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Don’t look now, but half-century-old trends in American business incorporation appear to be inverting — at least for now.
“I’ve looked at this data going back 50-60 years, and we’ve never seen a kind of boom like this during a recession,” said Luke Pardue, an economist at Gusto, the HR and payroll provider. “And we’ve never seen it led by the kinds of people who are creating businesses today.”
American rates of entrepreneurship have been declining since the 1970s, and they’ve gotten worse during recessions (contrary to common perception). Worse still, founders of color and women-led businesses were typically less capitalized and harder hit during economic downturns. That changed during this pandemic — and the trend continues apace.
Nearly 5.5 million businesses were formed in 2021, a million more than the year prior and an astounding 54% more than in 2019. Monthly incorporations of so-called “high-propensity” businesses, or those likely to hire employees, remain elevated this year, according to data from the Federal Reserve Bank.
Who is starting all these businesses?
According to a new report from Gusto based on a survey of more than 2,600 of its clients, as well as the firm’s own internal economic data, rates of Black, Hispanic and women-led incorporations are up contributing to record-setting firm creation:
- In 2021, 49% of entrepreneurs were women, a dramatic increase from the 28% seen in 2019
- 28% of 2021 business incorporations were founded by people of color, still lower than overall population representation but well beyond pre-pandemic levels
- 7% of new business owners identified as LGBTQ, a new baseline number
The Gusto report also included an economy-wide estimate of LGBTQ-led small businesses: 1.4 million businesses generating $1.7 trillion.
Why are so many people starting businesses? Flexibility.
Just 14% of business owners who started a company in 2021 did so because of a layoff — reflecting a tight labor market. The rate of founders choosing to start a business to schedule around childcare needs doubled to 12% between 2020 and 2021, according to Gusto.
A quarter of business founders did so to have more control over their financial situation.
Of those who started a business after quitting a job, 71% stayed in the same industry. The entrepreneurship boom isn’t a career shift, then, but an extension of rising employment expectations.
“People are making choices to design a business around their life,” Pardue told me.
What kinds of businesses are being created?
The country’s entrepreneurial boom has played out differently throughout the pandemic.
“Professional services dominate new business creation,” according to the Gusto report, which includes higher-wage industries from legal and accounting to information technology. In late 2020, the growth was with personal services, as people adapted new retail and food models following lockdowns and health restrictions.
Company culture has become a widespread priority, after “burnout” became the country’s watchword. Nearly three quarters of new business owners surveyed said they believe a strong company culture is either extremely or very important to the success of their business. A third of owners say they spend as much as a quarter of their time building company culture, per Gusto.
Why is an entrepreneurship boom important?
It’s a mechanism for introducing new products and services that existing businesses won’t. It fosters competition, which is a device for sharpening focus. It also comes with considerable reputational and financial risk, which is rewarded with the possibility of prestige, control and profit. Lots of people don’t get the reward but enough do that entrepreneurship is seen as a vehicle for wealth creation.
That makes entrepreneurship a major conversation point for addressing wealth inequality. The typical white family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family, according to an analysis by the Federal Reserve Bank. Forget the question of morality for a moment and consider the remarkable economic inefficiency: Fewer entrepreneurs impoverishes us all.
If those percentages were proportionate the American economy would have almost 1.5 million more Black and Hispanic-owned businesses, according to new research from the Alliance for Entrepreneurial Equity, a newly formed, DC-based pressure group with backing from the National Urban League. Other factors play a more widespread role in racial wealth inequality, notably home ownership.
Has inclusive entrepreneurship efforts helped?
One big question this demographic data brings up: Why the explosion of entrepreneurship generally, and specifically from women and people of color? For years, government, business and nonprofit efforts have prioritized the development of entrepreneurial support systems for all, with a special focus on underrepresented founders. And for years, there had been very little progress. Did a decade of investments in so-called “inclusive entrepreneurship” make a difference?
No doubt we’ll have years of economic analysis of this pandemic era, but this could be a point of optimism.
“I do think what we’ve been seeing in the past two years is due in large part to the foundation set by these incubators and ecosystems,” Pardue said. “The proof is in the pudding, these businesses are more prepared and they’re willing to hire. This is not a blip. Real, high-quality sustainable businesses have started.”