Why are there so many new companies?
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I recently saw a headline that stated that new companies are being created at nearly twice the rate this year compared to previous years. This came off as super interesting to me. I will parse out my thoughts but would love to have a discussion about it.
The immediate question is why. My initial thoughts had to do with the heightened unemployment rate. For context, the unemployment rate is currently 8%, which is not too much higher than the average over the years. However, at its peak, unemployment touched 15% in April. Either way, the unemployment rate now is much higher than at its all-time lows pre-pandemic. With less people working, more people have time on their hands, which can spur creativity. The pandemic-driven unemployment may have given some the time they always needed to take the steps to start the company that has always been in the back of their minds. Similarly, if a person is out of work, the opportunity cost of the many hours it takes to start a company is far lower, now that they are not forgoing wages. I would be surprised if the heightened unemployment rate is not at least part of the reason for the wave of new companies.
The next question that came to mind was weather this was good or bad. On one hand, there are seemingly always new products and services that can make peoples’ lives better. On the other hand, some inspiring entrepreneurs might be putting their life savings into their new idea in an evidently saturated market. This could lead to further wide-spread economic supression. After all, how many startups actually succeed?
… which brings me to my next point. From where I sit, big companies keep getting bigger while there are fewer small companies that remain afloat. I continue going to Amazon for more and more products, while the local hardware store and diner have shuttered. I am just not convinced that these tiny startups have the ability to compete with the ever-growing, omnipotent global players.
Going forward, will this rise in new companies have any material impact on the economy? While the economy continues to become more normalized, will the inspiring entrepreneurs abandon their risky projects and go back to normal wage-paying jobs? Or will they throw every last penny they have at their aspirations and end up having material impact on unemployment, consumer spending, poverty, etc.?
I am not sure. I think it is an interesting question. Obviously, entrepreneurship is a huge positive for society. Where would we be without the likes of Bill Gates, Mark Zuckerberg, Steve Jobs, etc.? However, the need for middle-class wage-earners will never go away. Is the scale becoming unfavorably tilted?
I would love to hear everyone’s thoughts! Please comment!
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I’m curious if “new companies are being created at nearly twice the rate this year compared to previous years” means new Corporations/Partnerships (basically formal business) or include anyone with a “side gig” type business? I also wonder if “With less people working, more people have time on their hands, which can spur creativity” it may also be more out of desperation/need. Sorry, that’s all I got but certainly will be following this thread.
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@rick505 thanks for engaging Rick! I think your thoughts are very helpful.
To your first point, I am pretty sure that it formal businesses. Would it even be possible to gather data on “side gig” businesses? What would that even look like?
I think your second point is an interesting one. I wonder what the difference is between starting a company out of desperation vs. starting a company because you came upon a good idea is… which is more powerful?
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I have to jump in here. This discussion is based on a headline that @studentsavings saw. Can we get a link to the story? I would like to know how the increased rate was calculated? Was is based on a survey, or filing of fictions names, or incorporation papers, or what? Hard to really try to understand the statistic without knowing the composition of that statistic.
@studentsavings - can you share a link to the story?
—. Z. —
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@zerenia thanks for engaging. Here’s the link:
I’d love to hear what you think!
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@studentsavings said in Why are there so many new companies?:
@zerenia thanks for engaging. Here’s the link:
I’d love to hear what you think!
I let my WSJ subscription lapse when I finished grad school and couldn’t get a decent discounted subscription rate. Is there another way to read the story?
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Is It Insane to Start a Business During Coronavirus? Millions of Americans Don’t Think So.
The pandemic closed hundreds of thousands of businesses across the country. But now applications for new U.S. businesses are rising at the fastest rate since 2007. Why? A mix of necessity and opportunity.By Gwynn Guilford and Charity L. Scott
Sept. 26, 2020 12:00 am ETThe pandemic forced hundreds of thousands of small businesses to close. For Madison Schneider, it was a good time to start a new one.
The 22-year-old in Haviland, Kan., opened Lela’s Bakery and Coffeehouse on Sept. 12, naming it after her grandmother. It has been busy every day since, she said. “It just felt like the right thing to do,” Ms. Schneider said.
Americans are starting new businesses at the fastest rate in more than a decade, according to government data, seizing on pent-up demand and new opportunities after the pandemic shut down and reshaped the economy.
Applications for the employer identification numbers that entrepreneurs need to start a business have passed 3.2 million so far this year, compared with 2.7 million at the same point in 2019, according to the U.S. Census Bureau. That group includes gig-economy workers and other independent contractors who may have struck out on their own after being laid off.
Even excluding those applicants, new filings among a subset of business owners who tend to employ other workers reached 1.1 million through mid-September, a 12% increase over the same period last year and the most since 2007, the data show.
“This pandemic is actually inducing a surge in employer business startups that takes us back to the days before the decline in the Great Recession,” said John Haltiwanger, an economist at the University of Maryland who studies the data.
Many of these won’t pan out. More than half of new employer businesses fail within five years, he said. What’s more, small-business revenue was down 21% as of mid-September versus January levels, according to data and technology company Womply. “I think most entrepreneurs realize the probability of success is not high,” Mr. Haltiwanger said. “The question is: Are they jumping on market opportunities that have emerged rapidly given the current environment?”
The pace of new launches comes amid a wave of business closures, which created an unusually large void for new entrants to fill. The U.S. lost more businesses during the first three months of the crisis than it normally does in an entire year, said Steven Hamilton, an economist at George Washington University. In addition, business applications are growing at nowhere near the pace needed to keep up with the 700,000 firms that Mr. Hamilton estimates will be lost this year.
Spending is picking up as cities and states lift restrictions on everything from restaurants to retailers, leading to a rush of activity that had been on hold in the early months of Covid-19. At the same time, the continuing spread of the virus has led to a more sustained shift in consumer behavior than in previous downturns. That has wiped out revenue streams for existing businesses, but also opened up new markets for upstarts.
Another lift may be coming from personal savings rates, which are around three times as high as they were during the last recession, and home prices that remain aloft across most of the country. Nearly 90% of firms depend on an owner’s personal credit score to secure loans, according to a survey by Federal Reserve regional banks. More than half had relied on funds from personal savings, friends or family to support their business at some point in the last five years, the report found.
New-business applications began to pick up in June, likely fueled in part by a change in the tax calendar. After the government postponed tax-filing deadlines from April to July, it pushed back the rush of new-business applications that typically comes in March. As states eased restrictions in May and June, entrepreneurs who had shelved plans during the extreme uncertainty began to move ahead.
The jump may be one sign that the pandemic is speeding up “creative destruction,” the concept popularized by economist Joseph Schumpeter in the 1940s to describe how new, innovative businesses often displace older, less-efficient ones, buoying long-term prosperity.
Even though new businesses inevitably start small, they are a critical engine of job creation. Startups have historically accounted for around one-fifth of job creation, according to Mr. Haltiwanger’s research. More than half of new jobs come from the fastest-growing existing firms, most of which are relatively young companies, he said. Firms with fewer than 500 employees accounted for nearly half of private-sector employment in 2017, according to the Census Bureau.
The 2007-09 recession and the anemic expansion that followed are a reminder of how crucial that engine is. The sluggish pace of new- business creation in years after the recession officially ended contributed to a slow recovery and unusually high unemployment.
Despite widespread fears in the spring that venture-capital investment would dry up, deal activity fell just 6% in the first half of 2020, compared with the same period of 2019, according to a new analysis by Ian Hathaway, a senior fellow at the Brookings Institution think tank.
“As the crisis set in, everyone was holding their breath. Then, especially in knowledge-intensive industries, people realized life will go on,” said Mr. Hathaway. “We had a contraction and mass layoffs, but GDP was down 9%, not 50%. It was not as large as people thought.”
Here is a deeper look at eight people who risked their futures on the launch of a new business during one of the worst downturns since the Great Depression. For many it meant trying on new identities and forging new lives.
The Baker
Necessity motivated Ms. Schneider’s gamble. She graduated from college in May, and wanted to work as a worship leader in a church before bans on in-person services scuttled her plans. When a popular coffee shop in town shut down, she decided to reach out to the previous owner to inquire about purchasing the business. “It was way out of my price range,” she said.Renting the commercial space, however, was much more affordable: just $350 a month. So, she decided to chase her dream of opening a bakery. Ms. Schneider took about $8,000 from her personal savings to finance the startup costs and secured the inexpensive lease in August. Her parents lent her the money to buy an espresso machine. Local residents helped her paint the tin ceiling tiles and pull up old carpet before Lela’s Bakery and Coffeehouse opened this month.
“It all happened very quickly and was really crazy,” Ms. Schneider said. She plans to eventually bring on employees so she can expand her offerings beyond cookies, muffins and cinnamon rolls, and begin hosting special events.
The App Creator
Ileana Valdez saw an opportunity after a sign-up sheet she designed and posted as a joke in a Facebook group for college-related memes received thousands of responses from homebound students. Ms. Valdez and her brother, Jorge, spent a frantic weekend in their childhood home in Dallas, transforming the joke into a functioning dating website for college students. “There was no plan in any way to monetize it or turn it into a startup project, but because there was so much demand, we had to deliver a good product,” she said.The result, which they dubbed OKZoomer, is a dating platform without profile pictures that now has 20,000 users. New users sign up with their college email addresses, and take a personality quiz, which the OKZoomer algorithm uses to match them with other students from their school.
The fledgling company has since hired six employees to launch the OKZoomer mobile app, and is fielding inquiries from interested venture capitalists, said Ms. Valdez, 21, who is in the final year of earning a computer science degree at Yale University.
“OKZoomer started overnight as a meme, like ‘Missed your last chance to shoot your shot? We’ll help you with our dating algorithm,’” she said. “But it blew up.”
The Fitness Founder
Danielle Payton watched her publicist business wither in March, as fitness studios, a core client base, had to close to comply with shelter-in-place orders. In the weeks that followed, she noticed fitness instructors holding free classes on Instagram Live. “They were giving away their livelihood,” she said. “Free is not sustainable. Our haircuts aren’t free, our rent isn’t free…Nothing is free.”In response, Ms. Payton, who lives in Miami, Fla., launched Kuudose, an online workout-class platform, with co-founder Rachel Siegel in mid-June. “Fitness should be affordable and accessible to all, but everyone needs to make a living,” she said. The trainers on Kuudose receive monthly commissions for the members they bring to the platform, Ms. Payton said.
Kuudose gives customers access to about 200 short workout routines recorded by professional trainers in their homes for $9.99 a month or $99 for a year. The company has signed up 550 customers so far, Ms. Payton said. “We’re really looking at this as more of a long-term play,” she said. “We’re using the pandemic as the steppingstone to really launch us.”
The Mask Maker
Janizze Masacayan was a nursing home director in Monterey, Calif. when the pandemic hit, placing her at the center of a national health-care crisis while she wrestled with a child care crisis at home. She and her husband had no one to watch her 3-year-old son, who was now home from school due to government stay-at-home orders. “[My supervisor] asked me, ‘Do you want to quit? Because we need you here,’” she said. “So I just quit.”To offset the loss of income, Ms. Masacayan decided to try making reusable masks. “As a little kid, my grandma taught me how to use the sewing machine, so I thought, ‘Why not make masks for my family,’” she said.
Eventually, she decided to open an Etsy shop and sell her masks to others. She now has a stand-alone website called Jellybean Boutique, and makes customized masks for a local hotel.
Ms. Masacayan said she wants to expand her products to make her business more sustainable, so she won’t have to work outside of the home. “It’s been really great staying at home and being able to take care of my son,” she said. “It’s just very fulfilling for me.”
The Bike Mechanic
Ian Oestreich realized by early March that the coronavirus meant his days as a fitness trainer were numbered. So he began hawking his knack for fixing bikes. It paid off a few weeks later, when the gym where he worked in Madison, Wis., laid him off, and he began pursuing his idea of creating a mobile bike-repair shop.After investing about $1,000 of his savings in tools and equipment, Mr. Oestreich launched Backyard Bicycles in April, camping out in friends’ yards around Madison and spreading word of his itinerary via social media.
“This model would only work on the weekends in the prior world,” said the 26-year-old. “Now people are available between Zoom calls. Every day of the week is like a weekend.”
Soon he was putting in 10-hour days, fixing as many as 18 bikes daily. When the gym that laid him off offered his job back in June, he declined—he was earning more running Backyard Bicycles than he would have as a trainer.
“It’s honestly kind of unfathomable,” he said. “It feels like I built a rocket and lit it—and now I’m just holding on to the tail and waiting for it to fizzle out at the end of the season.”
The Chef
Nic Bryon was a sous chef in Tampa, Fla. who lost his job when the restaurant where he worked closed. During his first week of being unemployed, he joined forces with his brother, Greg, to start development on a local meal-kit delivery service called Pasta Packs.The concept itself is simple: the brothers offer a handful of fresh pasta dishes that arrive packaged with detailed instructions on how to reheat them to achieve a restaurant-quality meal. “You just need to be able to boil a pot of water,” Nic said.
While Nic developed the recipes, Greg, who is a photographer and designer, worked on branding concepts and taking photos of the completed dishes. Pasta Packs initially launched on Instagram, with their first customers being friends. From there, the brothers started a website and began to expand their customer base.
Nic wakes up at 6 a.m. every morning to do grocery shopping for the day’s orders. Then he spends the rest of the morning making the pasta, sauces and other accompaniments, before packaging everything. Nic and Greg said they are currently testing options to ship outside of Tampa.
The Bookseller
Leigh Altshuler always loved bookstores. She even worked at one, spending several years as the communications director for the Strand Bookstore, a well-known independent bookseller in Manhattan.But it wasn’t until after she lost her job in immersive theater in March that she began thinking of opening her own used bookstore in New York. “I was thinking of all of the things that would make me feel motivated to go back to work, things that I love,” she said.
Ms. Altshuler, 29, is using her own savings to open her shop, getting plenty of other help from her boyfriend, neighbors and friends in the form of book donations and spare hands. She aims to open near the end of October.
“If somebody asked me what I wanted to do when I was little, I probably would’ve said I wanted to have a bookstore, but in New York it never felt like it was a good time to open your own business,” she said.
Some people have questioned whether now is the right time for her to open a retail store. “I may as well just do something crazy and follow my dream,” she said. “And if it doesn’t work now, when will it?”
The Therapist
Joyre Montgomery wanted to start her own therapy practice once she received her master’s degree in 2015. It took a pandemic for her to act on it.She had a job as a school-based therapist in Chattanooga, Tenn., but that looked uncertain as schools closed and governments enforced lockdowns. The pause gave her the time to focus on what it would take to become a business owner. With new mental-health challenges to confront and a shift to virtual therapy, it seemed like the right time to start her new practice.
Ms. Montgomery created a plan in April and May and by June had completed the requirements to become a licensed clinical social worker. The catalyst that prompted her to open in July was the willingness among insurers to cover a broader range of telehealth visits. Ms. Montgomery got approval from companies to accept insurance in a fraction of the time it would normally take, she said.
She saw her first client on July 13 and now has nearly 60, an unexpected growth for Ms. Montgomery. “I was very shocked,” she said. “It’s almost at a point where I have to say I’m not accepting new clients.”
—Francesca Fontana and Derek Hall contributed to this article.
Write to Gwynn Guilford at gwynn.guilford@wsj.com and Charity L. Scott at Charity.Scott@wsj.com
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved.
Appeared in the September 26, 2020, print edition as ‘Rising From the Pandemic’s Destruction: A Million New Businesses.’
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@kohlspowrshopper thanks for this!
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@KohlsPowrShopper - thank you!
@studentsavings - looks like applications for EINs are the statistic. Without thinking too hard, that statistic is probably OK, but not 100% reliable. People can apply for an EIN but never actually start a business. I have heard that sole proprietors applying for bankruptcy need to establish an EIN, and that would be a very disheartening reason for a jump in EIN applications (IRS Info - https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-a-new-ein). Nevertheless, let’s suppose that the statistic is good enough for this discussion.
What is interesting to me is that people with EINs may not need them. My wife is a sub-S corporation and uses her SSN as her EIN, for example.
So, if people are applying for tax id numbers in relation to opening businesses, then what’s driving them to compete with Amazon and WalMart? Amazingly, even thought I love shopping at Amazon and will hit Walmart for some items, neither has an Italian Bakery I like. My local supermarket and the gourmet grocery don’t have a good Italian bakery section either, but guess who DOES have a great Italian bakery? My local pizzeria - the owner is actually a pastry chef who makes out-of-this-world great pastries, but also makes pizzas and other Italian food. I think he drives business to his pastry offerings when people pick up take-out food. My point is that Amazon and Walmart, so far, can’t be everything to everyone. There are a lot of service-based businesses that Amazon and Walmart haven’t touched, so that leaves the field open for others.
Here’s my unscientific thought - people believe they have the next great idea or they can do something better than others. See the stories above about the baker and the bookseller. Someone else closed so they decided to try and capture the abandoned customer base. I think this is risky as if the existing provider failed, what makes someone think they can do a better job unless they have a unique offering that people actually are willing to pay for, or they lead with low price for the market? I’m not sure how to get the statistics, but I would like to know from all of the new EINs issued, how many actually started businesses, and how many were still in business one year later? What’s the bike mechanic going to do when the streets are covered with snow and it’s way too cold to go bike riding?
Where I’m going with all of this is that people are optimistically starting businesses because they have been thrust into an unemployment situation with little hope of re-employment, at least in the near term. Some are brave or creative, or both, and dive into starting a business because they have little to lose by doing so. The question to ask is if these same people would have started businesses if they had not lost their jobs, and my feeling is that they would not have done so. If they were very confident in their uniqueness or ability to capture a piece of a market, why didn’t they start their businesses as a side hustle when they were still employed? Perhaps there was too much competition or a saturated market? If that was true, then the business closings tell me that there were too many providers in the markets and they were hanging on by a thread, or going further and further into debt to keep their businesses afloat. The business closings were a natural reaction to the weakly financed enterprises facing reduced customer demand, and if that’s true, then new entrants, if not strongly financed, face the same fate.
In short, optimism coupled with low risk is driving the EIN applications. I want to think so, anyway, and pray it’s not bankruptcies driving the EIN applications…
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@zerenia very insightful as always! Thanks. I definitely agree that there is much less to lose now for most people. I think the article also asserts that point. Hopefully the new business are able to gain the traction to stick around!
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@zerenia said in Why are there so many new companies?:
What is interesting to me is that people with EINs may not need them. My wife is a sub-S corporation and uses her SSN as her EIN, for example.
I know the Supreme Court decided that corporations are people, but I didn’t know you could marry them.
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@studentsavings Here’s another perspective, but be sure to read the entire story.
NC Record Number of Business Applications
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@zerenia very relevant and interesting. thanks for this!
it seems as if our initial thoughts weren’t too far off - more people have more time to put their ideas to work. good luck to them!
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@studentsavings Agree - good luck to them. I wish everyone well who ventures out own their own. It takes a special kind of person to take the risk, and a special kind of person to persevere and succeed.
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@zerenia could not agree more.
but to be fair, those who do venture out on their own and succeed on a large scale certainly get compensated more than their fair share.
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@studentsavings I can only hope that the “Big Winners” give back to the rest of us, especially those who really need the help. Bill and Melinda Gates come to mind. Bill took huge risks, got outrageous rewards, and is now giving back.
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@zerenia Bill Gates is certainly a perfect example of the societal benefits of the endless opportunities offered in our country. We can only hope that all billionaires will follow his example.
