As pandemic mitigation measures took hold in the United States, unemployment soared. Small businesses across the United States closed their doors and, when possible, switched to remote operations.
However, pandemic entrepreneurship took off at unprecedented levels, leading to the largest increase in new business applications in recorded history—a number that continues to rise well into 2021. Below we break down pandemic startup trends, revealing the industries, locations and demographics behind these new ventures.
We uncovered pandemic startup trends by reviewing U.S. Census Bureau business formation statistics and reports from the Ewing Marion Kauffman Foundation, the National Bureau of Economic Research (NBER) and the Global Entrepreneurship Monitor (GEM) from Babson College.
Here are the main takeaways from our research:
- Over 4.3 million new business applications were filed in 2020, an increase of 24% over 2019.
- During 2020, about 380 out of every 100,000 adults became new entrepreneurs each month.
- Retail trade saw the highest gains, with a 58% year-over-year increase in 2020 business applications.
A closer look at who started new businesses in 2020
Who are these new entrepreneurs? The Kauffman Foundation’s “National Report on Early-Stage Entrepreneurship in the United States” looked at indicators of entrepreneurship, including age, education, nativity, race, sex and veteran status. Although every group experienced growth in 2020, some categories outperformed others.
The following groups had the highest percentages of new entrepreneurs:
- 45- to 54-year-olds.
- People with less than a high school degree.
However, veterans and Black entrepreneurs realized the most significant YoY increases. The National Bureau of Economic Research (NBER) reviewed business registration records from eight states. It noted: “Areas including a higher proportion of Black residents, and more specifically higher median income Black neighborhoods, are associated with higher growth in startup formation rates between 2019 and 2020.”
Pandemic startups: growth by industry
The U.S. Census Bureau tracks new business applications according to their assigned North American Industry Classification System (NAICS) code. Only two categories saw less growth in new business applications compared to 2019: mining and real estate. Others increased substantially, including the retail industry, which consists of direct-to-consumer startups.
When looking at year-over-year growth, new business applications rose more than 20% in the following categories:
- Wholesale trade.
- Retail trade.
- Transportation and warehousing.
- Administrative and support.
- Healthcare and social assistance.
- Accommodations and food services.
- Other services.
Stand-out sectors include retail trade at 58.2% and transportation and warehousing at 34.6%. Business applications without an assigned NAICS rose 56.9%.
In addition, high-propensity business applications (HBA), which are highly likely to become companies with payroll, increased 15.6% in 2020 compared to a 1.2% decline in 2019. The same is true for business applications with planned wages. In 2019, these declined by 5% year-over-year, whereas in 2020, they rose 9%.
According to a Salesforce survey, 52% of “new small business owners launched their new companies with less than $10,000 in funding — and nearly half of that group had less than $5,000 on hand on opening day.”
The location of startups during the pandemic
During the pandemic startup boon, only three states had lower business applications than previous years: Alaska, South Dakota and North Dakota. In comparison, 30 states and the District of Columbia saw increases of more than 10%. Business applications increased 31.5% in the South, 28.6% in the Midwest, 14.4% in the West, and 14.2% in the Northeast.
Here’s how it breaks down by state:
- 1% to 9.9% increase: Colorado, Hawaii, Idaho, Iowa, Kansas, Maine, Massachusetts, Montana, Nebraska, New Hampshire, New Mexico, Oregon, Rhode Island, Utah, Vermont, Washington and West Virginia.
- 10% to 19.9% increase: Arizona, California, Connecticut, Delaware, District of Columbia, Kentucky, Minnesota, New Jersey, New York, Oklahoma and Wyoming.
- 20% to 29.9% increase: Arkansas, Florida, Indiana, Maryland, Nevada, North Carolina, Pennsylvania, Tennessee, Texas, Virginia and Wisconsin.
- 30% and above: Alabama, Georgia, Illinois, Louisiana, Michigan, Mississippi, Ohio and South Carolina.
How pandemic entrepreneurs funded operations
Starting a new business isn’t cheap, and it costs money to apply for a business application. The National Bureau of Economic Research found that the CARES Act and Supplemental Act “are associated with an increase in new business registration with marked differences across geographies.” Moreover, “after each [stimulus], we observe an increase in the startup formation rate, particularly in neighborhoods with a high median income and a high proportion of Black residents.”
According to a Salesforce survey, 52% of “new small business owners launched their new companies with less than $10,000 in funding — and nearly half of that group had less than $5,000 on hand on opening day.” The survey also noted that almost “80% of founders drew from their own bank accounts to get things going, while roughly one-third received friends and family investments.”
Opportunity vs. necessity: why people started new businesses in 2020
The Kauffman Foundation separates the reasoning behind startups into two categories: opportunity and necessity. Their data showed that “about 30% of new entrepreneurs last year were unemployed when they started their businesses, roughly double the pre-pandemic rate.” In 2020, 69.75% of entrepreneurs created a business by choice versus 86.86% in 2019.
NBER’s “Entrepreneurship During the COVID-19 Pandemic: Evidence From the Business Formation Statistics” noted, “the opportunity share of this activity plummeted to the lowest share in 25 years, indicating that many of these transitions were undertaken by people with few other options for economic engagement.”
The Global Entrepreneurship Monitor (GEM) report backs up these findings. It stated that “one-half of entrepreneurs said they were motivated to start a venture because jobs were difficult to find, representing a 22% increase from 2019.”
Will the surge in startups continue?
Since 2005, the number of new business applications has never increased in double digits year-over-year. But 2020 changed everything. These statistics represent a restructuring of the workplace and workforce. Further research is needed to understand the long-term impact of the pandemic on entrepreneurship.
But during the first eight months of 2021, entrepreneurs filed 4,283,326 business applications. That’s only 46,697 fewer than all of 2020, putting 2021 on track to see another double-digit increase in business ownership.
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