Resilience and rebound: Recent trends in United States entrepreneurship

As the repercussions of the COVID-19 pandemic resonated across the United States economy in 2021, the nation’s startup spirit remained strong. According to the early-stage measures within the Kauffman Indicators of Entrepreneurship, business ventures open a year or less reported ongoing success at a relatively high rate while new businesses increasingly started out of opportunities instead of necessity. To provide some context, Robert Fairlie, economics professor at the University of California, Santa Cruz, and lead researcher for the Kauffman Indicators of Early-Stage Entrepreneurship, recently discussed the Early-Stage Entrepreneurship findings, which draw upon U.S. Bureau of Labor Statistics data.

Considering the economic whiplash the pandemic caused during the past two years, where did it most significantly appear to affect early-stage entrepreneurship?

Fairlie: In 2020, we saw a drop in one-year survival rates, much as we saw a decline during the Great Recession. But in 2021, we saw a sharp increase as 2020 startups fared much better. Why? Perhaps only stronger types of businesses were deemed worth the risk in 2020. Or it could be that the pandemic created number of holes in the business landscape, and new businesses stepped up to fill those gaps and take advantage of the opportunities.

Did the increased opportunities lead to a rise in new business formations?

Fairlie: To clarify, the data tries to capture all types of businesses, from solo ventures to those that employ others and from ones formed out of necessity to those tied to an opportunity. In 2020, as many people likely had to start a business out of necessity when they became unemployed, this rate of new entrepreneurs jumped to an all-time high for the Index. It declined modestly in 2021, although the rate of new business creation remained higher than the 25-year average.

Within that broad rate of new entrepreneurs, can you share any insights by demographic?

Fairlie: From a race and ethnicity perspective, the Latino community featured the highest rate of new entrepreneurs in 2021, while the rate of new Black ventures subsided somewhat after jumping in 2020.

Interestingly, over the Indicators’ 25-year span, the Latino rate of new entrepreneurship has consistently led the U.S., and in 2021, 24.2% of the country’s entrepreneurs were Latino – up from 10.0% in 1996. Probably the biggest part of that is the growth in the Latino population, but it also reflects the consistently higher rate of entrepreneurship, which could reflect necessity, limited job opportunities, or a desire for flexible work conditions. Alternatively, the white community accounted for 54.5% of the nation’s entrepreneurs in 2021 (compared to 77.1% in 1996), Black individuals represented 10.1% of the entrepreneurial community in 2021 (compared to 8.4% in 1996), and people of Asian descent increased their share of entrepreneurs from 3.4% to 7.3% between 1996-2021.

Back to the broader rate of new entrepreneurs, did the necessity-opportunity split return to a more traditional footing in 2021?

Fairlie: Definitely. More specifically, the opportunity share of new entrepreneurs – or the percent of individuals who chose to start a new venture to pursue an opportunity – dropped more than 15% in 2020 to levels lower than we saw during the Great Recession. What’s encouraging is that this rebounded strongly in 2021, exceeding the levels recorded in the aftermath of the Great Recession.

Looking beyond the new entrepreneurs themselves, how have the new ventures impacted the nation’s job market?

Fairlie: The pandemic basically extended the slump in job creation among early-stage startups that started during the Great Recession. After holding steady at a little more than five jobs per 1,000 people between 2015-19, the rate dipped below five in 2020 and declined further in 2021.

Looking ahead, where do you see further opportunities and challenges?

Fairlie: I think the increase in self-employment activity was accelerated somewhat by the pandemic and I don’t believe it’s going to return to where we would have expected it to be if COVID-19 hadn’t happened. Meanwhile, I think small retailers and others that sell goods will continue to be challenged by consumers’ increased comfort with online purchasing. Although, some interesting hybrid business models delivering goods and services may result, especially given the gaps that emerged in small business areas such as downtowns.