An unexpected result of the pandemic era is an increase in entrepreneurial activity. Since 2020, the number of applications to start new businesses has skyrocketed, reversing a decades-long slump.
The reasons for the boom are many. Millions of people were suddenly laid off, giving them the time and inclination to start new businesses. Personal savings soared, buoyed in part by a frothy stock market and government stimulus payments, giving would-be entrepreneurs the means to realize their visions. Low interest rates made money cheap and widely available.
But the buoyant economic climate that helped foster this entrepreneurial spirit has given way to high inflation, rising interest rates and dwindling savings. That has left these emerging companies navigating challenging financial headwinds – and a possible recession – at a time when they are most vulnerable. Even under normal circumstances, about half of new businesses fail within five years.
“Young companies are inherently vulnerable,” said John Haltiwanger, an economist at the University of Maryland who studies entrepreneurship. “They’re likely to fail, and they’re especially likely to fail in a recession.”
In 2021, Americans filed applications to start 5.4 million new businesses, according to Census Bureau data. That was on top of the 4.4 million applications submitted in 2020, which was by far the highest in the government’s more than 15 years of tracking. (Last year’s applications through November were ahead of 2020 but behind 2021; December figures will be released this week.)
Data on actual company formation will only become available in a few years, so it is not yet possible to measure the effects of the cooling economy on new ventures. The survival of these new businesses could have major implications for the health and dynamism of the economy as a whole.
“Innovation drives productivity gains,” said John Dearie, president of the Center for American Entrepreneurship, an advocacy group. “And innovation disproportionately comes from new companies.”
But he warned that the Federal Reserve’s monetary policy — designed to curb the fastest price rises in decades — “adds up the headwinds for entrepreneurs by crushing demand and raising the price of money.”
In interviews, entrepreneurs expressed a mix of determination and resignation about the coming months. Some said they learned lessons from the turmoil of the pandemic about how to weather financial adversities that they believed had recession-proofed their business models. Others were clear about needing outside funding that they feared would not come.
Inflation FAQs
What is Inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in prices for everyday goods and services such as food, furniture, clothing, transport and toys.
“It’s definitely been a bumpy ride,” says Jennifer Sutton, who started a juice and wellness bar in Park City, Utah, in 2021. She is most concerned about inflation, she said, as well as the prospect of a recession that could reduce the tourism on which her business depends. She opened a second grocery store location, in part because it required less start-up capital than opening another stand-alone store.
In many ways, however, Mrs. Sutton is lucky. She self-funded her business, High Vibes Juicery and Wellness Bar, largely from her family’s savings and credit card debt.
Taylor Wallace, a Florida entrepreneur, is in a different position.
After being laid off from the augmented reality company Magic Leap at the start of the pandemic, he reconnected with a friend, Mike Mayleben, who was looking to start a dog daycare. In the fall of 2020, the two began acquiring dog shelters for sale, rolling into a new company called Paws ‘n’ Rec.
The company, which offers membership-based childcare, room and board, currently has two locations in the Tampa, Fla., area, with a third under construction. But the company wants to grow by opening more locations, just as inflation drives up construction costs and rising interest rates make loan terms more difficult. His borrowing costs on the company’s line of credit, which he expects to draw soon, are based on prevailing interest rates and are up more than four percentage points from a year ago.
“The fact that debt is more expensive is going to be a huge challenge for us and for everyone,” he said. “When we started this, we were dealing with money that has been the cheapest ever in the United States.”
Higher interest rates and uncertainty about the economy also seem to dry up flowing sources of capital, some entrepreneurs said.
When Lundon Attisha started his first business in the summer of 2021, Bidstitch, a subscription-based online marketplace and news site for vintage clothing, he was able to quickly raise about $200,000 in venture capital and angel investments.
“I thought I was the all-star in raising capital,” said Mr. Attisha, who quit his job at a law firm within a month to start his business. “The space was somewhat squeezed at the time.”
Understand inflation and how it affects you
But investors seemed much more reluctant to put money into early-stage companies when he started raising money again last year, he said. “The tone of the room with investors – there was a palpable change,” he said. He finally sold Bidstitch to a portfolio company in Los Angeles in September.
That experience helped form the business model for a second company he started last year, Cita Reservations, an online reservation system for tables at popular restaurants. Instead of relying on outside financing, the company started charging people right away and selling reservations at some restaurants for $200. To attract attention, he gives away reservations to social media influencers.
“We need to be much more aware of where we put our resources,” he said.
Census data shows that a large portion of new business applications were for sole proprietors who had no intention of hiring employees. Many applications were also for businesses in industries rocked by the pandemic, including retail, food service and logistics, some of which may have replaced others that were closed.
But despite a slowdown that could hurt new businesses, many economists are optimistic that the rush to start businesses that began in 2020 will still translate into job growth, innovation and ultimately a more productive economy.
“Many of these new businesses continue to grow and hire,” said Luke Pardue, an economist at Gusto, a payroll and benefits platform for small businesses. “These new companies are really driving job growth right now because they continue to grow and because they are ambitious in their future roles.”
The CEO of a vacuum manufacturer in Price, Utah that his father started in 1985, Spencer Loveless grew frustrated during the early months of the pandemic that supply chain issues prevented him from sourcing parts from China. So he started using 3D printers his company had on hand to make his own parts. Companies similarly caught in the grunt of the supply chain got wind of what he was doing and began asking him to print items for them as well.
In November 2020, he started Merit3D, a 3D printing company. The company originally had two employees, but has grown. Last year he had 20 employees; this year he is aiming for 30 to 40.
His hiring plans don’t stop there. He wants Merit3D to eventually have 1,700 employees, offsetting job losses at nearby power plants that will close in the coming years.
Mr Loveless said his goal for this year was to “bring as much revenue to the business as possible so that it can sustain itself as quickly as possible”. He was relatively unmoved by the prospect of an economic downturn.
“I think the recession will hit harder than most people think,” he said. “How we prepare for that is that we become the best at what we can do.”
