early-stage companies facing the heightened challenge of starting a business during a pandemic. And local economic development organizations, chambers of commerce, and industry associations are offering enhanced financial assistance, workshops, networking resources, and other support to serve their business constituencies.
Looking ahead to the prospects for 2021, Coloradans can aspire to maximize the state’s formidable strengths to work toward recovery from COVID-19 and to ensure that the recovery is equitable for everyone in Colorado and even beyond.
Select Colorado Innovation and Entrepreneurship Rankings