At the same time, US entrepreneurs started the most businesses in history. The impetus for the startups appears to have been the relative wealth of consumers, investors and entrepreneurs as the evolution to digitally-driven working from home and well-designed government stimulus spared many people the worst ravages of the recession, kept most consumers spending and inspired business founders to recalibrate risk-reward ratios in favor of seizing opportunities. JL
Annie Lowrey reports in The Atlantic:
Americans are starting companies at the fastest-ever recorded pace. Entrepreneurs launched 500,000 more new businesses considered likely to hire employees. "Stimmies” kept household spending stable. White-collar fields experienced little financial fallout, and many saw net worth climb as housing prices increased and the stock market rallied. Entrepreneurs saw no reason not to launch and cater to them. Unique characteristics made starting a business attractive: working from home made setting up faster and cut costs. “(No) [office] leases and recruiting C-level executives from around the world, without having to relocate (them)." The pandemic also made connecting with suppliers, investors, and sales contacts simpler. It changed risk-reward calculus, inculcating a just-do-it attitude. Last March, the coronavirus pandemic hit, and the serial entrepreneur Mike Landau found himself spending nearly every minute of every day inside his Long Island home with his wife and five daughters. He had new responsibilities, he told me: worrying about everyone’s health, supervising Zoom school, cleaning up Barbies, trying to keep their home from looking like a “defunct Amazon warehouse.” But he also had some business ideas, and time to incubate them.
The pandemic led to a massive spike in e-commerce, with millions of Americans opting to work, eat, exercise, and entertain themselves at home, and wanting the gear to do so. Firms like UPS and XPO experienced package volumes normally seen during the holiday-season rush, and those have still not fallen to their pre-pandemic levels. With all those boxes to manage, last-mile and long-haul delivery services needed secure places to park their vehicles. Landau sketched out an idea to locate empty or distressed lots in metro areas, set up safe perimeters, and lease parking spaces. The company ParkMyFleet came together at his kitchen table and launched in a matter of months. Landau hired an all-remote team and added city-to-city vehicle transport, as well as on-site repair and car-washing services.
As awful as the pandemic was, the uncertainty changed the business climate for the better in some ways, he told me. “It accelerated everything.” Around the country, roughly 500,000 entrepreneurs were finding much the same. The coronavirus decimated an unprecedented number of small businesses—200,000 more closed than would be expected during a normal year—but also enabled the launch of an unprecedented number of new ones. And that unexpected business boom holds lessons for how to make the economy more conducive to new ideas, new companies, and new entrepreneurs in the future.As a general rule, business formation is cyclical: People are more apt to start companies when net worths are rising, confidence is soaring, and lenders are itching to lend. People are less apt to start companies when family finances are stressed, the business outlook is cratering, and credit conditions are tightening. It was no surprise, then, that the pandemic recession led to a huge drop in new business starts last spring.
What was a surprise was that business formation surged strongly in the second half of 2020, when much of the country was still shut down, and the surge just kept going. Entrepreneurs launched 500,000 more new businesses considered likely to hire employees from mid-2020 to mid-2021 than from mid-2018 to mid-2019, and today Americans are starting companies at the fastest-ever recorded pace.
“Last year, we were doing this mutual head-scratching, like, What is happening? Is this going to last?” John Lettieri, a co-founder of the Economic Innovation Group, a start-up research and advocacy group, told me. “Then it was, This seems different! And things kept on taking off.”
Indeed, at first many experts wondered whether the business boom was illusory. Perhaps it was a statistical fluctuation: entrepreneurs delaying their launches en masse, creating a drop and a bounce-back without changing the underlying long-term trend. Or perhaps it was driven by less-than-scrupulous entrepreneurs and off-the-books sole proprietors (caterers, housekeepers, aestheticians, and the like) establishing firms to angle for government small-business-relief money.
But the persistence of the trend has belied those explanations. The government’s Small Business Administration loan programs had strictures to prevent firms without payroll records or ongoing operating expenses from cashing in. When the application windows closed, there was no drop in new-business formation, either. Nor have economists seen any kind of reversion to the pre-pandemic mean. “At this point, this is reflecting very real activity,” Lettieri told me.
What is driving that very real activity? The SBA loan programs seem to have little to do with it. But all the other government money sloshing around does. Unlike after the Great Recession, Washington flooded families with stimulus when the coronavirus hit, roughly $5 trillion of it. Even after the jobless rate soared as high as 14.8 percent, “stimmies” and the superdole kept household spending remarkably stable. Moreover, high-income families working in white-collar fields experienced little to no financial fallout from the coronavirus recession, and many saw their net worth climb as housing prices increased and the stock market rallied: The recovery was “K-shaped,” as forecasters like to put it. The unemployment rate for college-educated Americans rose just two percentage points between spring and fall last year.
Much of America’s vast consumer class remained ready and able to spend through the downturn. Many entrepreneurs saw no reason not to launch and to cater to them. One of them was Marc Bridge of Seattle, who started At Present, an online jewelry retailer, last August. The decision to proceed was fraught. “In most recessionary periods, the first thing to go are discretionary purchases like jewelry,” he told me. “I thought, Hmm, okay, well, this is a really interesting time to start a new jewelry business.” But anecdotes from work-from-home friends and hard data about consumer finances persuaded him and his co-founder to forge ahead.
“People had nothing else to do. They’re sitting at home, on the couch all day, watching Outer Banks, bored out of their minds, some of them not terribly affected” by the recession, he told me. “We were selling things that people wanted, little doses of joy in a period so painfully free of that, and jewelry was surprisingly consistent with people’s lifestyles. You might be wearing sweatpants, but if you’re on Zoom every day, it’s nice to put on a pair of earrings.”
In other ways, the unique characteristics of the pandemic recession made starting a business an attractive proposition. The shift to working from home made setting up shop faster and cut certain costs. “I’ve sworn off [office] leases, which also means swearing off escalations,” Landau of ParkMyFleet told me. “I was literally able to recruit C-level executives from around the world, super-talented people, and we got started without having to relocate a single person. They’re hiring. They are executing. They are cranking.”
The pandemic also made connecting with suppliers, investors, and sales contacts simpler, other new-business owners told me. “It was way easier to get people to agree to talk to you,” said Priyanka Jain, who just launched Evvy, which sells at-home vaginal-microbiome testing kits. “It was so hard for people to say no to a 15-minute Zoom call, and I felt like I could send more cold emails. Geography just stopped mattering. I talked to 200 people in the process of formulating my idea, and I never would have been able to do that if we were taking walks or doing in-person meetings in San Francisco or New York.
On top of that, the pandemic recession fomented creative destruction, accelerating the shift to work-from-home, remote, distributed, and direct-to-consumer business models that economists have been anticipating since the dawn of the computer age. The coronavirus destroyed brick-and-mortar restaurants but boosted spending on delivery; it killed gyms and yoga studios but increased interest in personal fitness equipment; it decimated formal office-wear sales but boosted revenue for skin care and loungewear; it halted business travel but led to the uptake of virtual-conferencing and collaborative-work technologies.
For the Texas-based entrepreneurs Christie Zwahlen and David Taffet, the pandemic both gave and took away. The two had co-founded a direct-to-consumer company that was getting ready to ship a freezer-cum-trash-can called Petal. (Cold trash doesn’t stink up a small apartment.) But the pandemic increased demand and kinked the supply chain for freezer parts. That made it impossible for the company to manufacture its trash can for a reasonable cost. The company is—forgive me—on ice for the moment. “I was devastated,” Zwahlen told me. “But we couldn’t make it work.” Still, the pair launched an all-virtual business consultancy during the pandemic; its first client was the refrigeration company they had contracted with to produce the trash can.
Finally, a number of entrepreneurs mentioned that the pandemic had changed their risk-reward calculus in some ineffable, unquantifiable way, inculcating in them a kind of just-do-it, if-not-then-when attitude. “There comes this sudden moment of, I might as well give it a go!” Taffet told me. “It’s a pandemic. The world is changing. There’s something hopeful about it, in a weird way.”
I cannot substantiate the importance of that impulse, and future policy makers might not be able to recapture it. But they very much might be able to re-create the material conditions that let the COVID-19 business boom happen. Flooding the economy with money, such that millions of Americans do not suffer the financial losses commonly associated with recessions, might help keep existing businesses afloat while allowing new ones to launch. Entrepreneurship need not be a victim of future downturns.
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