The coronavirus pandemic appears to have unleashed a tidal wave of entrepreneurial activity, breaking the United States — at least temporarily — out of a decadeslong startup slump.
Americans filed paperwork to start 4.3 million businesses last year, according to data from the Census Bureau, a 24% increase from the year before and by far the most in the decade and a half that the government has kept track. Applications are on a pace to be even higher this year.
The surge is a striking and unexpected turnaround after a 40-year decline in U.S. entrepreneurship. In 1980, 12% of employers were new businesses. By 2018, the most recent year for which data is available, that share had fallen to 8%.
The prolonged decline worried economists, because startups are a key source of job growth, innovation and economic resiliency. A reversal of the trend could contribute to a more dynamic, productive economy that could more easily rebound from future recessions.
“The pandemic forced a big realignment that we never would have seen otherwise,” said John Lettieri, president and CEO of the Economic Innovation Group, a Washington research organization. “What I hope is that this was the definitive moment where the sclerosis broke.”
It is too soon to declare that the slump is over. The Census Bureau tracks business applications by the week, but not all applications turn into real-world businesses or result in hiring. Data on actual business formation will not be available for several years. And even if the rebound proves real, it could fade quickly as the economy reopens and people who started businesses in the pandemic return to more traditional forms of employment.
So far, however, the entrepreneurial boom has proved broader and more durable than early skeptics expected.
Many of the biggest gains have been in industries heavily affected by the pandemic, such as retailing, food service and logistics, but there have also been significant increases in manufacturing, finance, construction and other sectors. And so far, at least, the economy’s reopening does not seem to be pulling people away from entrepreneurship — the share of workers reporting they were self-employed hit an eight-year high in July.
“There is evidence that this is something that is not just transitory,” said John Haltiwanger, a University of Maryland economist who was among the first to document the decline in entrepreneurship.
Until last year, Omayya Atout and Ellen Hodges were living a life typical of many aspiring musicians in New York City, with day jobs and dreams. Hodges, 27, was working as a barista in a Manhattan coffee shop. Atout, 32, had a job as a civil engineer at Amtrak. The couple, who have since married, had done a few gigs around the city — both play guitar and some keyboard, and Hodges sings — with hopes of hitting it big, but no real expectation of doing so.
When the pandemic hit, the coffee shop sent workers home, and Atout’s salary was cut. Home all day and their income uncertain, the couple began to take the prospect of a music career more seriously. They set up a website and opened a business, Songlorious, writing custom songs for weddings, birthdays and similar events. Within weeks, they had more business than they could handle and began hiring other musicians to help out. Last fall, Atout quit his railroad job to work on the venture full time.
“I think the pandemic kind of forced us into this a little bit,” he said. “It gave us a nudge where I’ve always wanted to do something but I was too scared because I didn’t want to lose the stability of my job.”
Songlorious is in many ways typical of COVID-era startups. It is an online-only business in a field, performing arts, that was heavily disrupted by the pandemic. Its founders started the company at least partly out of financial necessity. And though it began in New York, they are building the business in a midsize city, Chattanooga, Tennessee, where they moved in December looking in part for a lower cost of living. Early evidence suggests the increase in startups has been strongest outside the big-city downtowns that have been hit hard by the exodus of office workers.
The increase was probably driven, to some extent, by the layoffs that left millions of people out of work early in the pandemic. Researchers at the Kauffman Foundation found that about 30% of new entrepreneurs last year were unemployed when they started their businesses, roughly double the pre-pandemic rate.
The preceding recession, more than a decade earlier, also led to millions of job losses, but entrepreneurship, by a variety of measures, fell sharply and rebounded only slowly. It was accompanied by a financial crisis and a collapse in home values, which made it difficult to get capital to start businesses.
This time may have been different partly because would-be entrepreneurs were more likely to have the wherewithal to pursue their visions. Swift action by the Federal Reserve helped prevent a financial crisis, and home prices boomed.
The government also handed out hundreds of billions of dollars in unemployment benefits, direct checks to households and other aid. Atout said federal stimulus checks had helped him and Hodges make ends meet while they got their business running.
Many entrepreneurs also describe a factor that is harder to quantify: The pandemic and its disruptions led many people reassess their lives and consider a different path.
Some economists remain skeptical of the long-term significance of the startup boom. A substantial share of the new businesses are sole proprietorships, many of them in retailing — which could mean nothing more than someone selling crafts online. Other businesses are simply replacing others that failed in the pandemic, like new restaurants taking over the locations of ones that closed. That is better than downtowns full of boarded-up vacancies, but hardly reflects a wave of innovation.
“The big question is how many of these are really going to be disruptive businesses of the sort that really make a difference to economic growth and are going to be job creators,” said John Dearie, president of the Center for American Entrepreneurship, an advocacy organization. “I don’t think this is a major reversal of that broad and multidecade trend” of declining entrepreneurship.
But others argue that the pandemic has almost certainly caused lasting shifts in the economy — accelerating the shift to online retailing, for example, and opening the door to more remote work. At least some of the pandemic entrepreneurs are probably responding to those shifts and will help shape them.