The growth potential of startups over the business cycle

This paper shows that job creation of cohorts of U.S. firms is strongly influenced by aggregate conditions at the time of their entry. Using data from the Business Dynamics Statistics (BDS) we follow cohorts of young firms and document that their employment levels are very persistent and largely driven by the intensive margin (average firm size) rather than the extensive margin (number of firms). To differentiate changes in the composition of startup cohorts from post-entry choices and to evaluate aggregate effects, we estimate a general equilibrium firm dynamics model using BDS data. We find that even for older firms, the aggregate state at birth drives the vast majority of variations in employment across cohorts of the same age. The key force behind this result is fluctuation in choices made by startups that determine their potential to grow large. At the aggregate level, startup decisions account for the large low-frequency fluctuations observed in the employment rate.