- Why did small businesses explode?
- How do these new businesses affect the economy?
- What does this mean for traditional businesses and the new economy?
Q: Why did small business formation dramatically increase during the pandemic?
A: Pandemic-related lockdowns, loss of existing jobs, and the resulting pause in normal commerce created an opportunity for small businesses and new startups to become realized.
The pandemic unleashed devastation on US businesses, with 34% of small businesses in the U.S. still closed (as of May 2021).
And yet, amid the closures, job losses, and financial strain, there has been a surprising entrepreneurial comeback.
2020 saw a record-breaking surge in startups.
Specifically, the number of U.S. startups grew from 3.5 million in 2019 to 4.4 million in 2020, a 24 percent increase.
And based on current data, 2021 looks set to surpass 2020’s gains.
Why is small business formation rocketing?
Why are entrepreneurs starting businesses amid so much uncertainty?
What is the longer-term impact of a small business boom?
In this article, we explore how the pandemic is changing the small business landscape, what this means for the economic recovery, and how it could influence the future of work.
Why Did Small Businesses Explode?
Despite a global health crisis and one of the most impactful economic disruptors in recent history, records indicate an explosion in new businesses.
What is the link between the pandemic and new business growth?
Before we dive into the reasons, it’s important to understand the research methodology used in these startup reports.
Many reports, including those referenced in this article, are based on the number of applications for an employer-identification number (EIN) to the Internal Revenue Service.
This is typically the first step taken by an entrepreneur in the creation of a business.
A business at the application or EIN stage does not necessarily lead to a business formation. In some cases it may never begin operating.
Nevertheless, the number of EIN applications are widely used as a strong indicator of startup activity and trends related to small business formations.
What Prompted the Rise in Small Business Activity During the Pandemic?
Are small businesses on the rise?
Yes — the pandemic accelerated the proliferation of new small businesses. This chart clearly demonstrates the incredible surge in new small business formations.
These applications came at a time of great insecurity and vulnerability — not only from a health perspective, but financially too.
Quarantine, shuttered businesses, furlough, wage cuts, and soaring job losses meant many people were left with little, or no, income.
While the pandemic was a big stressor, many also saw it as an opportunity.
The economic uncertainty brought about a sudden change in perspective that threw entrepreneurs into action.
Here are some of the key reasons why small business formations rose during the pandemic:
- Time to innovate. People on furlough, in lockdown or in isolation, or those who worked from home for the first time, were able to recoup a lot of time that was previously spent working in offices or commuting. Innovative business ideas during lockdown flourished. People were able to step back from the ‘daily grind’ and use that time to research, develop ideas, and realize new business opportunities.
- ‘Creative destruction’. As Austrian economist Joseph Schumpeter famously noted in 1942, economic crises bring new ideas and ways of doing business to the fore. While some businesses and industries suffered (such as hospitality), others, such as healthcare suppliers and those operating in e-commerce, boomed.
- Job losses. Roughly 9.6 million U.S. workers lost their jobs in the first three quarters of 2020 (based on averages compared with the first three quarters of 2019). The financial pressure mixed with the inability to attain traditional employment led many to start their own businesses. People were motivated to become their own boss, and those who had been waiting to start their own business suddenly had no reason not to.
- New and niche requirements. At the start of 2020, nobody could have predicted that within weeks, there would be a massive global requirement for masks, disposable gloves, hand sanitizer, perspex screens, and so on. New small business ideas came to the fore. This opened up fresh opportunities for entrepreneurs during Covid-19 at every level — ranging from hobbyists with a personal business selling face masks from home, to businesses diversifying and developing new products.
- Availability of funding. Unlike the last recession, when the financial crisis made it hard for would-be entrepreneurs to get funding, this time there has been trillions of dollars in government support for U.S. households and businesses. Whether would-be entrepreneurs needed a new small business grant, a new small business loan, or some other stimulus, it was more widely available. This made the process of gaining financial support more feasible, particularly at a time when businesses were forced to close and the future of the economy relied on either getting businesses back on their feet, or supporting new ventures.
- New homes and locations. Some workers took advantage of new remote work policies during the pandemic and moved home. A new location, a more affordable cost of living, new connections, a fresh start, a larger house — all of these elements create a breeding ground in which entrepreneurship can flourish.
- Discovering remote work. A big change between employment and entrepreneurship is self-discipline. Some employees who experimented with flexible remote work for the first time in 2020 — and realised they could do it — found the impetus they needed to step into entrepreneurship.
For some, flexibility and work-life balance takes precedence over traditional employment.
This is at least partly evident in emerging workplace trends.
This ties in with the question:
What are the business trends for 2021?
Clearly, one of the biggest business trends to emerge during the pandemic is a focus on remote work and flexible workspaces.
Indeed, research claims that when given the option to work from home, only 4% of workers chose to work in the office.
The taste of flexibility and freedom that came from more than a year of working from home is enough to give some people the push they need to become their own boss.
Platforms Enabling Entrepreneurship
Another enabler for entrepreneurship is the range and breadth of platforms that are now available to new businesses.
For instance, e-commerce platforms such as Amazon, Etsy, and eBay means it’s easier than ever to sell products online.
Not only that, these platforms make it easier to reach a larger audience, quickly and cost efficiently.
Setting up an online presence is also fast and affordable, thanks to the likes of GoDaddy and Shopify.
And with millions of people now freelancing, there are more skills and affordable support options available for new entrepreneurs than ever before.
How Do These New Businesses Affect the Economy?
The pandemic brought down many businesses, including big economic players.
The long-term impact on the economy and the U.S. labor market remains unclear.
How are small businesses doing in 2021?
One area of research (May 2021) suggests that more than half of existing small businesses are performing well. Specifically, 60% of small business owners expect their revenue to increase over the next 12 months.
This compares to fall 2020, when just 34% of small business owners were confident of increasing revenue.
There is also optimism that new startups emerging from the devastation can strengthen employment growth and stimulate the economy.
Partly, this is because the current recession is different from previous economic crises.
According to Daniel Newman from the Economic Innovation Group:
A key reason for this is because people and businesses had access to sustained financial support in the form of PPP and other new small business stimulus programs.
In previous recessions, the financial crisis of the time made it hard for would-be entrepreneurs to get funding.
“One likely factor is the trillions of dollars in government support for U.S. households and businesses, far more than was available in past recessions or in other countries.” – Ben Casselman, New York Times
The prolonged financial stimulus available may therefore be enabling — and indeed encouraging — many more new business applications.
The Changing Economy
Positively, the surge in new business applications in 2020 and 2021 includes a rise in applications for both likely employer and likely nonemployer businesses.
However, according to a report by John C. Haltiwanger, National Bureau of Economic Research, which drew data from U.S. business formation statistics, the surge in new business applications has been especially large for likely nonemployer businesses.
This may prompt concern, as economic recovery relies on jobs and employment.
But, Haltiwanger notes that the surge in likely nonemployer applications is of interest given the “increasingly important role that gig workers are playing in the U.S. economy”.
The report notes that the number of nonemployer businesses has been on an upward trend over the last 15 years or so with rapid acceleration in the post-2010 period.
This suggests that the structure of the economy is changing. Notably, it is continuing to embrace the gig economy.
What’s more, the report notes that the Covid-19 Recession has “induced a change in the structure of the U.S. economy towards more remote activity”.
This is already prompting new businesses to explore related opportunities, such as e-commerce and the remote delivery of services, such as telemedicine, consulting, distance learning, and so on.
A “Noisy and Complex” Recovery?
Going forward, what can we expect from the economic recovery?
- If the huge growth in non-employer businesses continues, we may see many more independent workers and further development in the gig economy.
- As restrictions continue to ease, employer businesses will reopen or new businesses will take their place. This will prompt job openings — which may come in the form of traditional employment as well as gig work.
- Gaps in the market will create demand for new businesses. For instance, Haltiwanger expects the shift towards e-commerce to stick as it reflects a pre-pandemic trend. This could trigger growth in demand for related requirements such as delivery drivers, logistics, storage, warehouse roles, and so on.
Haltiwanger notes that, “All this highlights that the pandemic surge in business applications is associated with intensified restructuring on several dimensions.”
Large corporations may not be able to dominate the way they did prior to the pandemic, and smaller businesses have learned to be lean, innovative, and adaptable.
As a result, new, small, and individual businesses, as well as existing SMBs, have an opportunity to jump in and gain traction where they previously couldn’t.
One thing we do know is that change is certain.
Looking ahead, the surge in new business applications is promising.
However, as noted by Daniel Newman (Economic Innovation Group, July 2021), “it will be some time before the extent of business closures due to the pandemic can be tallied and we have a full picture of the net effect of the pandemic on the country’s business and entrepreneurial landscape.”
There will also be a delay while it is determined whether the record high number of new business applications transition to fully operable businesses.
That said, Newman acknowledges the historically high correlation between the number of applications and true business formations.
“If the past is any guide and a substantial number of these applications turn into real new firms, their survival and growth will help power the economic recovery.”
And, according to Peterson Institute for International Economics, there is cautious optimism for the future of employment:
“There is a widespread perception that small businesses create the most jobs in the United States and other advanced economies. Research suggests that it is new businesses, not small ones, that create these jobs (Haltiwanger et al. 2013).”
What Does this Mean for Traditional Work and the Business Environment?
We are at an interesting turning point.
Pre-pandemic, very few people had the opportunity to work flexibly or remotely.
According to workplace statistics by Pew Research Center (October 2020), most workers who could work from home say that, before the pandemic, they rarely or never teleworked.
Only one-in-five say they worked from home all or most of the time.
By the fourth quarter of 2020, 71% of those workers were doing their job from home all or most of the time.
The onset of the pandemic triggered the biggest flexible work experiment the world has ever seen.
It shifted perspectives, upended old norms, and challenged baked-in preconceptions about the way we work.
Some people are happy to return to the traditional workplace.
Pew Research Center’s survey found that more than half of respondents would, given a choice, keep working from home even after the pandemic.
Going forward, there is greater emphasis on giving people choice over where and how they want to work. This applies both to large companies and small businesses.
It’s important that companies take their people’s wishes into account.
Why? Because many of those who don’t get the working conditions they want are prepared to vote with their feet.
In fact, this trend is gaining traction to the point where it has been dubbed ‘The Great Resignation’ or ‘The Great Reshuffle’.
And this is particularly prevalent among young workers.
According to an employment trends survey by Morning Consult on behalf of Bloomberg News (May 2021), 39% of people would consider quitting if their employers weren’t flexible about remote work.
The generational difference is clear: Among millennials and Gen Z, that figure was 49%.
War for Talent Intensifies
This comes at a time of intense labor shortages, economic uncertainty, and the ongoing war for talent.
As such, many companies are prioritizing their workers’ preferences in order to hold onto the best talent and reduce churn.
In numerous ways, small businesses have the advantage in this regard.
They have the opportunity to be more agile, because they typically don’t have the long-term liabilities of large businesses, such as fixed office leases.
Do small businesses create jobs?
Yes. According to the SBA, small firms accounted for about 63% of new private sector jobs from 2010 to 2019.
Small business employees are also more likely to work from home or in flexible workspaces, which offers more freedom than traditional corporate working arrangements.
Additionally, freelancing is expected to increase — which was already a growing trend pre-pandemic.
In 2018, 48% of businesses hired freelancers, up from 43% in 2017. This growth is made possible due to the ease, speed, and affordability of hiring independent proprietors.
The pandemic appears to be amplifying this trend, with more people taking on side gigs or full-time self-employment either out of necessity, or through a shift in mindset.
Case in point, approximately 64.8 million people carried out freelance work in the U.S. in 2020, up from 57.3 million in 2017.
As noted in the report by John C. Haltiwanger, the gig economy is growing.
The sharp rise in new applications from businesses that are not expected to become employers is another indicator that we may indeed see further growth in self-employment.
That means traditional jobs must compete with those who operate as a freelance worker, an independent contractor, the self-employed, and other entrepreneur careers — which are inherently flexible — in order to attract employees.
This is another reason why traditional employers must adapt and change in line with the expectations and wishes of their employees (both current and future).
Integrating Flexibility into Your Business
There are many ways organizations can become more agile, and therefore more adaptable to workforce expectations and market changes.
Offering more flexibility to workers and hiring from anywhere is one way to overcome labor shortages and improve talent retention.
Often, this impacts workspace requirements too.
Companies that operate a flexible work approach — such as hybrid working, remote work, or a hub-and-spoke office model — typically require less space than traditional organizations with full-time office requirements.
For those with the ability to reduce or relinquish their office lease commitments, there are much more flexible ways to obtain workspace.
- Serviced or flexible office space offers fully furnished workspace in various sizes with all-inclusive monthly agreements, onsite staff, and short- or mid-term commitments. It’s flexible by nature, which is particularly attractive to organizations during this time of uncertainty and flux.
- Managed office space is often provided by commercial real estate landlords or serviced office companies, and offers slightly longer-term commitments with the same flexibility and all-inclusive agreements. Occupants can usually have a say in the design and fit-out, and have the space remodelled to match their branding.
- Coworking comes in many different forms, ranging from monthly memberships with unassigned seating, to private office suites with access to collaborative lounges, meeting rooms, and other onsite facilities.
Another form of flexible workspace is a virtual office.
This type of workplace solution is fast growing in popularity with small businesses as well as larger organizations, particularly since the onset of the pandemic.
Suggested Reading: What is a Virtual Office and How Does it Work?
A virtual office provides all the essentials you’d expect from a physical office — such as a business address, mail processing services, and onsite staff.
The big difference is, companies don’t pay for full-time office space.
Virtual offices enable businesses to create a commercial presence in a specific location, but without the cost or commitment of maintaining a full-time workplace.
Companies can access physical workspace and meeting rooms at any time, by reserving space by the hour or by the day.
Other services such as mail forwarding, a live receptionist call answering service, and even full-time coworking access can be added, as needed.
Find out more about virtual office and live receptionist solutions from Alliance at www.alliancevirtualoffices.com.
Out of the devastation wrought by the pandemic came fresh hope and new business opportunities.
Entrepreneurs are responding by setting the startup scene alight with a record number of new business applications.
The economic recovery is bringing with it greater emphasis on flexibility, work life balance, and personal choice.
The future and sustainability of these small business formations remains to be seen, but the economy is changing — in many ways for the better — and opening the door for new and exciting ways of working.