As Americans came to terms with the COVID-19 pandemic and its economic disruptions, our rate of new business startups surged. That is encouraging news, but it should not distract us. The U.S. economic system is still filled with the same barriers to startups as before, one that caused a massive multi-decade decline in entrepreneurial activity, known as the Startup Slump. The fact that new startups are persevering today doesn't mean that barriers don't need to be cleared, or that the path of opportunity is equitable. For all Americans to exercise their right to start a business, the playing field should be level.
As The New York Times reports, "Americans filed paperwork to start 4.3 million businesses last year, according to data from the Census Bureau, a 24 percent increase from the year before... Applications are on a pace to be even higher this year. The surge is a striking and unexpected turnaround after a 40-year decline in U.S. entrepreneurship."
The monthly rate of new entrepreneurs grew substantially last year, as the economy went through the shutdowns, job losses, and re-openings associated with the pandemic, reports the Kauffman Foundation. That suggests that "necessity" rather than "opportunity" was a significant driver. About 30 percent of new businesses were the result of necessity in 2020, according to the Kauffman Foundation.
The surge in new businesses is exciting, but also deceiving. It's attributable not to an improved landscape for startups but to the pandemic. It's the equivalent of running faster due to an adrenaline rush, not a healthier body.
The pandemic has shaped behavior in entrepreneurial ways. I've talked with countless entrepreneurs in recent months. Many people lost jobs and had no alternative but to start their own businesses. Others found they could work remotely, which freed up time to start a part-time business on the side, or allowed them to move to a new place and finally pursue a dream business. Still others became so exasperated with their jobs during the pandemic that starting a business seemed like a better path.
Through it all, however, the system's barriers have remained in full force. People just got hungrier. But we shouldn't mistake people's hunger for thinking the food is better. We need to make a better environment for entrepreneurs by removing the barriers to entry. That would make a huge impact, since new businesses create virtually all net job growth in America, raise incomes, generate GDP, and fight inequality and poverty. American entrepreneurs are doing their part. The rest of us need to help.
Right to Start, the nonprofit I founded, is focused on breaking down those barriers to success. We speak constantly with our representatives and partners in all regions of the U.S. They tell us that these barriers haven't gone away. They include access to capital, government fees and licensing requirements. Here's a look at some of these issues.
Access to Capital
Lack of access to capital remains a major obstacle. A national poll released in February commissioned by Small Business Majority, with which Right to Start collaborates, found that about four in 10 small business owners don't take out lines of credit or loans, not even from friends or family. Right to Start's organizer in South Florida, Jeanine Suah, reports that even in Miami, which the website Biz2Credit ranked No. 1 among U.S. cities for small business growth in 2019, lack of access to capital remains by far the greatest challenge for startup founders, small businesses, and emerging nonprofits.
Many government fees essential to starting a business must be paid upfront. This is before a new business has any revenue. Daymara Baker, an organizer for Right to Start in northwest Arkansas, says that entrepreneurs regularly ask her: Why can't those fees be delayed for a year or two? Governments would eventually receive the same revenue, while at the same time, the dynamism of the business community would increase, and the tax base would grow. Everyone would win.
In the past 60 years, the percent of the workforce subject to licensing requirements has risen from 4-5 percent to more than 25 percent, as the economy has shifted from manufacturing to services, according to a 2015 report from the Obama White House.
Right to Start's Field Guide for Policymakers highlights many more barriers at all levels of government, federal, state, and local. Those barriers are pervasive, formidable, and costly. What's more, they inhibit the startup growth that would enable the U.S. economy to thrive.
America's rising rate of new entrepreneurs is good news. We should celebrate and recognize that. But the system that caused the stagnation is still fundamentally the same. Our entrepreneurs can't win in the new economy with an old system. As the U.S. bounces back from the pandemic, removing barriers to entrepreneurship will clear the path for everyone. Don't be distracted from that course.