An Unprecedented Increase in New Business Formation
Total business applications in the United States were the highest on record in 2021 — a 53% increase from 2019 and 23% higher than in 2020. Prior to the pandemic, business creation had been relatively flat for many years.
Unlike the last recession, the COVID-19 pandemic saw an unprecedented increase in new business formations. According to the Census Business Formation Statistics, during the great recession, new business formations declined 5.9% from 2006-2010. Following the great recession, business formations did not return to pre-recession levels until 2014.
Interestingly, the chart below shows we are not following a similar pattern coming out of the COVID-19 pandemic; new businesses are forming rapidly.
Source: Census Business Formation Statistics, 2006-2020
Peterson Institute for International Economics analysis claims that the pandemic surge is “attributed largely to entrepreneurship by necessity.” Yet the tightening labor market in 2021 didn’t result in a corresponding decrease in business applications.
New businesses are starting, but what types of businesses are they? Between 2019 and 2020, new businesses concentrated mainly on non-store retailers, professional services, personal and laundry services, administrative services, truck transportation, and food services. Firms that grew the most did not follow similar growth patterns from 2018 to 2019; in fact, a few industries declined, like truck transportation and professional services, before skyrocketing from 2019 to 2020.
Source: Census Business Formation Statistics, 2019-2020
Given pandemic conditions, industries with the most new businesses include ‘essential’ ones that have limited contact with people or offer services that allow individuals to stay in their homes. The rise in Non-store Retailers and Truck Transportation makes sense; many were locked down and relied on online shopping to deliver purchases to their homes. When you have millions of people in a similar situation, you can see an industry that saw a decline, now finding opportunity. That said, there were also increases in industries like Accommodation and Food Services.
In its analysis of new business formation, Economic Innovation Group notes that firms started during recessions tend to “remain smaller” than those that aren’t. Additionally, “fractional entrepreneurship” may increase as entrepreneurs re-enter the labor force but retain their business operations on a part-time basis. As time goes on and we get further away from pandemic conditions, how will communities support existing businesses and cultivate new ones?
The Role of Communities in Helping New Businesses Survive
Launching and growing a successful business is challenging regardless of the economic and external conditions. However, given the significant increase in business formation and the particularly challenging environment brought on by the COVID-19 pandemic, inflation, and recession concerns, it is especially important that communities work together to support new businesses and their success. The increase in business formation presents a critical opportunity to tap into innovative potential, increase vibrancy, and improve the overall economic prosperity of our communities.
One way to help support the success of new business is by fostering a robust entrepreneurial ecosystem – an interconnected network of local leadership, talent, and resources that works together to foster innovation and growth by supporting entrepreneurs throughout the entire business lifecycle. According to the Kauffman Foundation’s Entrepreneurial Ecosystem Building Playbook, the following 7 design principles are needed to build and enhance a community’s ecosystem.
Put entrepreneurs front and center.
Enlist collaborators. Everyone is invited.
Live the values.
Connect people bottom-up, top-down, outside-in.
Tell the community’s authentic story.
Start, be patient.
Entrepreneurship favors a bias toward action. Here are examples of communities that have implemented these design principles and realized the benefit. Regardless of what stage of ecosystem development your community finds itself, these promising practices demonstrate how to apply these 7 design principles in practice.
1. Put entrepreneurs front and center
An entrepreneurial ecosystem is best described as a network, not a hierarchy, with diverse leadership representing a variety of stakeholder groups, including public officials, university administrators, community developers, investors, and more. Yet it is widely accepted that a strong ecosystem is built with entrepreneurs at the center. This means they, too, should have a leadership role within the system.
Asheville, NC, has been acknowledged for building a strong ecosystem centered directly around the needs of entrepreneurs, particularly those in the craft beer, local food, and outdoor recreation sectors. Entrepreneurs have also been empowered to lead within the ecosystem. Outdoor Gear Builders, for example, was founded in 2013 by a small network of 5 gear manufacturers and has grown to more than 75 members representing the entire outdoor industry in Western North Carolina. The organization has helped member companies enter international markets and strengthen the local industry through festivals, trade shows, and workshops.
By reviewing new business data by industry, communities can develop their ecosystem model to meet the needs of the entrepreneurial community better and share informational resources regarding how new business formations relate to existing industry strengths and opportunities.
2. Foster conversations
Entrepreneurial ecosystems maintain a human-centered approach to economic development. As such, conversation – a core human behavior – is key to maintaining a strong ecosystem. 1 Million Cups is a free program developed with this in mind. “Based on the notion that entrepreneurs discover solutions and engage with their communities over a million cups of coffee,” this program of volunteers creates opportunities for conversations in a more collaborative environment than that of pitch meetings and competitions.
3. Enlist collaborators. Everyone is invited
Asking for help is critical to small business success, but entrepreneurs don’t always know who to turn to for the assistance they need. Startup Tucson offers a user-friendly entrepreneurial ecosystem guide for business owners to find service providers across a range of offerings. The service providers are organized by category, highlighting the variety and number of players it takes to maintain a healthy ecosystem. Categories include business events and networking, economic development and government services, chambers and memberships, workspaces, accelerators and incubators, funding, education and training, and professional services. The guide serves as a central location so entrepreneurs can more easily tap into the support system available to them.
4. Live the values
Building an entrepreneurial ecosystem requires building a culture of inclusivity and innovation. As the Ecosystem Building Playbook puts it, an ecosystem needs to “change values by changing behaviors.” Our society often relies on traditions as a playbook for how to support and show up for one another. Shine Registry is an example of any ecosystem builder that is creating a culture of entrepreneurial support that celebrates professional success through a new tradition – inspired by common customs used for other life milestones such as birthdays, graduations, and marriages. “If you can ask for a gravy boat when you're getting married, you should be able to ask for stuff when you're starting a business too.” Shine Registry provides a platform for businesses and their founders to host wedding registry-style lists of needs (monetary and non-monetary), giving their communities the chance to show and give their support.
5. Connect people bottom-up, top-down, outside-in
This ecosystem design principle speaks to the importance of helping entrepreneurs build social capital, importantly through business networking. However, it also highlights another important factor of increasing connectivity by removing barriers to the digital divide. In GoDaddy’s Venture Forward report, it found that “adding 1 highly active venture per 100 people could add $408 per household annually.” This statistic captured the attention of the Denison Development Alliance, which soon after invested $140,000 into a small-business accelerator geared towards teaching entrepreneurs how to get online. The program provided $6,000 grants for entrepreneurs to execute an $8,000 project to create an e-commerce platform and cover advertising and other promotional expenses. The municipality covered 75% of the cost and encouraged businesses to hire local photographers and digital marketers to support the project. This approach ensured the quality of the newly created e-commerce websites and spread the impact beyond the grant recipient.
6. Tell the community’s authentic story.
Who better to tell the business community’s authentic story than entrepreneurs themselves? Built by Philly describes Philadelphia’s entrepreneurial ecosystem based on three key components: the role of small businesses, advocacy and decision-making, and resource navigation. But it’s not the elected officials, investors, or incubator directors who define the ecosystem. More than 200 business owners spanning various industries and neighborhoods contributed to Built by Philly’s research, and 32 of these business owners are featured in a series of 1 to 2 minutes videos describing their personal stories and interactions within the ecosystem. Topics range from capital access, business services, customers, and the entrepreneurial ecosystem as a whole. Their experiences reflect the real complexities of the ecosystems – both its failings and successes. Built by Philly’s strong use of storytelling reveals the true charge for ecosystem building: “Small business owners build Philadelphia. Philadelphia owes its support to small business owners.”
Sharing authentic stories enhances trust, which is critical to a strong ecosystem. Paired with a culture of listening, honest storytelling strengthens peer connections and enables ecosystem builders to address real needs and opportunities.
6. Start, be patient.
Whether your community is just setting out or patiently growing, the development of a strong entrepreneurial ecosystem – just like business creation, itself – cannot be done in a vacuum. Fourth Economy helps build strong communities and impactful organizations, and this includes fostering strong business and entrepreneurial environments.