Fighting the New-Business Deficit in the Time of Coronavirus
Why Crisis Recovery Requires Strong Business Creation
Giacomo Bagarella is a Senior Analyst at HR&A Advisors. This article was co-written with Kate Wittels, a Partner at HR&A.
In addition to incalculable human loss and vast economic displacement, the COVID-19 recession will pose a massive test of the U.S. entrepreneurial ecosystem. A healthy economy requires the creation of new businesses, which contribute disproportionately to innovation and new jobs. In responding to the economic shocks of the pandemic, policymakers must go beyond traditional efforts that seek to preserve existing businesses and instead advance new policies that ensure that entrepreneurship continues.
New business formation has been in decline since at least the 1980s, a trend likely to be exacerbated by this recession as it was in the Great Recession. In 1980, 14% of companies were less than one year old; by 2015, that figure had shrunk to 8%.
New businesses contribute to economic opportunity and long-term prosperity. A National Bureau of Economic Research study states that “high-growth young firms contribute disproportionately to job creation, output, and productivity growth.” Recent research suggests that counties with larger shares of small digital entrepreneurs have higher growth in median household incomes. As a consequence, a dramatic drop in the creation of new companies affects the fabric and vitality of local communities and translates into lower vibrancy for the national economy.
Current federal crisis response policies, like those that followed the Great Recession, do not yet address the need to spur business formation. State and local government and the private sector are providing mostly one-off measures — adapting some of their processes to the current environment or making software and services available for free for a limited period. This patchwork is insufficient, and the next phase of governmental and philanthropic response needs to include initiatives that focus on stabilization and adaption for the entrepreneurial ecosystem.
The response should address obstacles that have limited business creation in the last few decades. The Economic Innovation Group points to the lack of new bank formation as a contributing factor. As the FDIC chairman noted in 2018, new banks “offer services and products to underserved communities and fill gaps in overlooked markets.” Entrenched business interests are also associated with lower entrepreneurship, suggesting the need to encourage broader market competition as well.
Additionally, investing in the next generation of small businesses could include seed funding or low-interest loans, training programs, and streamlined licensing and registration processes. (For example, lack of state licensing reciprocity is a major obstacle for many owners of businesses like hair and nail salons.) Many of these reforms can be implemented while full or partial lockdown measures remain in place: aspiring entrepreneurs should be able to start a company from their home while shelter-in-place measures are in effect or rapidly after they are lifted.
Start-up promotion should also embrace an equity agenda across a variety of dimensions. Policies should support not only the twenty-somethings with a pitch for an app but also blue-collar workers, recent immigrants, and mid-career professionals with a more prosaic idea. Likewise, start-up promotion should consider geographic inequities. PitchBook forecasts that investment capital, which had been venturing into new regions, will retreat back to major hubs that already have better access to funding sources.
The great news is that start-up promotion has already been happening under the radar, even before the pandemic. New York City’s Department of Small Business Services offers quick guides on starting a business, workforce training grants, training for aspiring entrepreneurs, and other helpful resources. In Massachusetts, MassChallenge accelerates nascent businesses in industries as diverse as social impact, life sciences, and clean energy, providing participants with expert advice, seed funding, and connections. On the private side, services like Stripe Atlas and LegalZoom offer streamlined packages to start a business digitally. The rise of co-working could also help: a study that HR&A performed for WeWork found that start-ups based in co-working spaces are more likely to survive after three years than those that aren’t.
The COVID-19 crisis will create opportunities in areas like telemedicine, medical equipment manufacturing, and services to keep us even better connected while our daily movement is circumscribed. There is also ample room for innovation in technology and operating models to help address climate change, improve economic mobility and mental health, and foster community and belonging.
We will measure our success in recovering from the COVID-19 pandemic by the extent that our cities and communities will be more equitable, vibrant, and innovative. Writing in the New York Times, Anne-Marie Slaughter of the New America Foundation described the myriad grassroots initiatives that thousands of people are taking to respond to the crisis. The many lists collating and sharing resources also attest to these creative undercurrents. Many of these ideas could and should bloom into new companies that make our economy and society more resilient.
When it comes, the next round of financial stimulus and government initiatives should help unleash Americans’ entrepreneurial spirits to create the next generation of small businesses.
