COVID-19 Likely to Result in Increased Entrepreneurship Rates
Despite the more than 40 million unemployment filings and anticipated millions of small business closures that will result due to COVID-19, previous economic downturns suggest that there may soon be ripe opportunities for business start-up activity.
Prior to COVID-19, the single biggest economic downturn was the appropriately titled “Great Recession” of 2007-2009. During that time, 8.8 million people lost their jobs and thousands of businesses closed or filed bankruptcy. However, it also resulted in a sizable increase in rates of entrepreneurship. In “How the Great Recession Spurred Entrepreneurship” by Robert Fairlie, Ph.D., data from 250 regions across the US demonstrated higher local unemployment rates were tied to higher rates of entrepreneurship. The unemployed started more businesses than those who held a job. In fact, entrepreneurship rose by 17 percent from 2006 through 2009.
A critical component to this trend will be the availability of capital resources. During the Great Recession, much of the entrepreneurial recovery was driven not by bank lending but by the growth of home equity, which enabled entrepreneurs to access home equity loans to launch. Many also tapped their retirement benefits. On the issue of home equity, given the decline in home ownership (down to 64% in 2018 from 70% in 2005 pre-Great Recession) it is unlikely that entrepreneurship will be totally driven by home equity loans. Like PPP lending, instead entrepreneurs may seek from more community banks, Fintech institutions and Certified Development Financial Institutions (CDFIs). In terms of retirement savings, the CARES Act did away with the early withdrawal penalty up to $100,000 from personal retirement savings for those impacted by COVID19. Thus, that will likely drive some start-up activity.
Interestingly, the types of businesses formed during the downturn are similar to those started in prosperous periods. In fact, the share of businesses created in each industry during boom and bust periods differs by less than a percentage point. The highest number of startups during the Great Recession appeared in the professional-services and construction sectors, followed by education and health services, wholesale, and retail. Manufacturing had the lowest rate.
It’s important to note that since the Great Recession much has changed in the rates of manufacturing start-ups. Launching a manufacturing business was historically the most capital-intensive business to start, and thus impacted rates of entrepreneurship in this industry. However, over the past decade, a combination of decreasing costs and access to equipment, logistics, and ability to reach consumers through e-commerce have lowered the barriers for “Small-scale Producers” to launch in nearly every retail sector. This has closely aligned with consumer interest in unique crafted products, the growth of platforms like Etsy, and economic development efforts to support maker spaces and shared food kitchens.
Given the early nature of the pandemic fallout, it is very difficult to extrapolate in exact terms COVID-19-related impacts in levels of new entrepreneurs. History certainly suggests a large increase is expected, especially given economist predictions like that of University of Stanford economist Nicholas Bloom, who suggests in a recent study that 42 percent of recent job losses will be permanent.
Unlike past recessions/depressions, COVID-19 will also require changes for existing businesses in a way that will require new entrepreneurial thinking. This may require existing small businesses to rethink everything from their business models, revenue channels, product/service offerings, and other adaptations to COVID-19-related shifts in shopping, working, and recreating.
Looking back at trends is a great predictor of future direction, albeit not an exact science. Past data demonstrates that in bad economic times that have forced business closures and resulted in large unemployment numbers, the silver lining has been the counter rise in entrepreneurship. Despite all the challenges, there is a need for optimism. For many Americans, the new potential lies ahead to launch a new business or recover stronger as an existing business from the pandemic.