By Frank F Islam
It is well known that the COVID-19 pandemic in the U.S. has ended many lives and livelihoods. What is not as well known is that the pandemic economy has also given birth to an enormous number of business start-ups.
Those new businesses do not compensate for the tragic losses and the costs that the pandemic has imposed. They do provide, however, the opportunity and platform to make the USA a start-up nation again.
According to the U.S. Census Bureau, applications it has received for the formation of new businesses have soared since the pandemic began. 2020 was the highest year ever for applications. There have been more than seven million applications since the pandemic began in March of 2020 through August 2021.
These breakout numbers that began during the economic crisis caused by the pandemic stand in stark contrast to the decline in business start-up activity caused by the Great Recession which began in December 2007 and ended officially in June 2009.
Things were not that great in terms of small business development even before the Great Recession. Small Business Administration and Bureau of Labor Statistics data show that from 1993 until 2001, small business births outpaced business deaths by about 25,000 a year.
From 2002 until 2008, births and deaths were about the same. Then, as the Great Recession struck, the bottom fell out for new business start-ups. Small business deaths lead births by over 44,000 in 2008, 162,000 in 2009, and 59,000 in 2010.
The contribution of small business start-ups to America’s economy remained dismal even after the Great Recession ended. As Ben Casselman of the New York Times reports, “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.”
Given the dramatic turnaround in new business creation during this pandemic, the questions become: Why did this occur? Is it sustainable? Will those businesses created survive? Will they make a positive difference for Americans and in the American economy going forward?
There are a number of factors that have contributed to the current new business creation trend. A pre-eminent one is undoubtedly the rapid closing of so-many “non-essential” businesses due to the pandemic.
Those closings caused those who had lost their jobs to either search for a new job in a job-starved market or to create a job for themselves by launching their own business instead. Many of these individuals chose the start-up route and became first-time entrepreneurs.
The Ewing Marion Kaufman Foundation (Kaufman Foundation) publishes a regular report on early stage entrepreneurship. The Foundation’s early stage report for 2020 published in February of 2021 revealed that the rate of new entrepreneurs “increased substantially” in 2020. The “opportunity share,” however, (the percentage of new entrepreneurs who created a business out of choice instead of necessity) fell dramatically from 86.9 percent in 2019 to 69.8 percent in 2020.
While necessity may have been a primary driver for many first-time entrepreneurs, a factor for some was a desire to use this moment in time to reflect on what they wanted personally and to chart their own future course as an employer rather than an employee.
This course was abetted by the federal government’s economic stimulus packages, which put spending money into the pockets of both the start-up owners and consumers. The fact that the recession precipitated by COVID-19 was the shortest in history, beginning in March and ending after April 2020 (the shortest recession before was in 1980 lasting six months), also ensured an economy that was receptive to new business development.
Time will tell whether the robust business start-up trend will continue post-pandemic. Distinguished professor of economics at the University of Maryland — College Park, John Haltiwanger, who recently conducted a study for a working paper on Entrepreneurship During the COVID-19 Pandemic, published by the National Bureau of Economic Research (NBER), believes that it will. In June after release of the NBER paper, he told Greg Rosalsky of NPR , “The surge continues. We’re now convinced this wasn’t just a blip.”
Haltiwanger’s study looked at “the surge” through May 2021. May was the second highest month for business applications, at nearly half a million, next to July 2020, which had more than 530,000. The Census Bureau’s business formation statistics for June, July, and August show a decline in the number of start-ups after May 2021, with August standing at 427,000.
It will be interesting to watch this play out over the last three months of 2021 and through the first three months of 2022. What will make it even more interesting and informative, regarding the potential for a sustained surge now that there is an agreement on a continuing budget resolution that keeps the government open until December 3, is what will happen on the debt ceiling, the bi-partisan infrastructure bill and the Build Back Better Act.
Observing the business applications and formations for that additional time period will give us a better perspective on what the “new normal” for business start-ups will be. Our best guesstimate now is that while business start-ups will not be maintained at the surge level for the next few years going forward, they will be sustained at a higher tide level than they have been for the past several decades.
Just as there is no guarantee on whether business start-ups will continue at a high level in the future, there is no methodology to predict with accuracy which ones and how many will survive in the short term and over the long term. The Kauffman Foundation though provides an indicator called the start-up early survival rate, which measures the percentage of new employer establishments that are still active after one year of operation.
The start-up early survival rate in 2020 was 78.1 percent compared to a rate for 79.4 for 2019. This was a slight decline, but since many of the businesses that were launched in 2020 had not been in business for one year the statistic for 2021 could, and most probably will, show a larger drop in the survival rate.
As the Kauffman Foundation emphasizes, the early survival rate “indicator is an annual measure of immediate, and not long term, survival.” The long-term survival for all of these pandemic start-up businesses — whether they were born out of opportunity or necessity — will be driven by their ability to do the planning, organization, and management required to enable them to respond effectively and efficiently to market and customer needs and demands.
One thing that will definitely survive for the long term is the definitional impact that these pandemic start-ups are having on the nature of America’s business landscape. “From a distance” has become the new business mantra, and the close proximity concepts of central business districts in mega-cities, large office towers, water cooler brainstorming, and coffee break collegiality, while not becoming things of the past, will certainly be recalibrated.
This reconsideration and reconstruction of the approach to doing business is being done by existing businesses of all sizes from large to small. The pandemic small business start-ups have occurred across the board, but as John Haltiwanger’s research found, it accelerated the most in ten 3- digit NAICS (North American Industries Classification System) industries, accounting for 75% of the surge. Non-store retail applications accounted for one-third of that growth, with other high-growth application industries including professional, scientific and technical services; truck transportation; accommodations and food service.
In June, the U.S. Chamber of Commerce put forward two sets of business ideas for success during and post-pandemic. They ranged from personal training and fitness to home improvement, and delivery services. They also included more individually-focused activities such as app development, graphic design, and accounting services.
Putting this into context, millions of businesses have been put out of business because of the pandemic, so there are gaps that need to be filled and opportunities to be addressed. In addition, federal government spending due to the Biden administration’s rescue plan — and the infrastructure bill if it passes — will create new needs and opportunities. The bottom line is that there is a potential solid bottom line for many start-up small businesses in these transitional times.
These start-up businesses and other existing small business will be critical to creating a positive future for the American economy. The pivotal importance of this rebuilding and restoration of America’s small business sector cannot be overstated.
The 2020 Small Business Profile prepared by the Small Business Administration Office of Advocacy reports that in 2018 there were 32.5 million small businesses in the U.S., constituting over 99 percent of American businesses. Just over 6 million of those firms had employees. Nearly 26.5 million were non-employer firms. Those businesses employed more than 61.2 million people or 46.8 percent of the private sector workforce.
Small businesses are also innovators and difference makers. Various research shows that: small businesses represent 96% of employer firms in high patent manufacturing industries; small firms are much more likely to develop emerging technologies than large firms; and on an annual basis, small businesses account for well over 60% of all new jobs created in the United States.
Those numbers and facts attest to the pivotal role that the small businesses play in sustaining and growing the American economy. What they do not disclose is the shrinking size of the small business sector in supporting the national GDP, and the decline of job creation in the small business sector over the past several decades.
An SBA report released at the beginning of 2019 showed that in the period from 1998 to 2014, the small business share of total GDP for the U.S. fell from 48.0 percent to 43.5 percent. The Kauffman Foundation examining jobs created by start-ups in their first year of operation in 2020 was 5.0, compared to nearly 8.0 in 1996.
In closing, it should be recognized that this surge in business applications and initial business formation is merely the starting point for start-up businesses. The total identified by the Census Bureau includes all applications. Within that group, the Census Bureau monthly identifies what it labels “High Propensity Business Applications,” which have a “high propensity of turning into businesses with a payroll.”
The high propensity applications before the pandemic ran about 40–45 percent of the monthly total applications. The high propensity applications since the pandemic have fallen to around one third of the total.
This indicates that considerably more of those applying now are first-time entrepreneurs establishing non-employer firms. It is likely that many of these entrepreneurs will be individuals who lost their jobs or microbusinesses during the pandemic.
Research indicates that those individuals who lost their jobs due to the pandemic were disproportionately women and minorities working in the leisure, hospitality, retail, personal service, and heath care sectors. The businesses that were at greatest risk of closing were in those same industry sectors, with those most affected being the smallest small businesses, non-employer firms, businesses owned by African Americans, immigrants, Latinx, Asians, and females, and main street businesses in smaller towns and urban neighborhoods.
Many start-up owners turn to their own savings/credit cards, friends, family, and the local bank for financial assistance.
These sources of assistance will probably be extremely limited in scope.
Therefore many of these first-time entrepreneurs will need assistance from another source. The federal government and the SBA can and could and should be a lender of first, and not last, resort for them.
The United States Congress and the SBA has done an excellent job in providing financial support through the Paycheck Protection Program (PPP) and the lesser known Economic Injury Disaster Loan (EIDL) program to the small businesses impacted by the pandemic.
Under the direction of its new administrator Isabella Casillas Guzman, the SBA has increased access for the smallest and minority-owned businesses in areas that were largely ignored in the first round of PPP funding. In addition, since the SBA launched its portal for direct forgiveness of PPP loans of $150,000 or less on August 4, it has processed more than 1 million applications.
The SBA needs to bring this targeted focus and lightning-like speed to assist small businesses being started up by first-time entrepreneurs with limited access to resources. As we have advocated for some time, the SBA should provide direct loans to small businesses — especially those in socially disadvantaged and economically distressed urban and rural areas.
At this point, unfortunately, the SBA can only be a guarantor of loans provided to small businesses through certified lenders. If the $3.5 trillion Build Back Better Act passes this will change.
Sec.100502 of that Act will provide $4.465 billion over a ten-year period to fund a direct loan product under the current 7(a) lending program administered by SBA. Some of that money should be dedicated to small business start-ups and non-employer firms that would have the greatest difficulty in securing access to capital from traditional lenders.
The direct loan program for these businesses should provide an initial grant for the operational assistance and sustenance during the business’ launch period. It should also provide technical assistance to these start-up entrepreneurs to help them refine their business model and to develop business plans for taking their business forward.
The period of the COVID-19 pandemic has been one of great uncertainty on all fronts. Early on it was thought that COVID’s impact would be short-lived. It was not.
In July 2021, after a large number of vaccines had been administered, it appeared that the country had turned the corner on the pandemic. It did.
Then, it ran into the Delta variant which has caused a COVID resurgence across the nation. Now, in October, it is difficult to predict what lies ahead on the COVID front with any certainty.
What is certain is that if these business start-ups do not get support and the economy is throttled by a continuing pandemic, they will be challenged for survival. By implementing a direct loan program, the SBA can help these businesses make it through these uncertain and challenging times. In return, they will make the essential contribution they must to ensure the United States becomes a start-up nation again.