The roaring 20s? A look at America’s entrepreneurship boom during a pandemic
By Elsa Bauer, BSc Politics and International Relations at Bristol University
Even though the USA experienced 14.7% unemployment in April at the height of the Covid-19 pandemic and currently has this number at 6.7% (Statista, 2020), it also unexpectedly went through a ‘startup boom’ despite this. The findings released by the Business Formation Statistics Report for the Third Quarter of 2020, released on October 14th, showed that business applications reached 1,566,373 — a 77.4% increase compared to the Second Quarter of 2020 (census.gov, 2020) (adjusted for seasonal variation).
This trend is especially surprising given that when the pandemic began, data collected by the US Census Bureau showed a logical collapse in new business applications. However, six weeks into the pandemic, these numbers started rising (Rosalsky, 2020). The US has lost more businesses during the first three months of the crisis than it normally does in an entire year (Guilford and Scott, 2020). This wave of business closures has left a void for new startups to fill. While statistics show that 9 out of 10 startups will fail (Bryant, 2019), American entrepreneurs are, despite the odds, motivated to take their chances during the pandemic. This recent surge in entrepreneurship has not been equally mirrored elsewhere in the rich world, suggesting that the US might have a different incentive structure regarding business creation.
A major contributing factor is the economic relief package passed in March by Congress, which focussed more on income protection than job preservation (Economist, 2020). Stimulus cheques of up to US$1,200 were given to individuals and the country also saw a US$260 billion increase in unemployment insurance payments (Wikipedia, 2020). These gave some people both the need and the means to take on the risk of starting a business of their own. In fact, this would not be the first time that a crisis led to innovative startup ideas in America; WhatsApp, Airbnb, Groupon, and Uber were all started there in 2008-2009. These services centre around quick and easy transactions, bypassing traditional retail — a pattern which will likely re-emerge with so many of our usual physical interactions being done online given the social distancing rules.
For a startup to be successful, one crucially needs time. The time to conduct market research, construct a business plan, devise a marketing strategy and secure funding is not always available in a working year. Obtaining the necessary permits and loans can take months. Now that workers from non-essential industries are spending more time away from work, this time can be put towards preparing the launch of a business, or a potential launch once the economy begins its upturn. Furthermore, it can be said that the qualities which ensure that firms remain viable in the face of adversity. Flexibility, endurance, and creativity are assuredly going to be fostered in a time of crisis, giving new businesses the necessary grit to compete. The fact that young companies typically employ fewer workers also equips them for the flexibility which a time of crisis demands.
Another reason for the rise in startups could be that personal savings rates in the US are currently three times as high as they were in the last recession. This points towards a higher propensity for business creation, given that 88% of firms rely on their owner’s personal credit score to secure financing, and 56% have used funds from their personal savings, friends, or family in the last 5 years to support their startups (fedsmallbusiness.org, 2020).
The rise in new business applications, while encouraging, has not helped bring US unemployment down or fill the huge job void in traditional businesses with physical premises. Most of these businesses will take a long time before they are able to employ larger numbers, and statistically, a large majority will not remain viable in the long-term. It is also possible that the encouraging data on business creation is inflated by people trying to qualify for stimulus money in this time of crisis. Either way, it remains good news that Americans have not lost their entrepreneurial spirit even during a global pandemic.
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1. census.gov (2020). Business Formation Statistics: https://www.census.gov/econ/bfs/index.html [Accessed 28 Dec. 2020]
2. Rosalsky, G. (2020). The Unexpected Boom In Startups: https://www.npr.org/sections/money/2020/11/10/933105790/the-unexpected-boom-in-startups. [Accessed 28 Dec. 2020]
3. Guilford, G. and Scott, C.L. (2020). Is It Insane to Start a Business During Coronavirus? Millions of Americans Don’t Think So: https://www.wsj.com/articles/is-it-insane-to-start-a-business-during-coronavirus-millions-of-americans-dont-think-so-11601092841. [Accessed 29 Dec. 2020]
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