Over the past two years, the economy has taken some interesting twists and turns. The pandemic was primarily the cause of the unpredictable conditions. Layoffs, businesses closing down, and shortages were some negative repercussions. One bright aspect of these times was the number of new businesses that started.
The entrepreneurial spirit seemed to grow during this time, as people lost their jobs or decided to make a change and go the self-employed route. Let’s look at how many businesses opened during the pandemic, what the future may look like, and more to understand this surge in entrepreneurship.
Was the pandemic the right time to start a business?
U.S. economist, John C. Haltiwanger wrote a working paper entitled “Entrepreneurship during the COVID-19 pandemic: evidence from the business formation statistics” that outlines the surge in applications in new businesses. He cites 2020 being a record year for new business formation. From 2019 to 2020, the number of applications increased by 20%. This puts the growth rate at double that of previous years.
There was an initial dip in applications during the first 6 months of 2020. After that, in the last 6 months of 2020 and through May 2021, the application volume significantly increased. Haltiwanger’s analysis included highlights on how the pandemic accelerated ongoing economic trends.
One example is the increase of applications for likely nonemployers. Over the last 15 years, the number of nonemployer businesses has grown, with the introduction of the gig economy. That’s not to say that there wasn’t an increase in employer business applications. This type of business also grew during this time, though it remains to be seen whether these new businesses will drive job creation.
A total of 4.4 million new business applications were filed in 2020 according to the U.S. Census Bureau. The record was surpassed the following year with 5.4 million new business applications in 2021. About ⅓ of the businesses that applied in 2021 is likely to hire employees. The 2021 new business applications were a 53% jump from pre-pandemic levels in 2019.
What’s the Future Growth Rate Look Like?
This boom in small businesses comes after one of the least entrepreneurial decades – the 2010s. The future of small businesses looks bright for several reasons. Although many businesses closed down during the pandemic, it is been small businesses that kept the economy above water during this time. From 2000 to 2019, small businesses have created 10.5 million net new jobs. There is no reason to believe this trend won’t continue in the future.
The pandemic also proved the resilience of small businesses and how they can move fast and adapt to changing economic situations. The small business owners that kept their businesses going during these tough economic times are the ones that have proven their abilities. A key trait in entrepreneurs is the ability to pivot and strategize ways to handle challenging economic situations.
Programs like the Paycheck Protection Program which offered tax credits to small businesses with paid employees a successful campaign. The government realizes how important small business growth is to the overall economy. Cities across the U.S. are encouraging entrepreneurship and community growth by offering incentives to stimulate growth. This trend will continue for years to come, helping to keep the growth rate strong.
Another key reason that the future of small business growth looks bright is the adoption of technology. Small businesses had to quickly transition to an increased online presence during the pandemic. Digital customer support, online ordering, and remote services are in high demand for customers.
As a result, small businesses have increased their investments in these types of online transactions. Small businesses are becoming more reliant on remote and mobile services that help get work done at a much lower barrier to entry than before. Small business owners are capitalizing on these technology investments as demonstrated by stats such as the ones below from RingCentral:
- 27% revenue growth increase
- 52% return on investment increase
- 47% customer satisfaction increase
- 20% reduction in hardware costs
- 33% employee productivity increase
Small businesses are evolving and changing to better equip themselves for the future.
Potential Changes in the Growth Rate
An interesting aspect of the pandemic was how it seemed to defy typical behavior. Business formation typically follows a cyclical pattern. When net worths are rising, confidence is high, and lenders want to lend money, these are the times that people are more likely to start companies. When the inverse is happening, people tend to shy away.
We saw that drop-off when the pandemic initially started in the spring of 2020. Although a large part of the country was shut down during the second half of the year, entrepreneurs rose significantly. The Small Business loan programs and stimulus checks didn’t’ appear to have a huge impact on this rise. Despite double-digit unemployment at times, households keep their spending in check, the stock market rallied, and home values went up. Consumers kept on spending, which lead many entrepreneurs to not have any reason to not launch their businesses.
The shift to remote, work-from-home opportunities leads entrepreneurs to cut costs and set up shots faster. The adoption of technology to become more efficient and cost-effective could continue to change the small business growth rate well into the future.
Factors Contributing to the Growth Rate
The environment for entrepreneurship is ripe, showing no signs of slowing down since the pandemic. There were many inputs that lead to this jump in small businesses. One of the major factors was how the pandemic gave people access to time and resources. For example, stimulus checks gave people access to cash to start new businesses. Staying home also allowed people to save money that was typically spent on gas.
The work-from-home environment gave people back hours from their work week. It also created new business opportunities in food delivery, e-commerce, and human resource consulting.
People started to value having a work-life balance in different ways. They wished to have work arrangements that better suited how they wanted to live their lives, which for many meant working for themselves. That was part of what led to “The Great Resignation”, where entrepreneurs finally took the chance to start their own companies.
One important aspect to consider is that most of these small business owners will fail, despite the boom in entrepreneurship. This time not only represents a good time to start a business but a good time to fail. The labor market still has plenty of opportunities for those whose businesses don’t survive to find a job.
Types of Businesses that Experienced the Most Growth
One type of business that’s grown significantly during these turbulent times is online microbusinesses. According to GoDaddy Venture Forward’s report, there were 2.8 million more of these types of businesses in 2020 than in the prior year. Several factors played into this boom in online micro businesses.
During the first few months of the pandemic, the unemployment rate jumped as employees lost their jobs. These people were forced to look for other income streams. Many of these affected people opted to take the entrepreneurship route because the barriers to entry were lower. The availability of broadband, higher digital fluency, and a simplified e-commerce market that makes creating a website, marketing, and collecting sales easier were made easier.
The amount of investment needed to enter into these microbusinesses was also substantially less. 63% of these microbusiness owners started their business with less than $5,000 after the pandemic to get started. Traditional banks do not make loans of this amount and pandemic relief checks likely helped many entrepreneurs get started.
Here are some of the other top types of businesses that started during the pandemic and beyond:
Retail E-Commerce
Applications for retail business according to the Census Bureau’s Business Formation Statistics show that this type of business was among the majority of new businesses. E-commerce retail businesses make up a large percentage of these businesses. Growth in e-commerce has been exploding in the last 10 years. It’s a viable choice for entrepreneurs and will likely continue this trend for years to come.
Administrative and Support
Businesses that offer general support to other businesses became an important job over the pandemic. This trend was seen across multiple industries. These support roles included filling in temporary positions, customer support, and entering documents. Janitorial services saw one of the biggest jumps. Businesses had to abide by strict federal mandates to keep up cleaning protocols to keep others safe.
Professional Services
Consulting, research, accounting, technical services, and legal services are among the professional services that grew since the pandemic. Part of the reason for this was that companies had to restructure themselves during the pandemic. There was an increase in cloud-based applications and services such as accounting. Entrepreneurs who saw this opportunity, capitalized on this trend as many companies became virtual or hybrid.
Transport and Warehousing
Logistics and supply chains remain an issue today since the pandemic started. Consequently, many entrepreneurs started up successful transportation and warehouse businesses. Supply chain startups received a 58% increase in funding in 2021 over the prior year. This shows there are tons of interest in this sector that will likely continue for the years to come.
Construction
The pandemic had an immediate negative impact on the construction industry during its beginning. However, the future of this business sector looks good. Innovative construction technologies that provide solutions to communication and supply chain issues are encouraging this growth.
Demographic Insights into the Pandemic Business Boom
Unpredictable economic times tend to affect women and minorities the most. The uncertainty caused by the pandemic was no exception. Black Americas were among the hardest-hit groups during the pandemic. But there is some good news as well.
About 26% of the new micro businesses opened during these times were Black owners. That’s up from 15% from the previous year.
Women-owned businesses also experienced a surge of new micro-business applications. That’s up from 48%.
While these are encouraging signs, it is important to recognize that minority-owned small businesses were among the hardest hit by the pandemic. Asian, Black, and Hispanic Americans reported more negative impacts on their small businesses during the pandemic according to research by the Federal Reserve Bank. These small business owners also cited having fewer options to improve their financial conditions as compared to their white counterparts.
What the Future Holds for Small Businesses
About 20% of small businesses fail within the first year of operations. By the 5th year, only 30% of small businesses will remain. Starting and running a small business will always be challenged by stats such as this.
What remains to be true is this: The lifeblood of America is small businesses. Almost half of the private workforce is employed by small businesses. Technology has made the barriers to entry much lower than in times before. It is not necessary to have a large infusion of cash to start a viable business anymore. But most importantly, the entrepreneurial spirit of building your business and being your own boss remains the ultimate goal for many.
