After waning for decades, applications to start businesses surged last year. If the rebound proves durable, it could provide a more resilient economy.
The coronavirus pandemic appears to have unleashed a tidal wave of entrepreneurial activity, breaking the United States — at least temporarily — out of a decades-long start-up slump.
Americans filed paperwork to start 4.3 million businesses last year, according to data from the Census Bureau, a 24 percent 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 percent of employers were new businesses; by 2018, the most recent year for which data is available, that share had fallen to 8 percent.
The prolonged decline worried economists, because start-ups 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 chief executive 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 won’t 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 doesn’t 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, with day jobs and dreams. Ms. Hodges, 27, was working as a barista in a Manhattan coffee shop. Mr. 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 Ms. 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 Mr. 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, Mr. 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 start-ups. 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, Tenn., where they moved in December looking in part for a lower cost of living. Early evidence suggests the increase in start-ups 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 percent of new entrepreneurs last year were unemployed when they started their businesses, roughly double the prepandemic 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. Mr. Atout said federal stimulus checks had helped him and Ms. 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.
“It made you think about life differently, in a way, when our whole lives were flipped upside down,” said Deborah Gladney, who started a business in Wichita, Kan., with her sister, Angela Muhwezi-Hall, during the pandemic.
Ms. Muhwezi-Hall, 31, had been nursing an idea for a business — a career site focused on service workers — for several years, but she had taken few steps to making it a reality. Early in the pandemic, however, her sister called her at 4 a.m. It was time to get the business going, she said, and they should do it together. They started the company, QuickHire, in September.
“We pushed this idea around for years and continued to give excuse after excuse after why now is not a good time, and Covid just made the whole world stop,” Ms. Muhwezi-Hall said. “I don’t know, if Covid didn’t happen, if we’d ever have gotten around to it, honestly.”
The pandemic didn’t just provide a motivation; it also provided a business opportunity. Companies were struggling to find workers, making it a good time to go into the recruitment business. Ms. Gladney, 34, and Ms. Muhwezi-Hall, who are Black, also started their business at what turned out to be a moment of racial reckoning, which they said might have helped them win financial backing.
“People who wouldn’t ordinarily be paying attention to a Black-woman-led tech start-up were paying attention,” Ms. Gladney said. “Being able to have the financial backing and support, that had something to do with it as well.”
Research from Gusto, which provides payroll and related services to small businesses, found that entrepreneurs in the pandemic were more likely than in the past to be women and more likely to be Black or Hispanic. A recent study from a team of economists found that start-up activity in the pandemic was particularly pronounced in Black neighborhoods, especially those with higher incomes.
“There was an untapped potential in these high-income Black communities to become entrepreneurs,” said Scott Stern, an economist at the Massachusetts Institute of Technology who was one of the study’s authors.
Some economists remain skeptical of the long-term significance of the start-up 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.
Olly Smith has spent his career working for large food-service companies like Pret a Manger, the premade-sandwich chain. But when the pandemic hit, he and his husband left New York City for the Hudson Valley, where they owned a home. Mr. Smith decided to quit his job and open a business, becoming a high-end grocer catering largely to other affluent professionals who had left the city.
“There were many people up here who wanted better food than they were necessarily able to get easily,” he said. “It was so much busier up here than it would ordinarily have been.”
The store, Westerlind Pantry, has been a success so far. And though some of the New Yorkers who relocated during the pandemic have returned to the city, Mr. Smith thinks enough will stay to keep the store viable. He is considering expansion.
Mr. Smith, 41, had considered opening a business for years. The pandemic, in a strange way, made it feel like less of a gamble.
“It seemed like there was no better time because the world was so uncertain,” he said. “Covid kind of gave permission to throw caution to the wind.”