By Rob Lalka, Albert R. Lepage Professor in Business and the Executive Director of the Albert Lepage Center for Entrepreneurship and Innovation at Tulane University.
We are excited to share the publication of our fourth annual Greater New Orleans Startup Report, which features information gathered in the first quarter of 2022. In this year’s report, two main themes emerge: choices and change.
In the face of uncertain market conditions, business owners are making hard choices about hiring, office locations and fundraising. These choices are reflected in the data and indicate that significant changes have taken place, and are currently taking place, which will have long-lasting impacts on our city and region.
Although the data show reasons for both optimism and concern, we can also look to the important investments being made in the future of our ecosystem that point to us building for the long term. In 2021, we saw many exits of firms such as Lucid, TurboSquid, Levelset and Kickboard, which resulted in “about $1 billion returned to the ecosystem through payouts to locally based founders and investors.” The funds returned to the ecosystem will almost certainly result in more companies created, additional investment dollars and even more job opportunities.
One of the most important new investments comes with the creation of Tulane’s Innovation Institute and the hiring of inaugural Chief Innovation and Entrepreneurship Officer, Kimberly Gramm. Through a multimillion-dollar commitment over the next decade, the Innovation Institute will help entrepreneurs both inside and outside of Tulane launch businesses, attract more than $100 million in capital to region and cultivate talent that will strengthen our region’s economy.
We are already seeing results from this initiative, as just this week the U.S. Treasury announced a commitment of $113 million to Louisiana for new loans and venture capital investments into startups through the State Small Business Credit Initiative (SSBCI), and the Innovation Institute debuted an investment fund for women- and minority-led startups in our region.
Previous years of this report have identified important disparities in terms of access to funding for Black, Indigenous and People of Color (BIPOC) and women. This year, the Lepage Center once again looked at funding access for BIPOC and women founders. In 2021, the GNO Startup Report noted increases in angel investment, convertible debt and venture capital for BIPOC-founded firms. The 2022 report shows a decrease in access to equity investment across the board for BIPOC-founded firms, which reflects national data that show a funding decline for BIPOC entrepreneurs. Women-led companies reported increased use of both venture capital and angel investment. The gap in angel investment decreased significantly in 2022 to 13% compared to 21% in 2021.
In a community that is full of talented female and BIPOC entrepreneurs this infusion of capital to the region will help them overcome one of their most pressing challenges – access to funding.
Businesses in the Greater New Orleans region, however, have demonstrated significant gains for both women and BIPOC leaders in attaining company leadership roles. The data indicate increasingly diverse leadership throughout our community’s startups. This year, 81% of participating companies report women in leadership positions, up from 71% the previous year. Representation of BIPOC leaders increased as well, from 31% to 33%, after experiencing a slight decline in 2021.
These increases are promising, and they bode well for the health of our entrepreneurial ecosystem – not only for principles of fairness and equity but also from a business standpoint. Increasing diversity has a well-documented correlation with better business outcomes; a 2020 McKinsey & Co. report on the topic concluded, “the most diverse companies are now more likely than ever to outperform less diverse peers on profitability.” That same report noted that, “companies in the top quartile for gender diversity on executive teams were 25% more likely to have above average profitability.”
Overall, our ecosystem continues to build on the investment gains we saw in 2021. In 2022, 59% of startups reported having raised some form of equity capital; 62% of those have raised more than $1 million. This is up from 36% of startups with investor backing in 2020, at which point only 42% had raised more than $1 million. More than half of 2022 respondents have raised some portion of that capital from local investors. Previous reports revealed anecdotal concerns over the lack of investment capital in the region, and in the 2021 report we saw an increase in companies reporting they raised most of their capital from outside investors. While the ability to attract investors outside of our area can be a validator of the progress our startups are making, this year’s report showcases that companies can attract outside investment and receive the capital needed to support their growth from local investors. This is an important step in creating a more robust and far more self-sustaining ecosystem.
When it comes to revenues, comparing data from all participants in the 2022 survey with the previous year’s cohort, average gross revenue across industries increased significantly, from $1.56 million in 2020 to $2.31 million in 2021. That said, some industries fared better than others. Retail and professional services both experienced significant increases in average gross revenues, while software and education showed significant declines.
Pandemic era uncertainty around hiring appears to be waning. Hiring intent is the highest it has ever been, with 68% of companies planning to hire in the next 12 months. While Louisiana has seen some of the highest employment increases in the nation, many entrepreneurs are bracing for challenges associated with hiring in this tight labor market. The story has been the same at the national level, where there are more job openings than there are applicants. In fact, the World Economic Forum reports that there are “nearly two on-site openings for every applicant looking for onsite work.” Conversely, it states that there are “two active applicants for every one remote work opportunity in the US.”
The data from this year show that workplace flexibility is a trend that won’t be going away anytime soon. Over 50% of survey respondents reported that they were offering remote work as a benefit, while paid time off (PTO) held steady and health insurance declined compared to 2021.
For the first time in this report’s four-year history, the most common workspace is not the home office. Last year, 48% of survey respondents reported working from home. That figure dropped to 32% in 2022, while leased commercial space increased from 32% to 38% during the same period to overtake the home office for the top spot on the list. Currently, 31% of respondents are planning on moving to a larger office.
After two years of steady decline, the change in home office use also seems to have been a boon to co-working, which increased to 13% of survey respondents (a 5% change from survey respondents in 2021 and 2022). After surviving a 15.6% decline globally in 2020, co-working spaces are positioned to benefit from companies needing to downsize their office footprint even while employees are still seeking in-person interactions. This reflects national trends as well; WeWork now reports that their occupancy rates have returned to pre-pandemic levels.
Since this data was collected, the economic conditions for startups and small businesses have become more uncertain. According to Crunchbase, startups have experienced more than a 50% reduction in funding from venture capital during the 3rd quarter of 2022 compared to the prior year.
There is no question that there are challenges ahead, but there are unique opportunities as well.
As the Chairman and CEO Revolution, Steve Case, said a number of years ago. “I think New Orleans is poised to re-emerge as one of the great startup cities in the country, maybe even the world.”
I often talk about his “Rise of the Rest” thesis, and this year he has a new book out with that title, Rise of the Rest: How Entrepreneurs in Surprising Places are Building the New American Dream, which makes the case that the future of startup investing will be in cities between the coasts.
Someone else I admire a great deal – the author and venture capitalist Alex Lazarow – describes ecosystems like ours as better able to manage volatile economic times like the ones we’re facing now. He notes that the “growth at all costs” method can work in the optimal conditions, but ecosystems can become more resilient if they focus on raising “camels” instead of unicorns. In nature, camels can survive in extreme conditions. Similarly, Lazarow’s startup camels “offer businesses in all industries and sectors valuable lessons on how to survive through crisis, and to sustain and grow in adverse conditions.”
Based on the data in the four years of the GNO Startup Report and these exciting new developments, I am hopeful that the next four years will prove out Steve Case’s belief in the New American Dream, right here in New Orleans, and Alex Lazarow’s thesis on startup resiliency for ecosystems like ours. We just need to remember who we are, study what is working, and expand, enhance and encourage each other. Instead of trying to be the next Silicon Valley, we need to be the best New Orleans. I believe we will.
The full 2022 Greater New Orleans Startup Report is available at: gnostartupreport.com