Wouldn't it be great if there were a proven formula for becoming the next multibillion-dollar company like Amazon or  Facebook?

Well, it appears that a team of researchers from MIT may have found it. The group has identified attributes that super-successful startups typically share, including having shorter names that project larger possibilities and setting up in business-friendly states.

MIT's Catherine Fazio, Jorge Guzman, Fiona Murray, and Scott Stern examined things that such companies do early on, as a kind of predictor of later success. Their research, which was published in February, does come with a big warning: Amidst declining rates of entrepreneurship, and with an economy that is less inclined to nurture startups, the next generation of Amazons may simply stagnate. And that's a problem because those companies, unlike main street companies, have the potential to become the job creators with the biggest impact on the economy.

"Even as the number of new ideas and potential for innovation is increasing, there seems to be a reduction in startups' ability to scale in a meaningful and systematic way," the researchers write. (The researchers were not available to comment by deadline.)

Here are four things the researchers found that correlate with more successful startups.

1. They choose shorter names that are not location-based, or that don't refer to the owners, such as Joe's Dry Cleaners.

2. They structure as a corporation, rather than an LLC or S-Corp.

3. They set up in business-friendly states such as Delaware that have fewer regulations and more favorable tax treatment of businesses.

4. They file for patents and trademarks early on.

The researchers found that the more of these attributes a company had, the greater its probability for success. For example, businesses with shorter names had a 248 percent greater probability of growth. Those structured as corporations rather than as LLCs or LLPs had a 405 percent greater probability of growth. Those that had filed for a patent and incorporated in Delaware had a nearly 20,000 percent greater likelihood of growth. (By contrast, firms named after the founder had a 70 percent lower probability of growth, the research indicates.)

Still, some of the findings may be cause for skepticism. Bruce Bachenheimer, a clinical professor of management at Pace University, disagrees with the point about shorter, non-local names, calling it a red herring. One example of a company that grew from startup phase to gargantuan proportions is Sun Microsystems, whose name, he points out, originally stood for Stanford University Network. And, he says, filing for a patent early on could work against a company because it can be expensive to file for one, or costly to defend against infringement claims. 

Bachenheimer agrees with the researchers that the economic environment has changed dramatically for entrepreneurs, making it more difficult for young companies to form and grow. One key reason is the decimation of savings and home ownership rates, which both provided much-needed financing to startups in prior decades.

"[The declining rate of entrepreneurship] has to do with the financial crisis, wage stagnation, and housing price declines since 2008, and it has to do with the erosion of the middle class," Bachenheimer says.

Government and legislative policies that don't take a one-size-fits-all approach to fostering small business growth are likely to help companies with the biggest potential to grow. 

"Ultimately, we may be able to do better for both fledgling small- to medium-sized enterprises and innovation-driven enterprises that aspire to exponential growth by accounting directly for the differences between them," the researchers say.

How to Build a $1.2 Billion 'Unicorn' in 6 Years
Published on: Mar 7, 2016