It’s not all gloom and doom – entrepreneurship surges during the pandemic

Buried far beneath the headlines is an ongoing story of American ingenuity and persistence. An extraordinary wave of new business formations began during the depths of the pandemic and continues to this day. 

The surge reflects favorably on the health of the nation’s economy and the spirit of American entrepreneurism.  

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Recent economic news has been a mixed bag with supply-chain disruptions, record job quits, widespread labor shortages, small business failures, and skyrocketing inflation on the one hand, but solid growth and payroll boosts on the other. The daily reports make it difficult to determine the health of the economy and to evaluate business prospects.  

However, buried far beneath the headlines is an ongoing story of American ingenuity and persistence. An extraordinary wave of new business formations began during the depths of the pandemic and continues to this day. The surge reflects favorably on the health of the nation’s economy and the spirit of American entrepreneurism.  

Confidence in the future 

In the spring of 2020, the nation was consumed by the pandemic. Governments closed schools, shut down businesses, and imposed lengthy stay-at-home orders. The economy collapsed, and unemployment climbed to precarious heights. Consequently, entrepreneurs faced a decidedly uncertain and difficult business environment.  

Nevertheless, they did not vacillate. Entrepreneurs launched thousands of new businesses. The numbers are staggering and smashed all previous records. They bet big on the future. And soon more would follow, month after month, producing historic growth in new business development.    

Business formations

The chart below presents Census Bureau data on the number of business applications. Applications are based on requests to the IRS for Employer Identification Numbers. The Census uses applications to project future business formations – see here.  

Notice, the Great Recession in 2008 produced slightly lower monthly applications. A notable spike in December 2012 (a monthly record at the time of 274,300 applications), however, started an upward trajectory that peaked 7 years later in December 2019 at 309,607 applications.       

Three months later – at the beginning of the pandemic, applications dropped sharply: March fell to 257,673 applications and April bottomed out at 234,838 – the lowest number of monthly applications since 2016.   

Yet, remarkably, applications rebounded. They climbed 150,000 in May, rose another 100,000 in June, and increased by nearly 200,000 in July.  Never had the country experienced such a dramatic and unexpected rise in business formations. The big turnaround inspired confidence and helped keep new business formations elevated well above pre-pandemic levels.  

Why the increase?

One reason is adversity.  Government shutdowns led to very high rates of unemployment.  Thousands of workers were permanently laid-off or asked to take extended furloughs.  From February to April 2020, the unemployment rate shot up 10 points and peaked just short of 15%.  The leisure and hospitality sector experienced nearly 40% unemployment, construction 17%, transportation and utilities 13%, and education and health services 11%.  Laid-off and furloughed workers considered starting businesses to earn income.  For them, it was entrepreneurship by necessity.  

For others, adversity sparked creativity. The entrepreneurial-minded found ways to satisfy emerging markets. Teachers offered virtual lessons, doctors embraced telemedicine, and business professionals started podcasts.  Parents sold baked goods out of their kitchens and established e-commerce websites.            

In addition, the recession caused many businesses to close for good, creating space for new businesses to grow and prosper.  For example, many traditional retail stores, restaurants, and bars closed during the early months of the pandemic. Motivated entrepreneurs stepped into that void. They adopted online retail and delivery services, special menu items, and community events to invigorate consumer demand.   

A second factor is the uncertain and fast-changing economic conditions. The pandemic created new needs and increased demand for old ones. Industries such as healthcare, tech, and transportation struggled. They labored mightily to deliver increased capacity to a growing and impatient consumer base. The adaptations included new and emerging technologies and refinement of existing efficiencies.  Entrepreneurs recognized the challenges and initiated new businesses to help industries. They also helped the economy adjust by transferring resources from declining areas to promising new opportunities.  

Bottom Line

For the past two years, the public has been overwhelmed by a flood of negative news about the Great Resignation, supply-chain disasters, rising unemployment, slumping consumer confidence, small business closures, rising inequality, and growing inflation. But despite all this, steadfast optimism survived.  Thousands of new businesses formed. The numbers are unprecedented. While experts often pointed to the clouds gathering overhead, entrepreneurs looked forward and seized the moment. 

The Census data on business applications demonstrates the determination and foresight of American entrepreneurs. New businesses are a major source of jobs, innovation, and competition. They are the backbone of any modern economy. The popularity of figures like Elon Musk, Bill Gates, Jeff Bezos, and Steve Jobs shows that entrepreneurs are the new rockstars.   

Giants like Amazon, Tesla, and Apple had humble beginnings. Like those before them, their founders had an idea, believed it would work, and applied for an Employer Identification Number.  They were merely 3 data points among the thousands.  

There will of be other giants. And no doubt we will discover those giants started during the extraordinary wave of pandemic entrepreneurship in the spring and summer of 2020.  

Change can be destructive.  It can also inspire and transform.  

It’s not all gloom and doom.                   

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