The coronavirus economic crisis has redefined the word “uncertainty” for US entrepreneurs. Starting your own business is always a risky venture, but as most brick-and-mortar businesses approach their third month of closure, the traditional risks of entrepreneurship are dwarfed by the daily struggle just to hold on a bit longer.
This is an alarming reality for many reasons. At a macro level, the US has higher entrepreneurship rates than other developed western economies, with an estimated 30+ million adults qualifying as early-stage entrepreneurs – those within 3 years of starting a business -- and 20+ million qualifying as established, independent business owners – those entrepreneurs with over 3 years of independent business ownership – according to GEM research. (There is some overlap in these categories as many established-business owners also have other early-stage ventures going concurrently).
Uncertainty is the word, again, as no one knows how many companies will be lost to the Coronavirus economic crisis. However, the 2008-2009 financial crisis can provide some guidance on what to expect, even if the situations vary greatly. Below, this graph demonstrates the impact of that recession on early-stage and established entrepreneurs.
The US lost more than 20% of its early-stage entrepreneurs between 2008 and 2010, with a rebound occurring in 2012. This demonstrates the immediate, severe impact macroeconomic crises can have on entrepreneurs; however, it also demonstrates their resilience. Established business owners were less impacted by the 2009 recession. Again, this may or may not be instructive for the current crisis, as in 2009 those businesses surely lost revenue but did not have to suddenly cease operation like today.
There are also second-order effects of losing entrepreneurs; namely, the loss of job-creation activities. This can be measured in part using a set of GEM indicators. In its annual survey, GEM asks entrepreneurs how many jobs they plan on creating within the next five years. While not all these entrepreneurs actually create the projected number of jobs, the responses serve as indicators of both economic confidence and the owner ambition – positive correlates to macroeconomic growth. Below are the rates of early-stage and established entrepreneurs who expect to create six plus jobs in the next five years with their company.
As shown, there is a precipitous drop in job-creation expectation for established business owners during the 2009 recession. This should not be surprising as economic uncertainty often reduces entrepreneurial ambition. The worrying trend of course is that these expectations have yet to recover to pre-recession levels, reflecting either a sustained impact on confidence, or a recent adjustment to small business hiring strategy; or both. The relative steadiness of early-stage job-creation expectation might be a sign for optimism, though these young companies also fail at greater rates than already-established businesses.
A final set of indicators discussed below may also provide some guidance. These are the motivations of early-stage entrepreneurs. GEM measures this trend by asking early-stage entrepreneurs if they started their company because they either identified a good business opportunity; or out of necessity, because of a lack of opportunities. In a strong economy, the rates of opportunity-motivated entrepreneurship should rise as prospects abound. Indeed, higher rates of opportunity-motivated entrepreneurship have been strongly correlated with healthy economic growth.
However, as the charts demonstrate below, there is a predictable plunge in opportunity-motivated entrepreneurship during the 2009 recession. Opportunity rates do not return to pre-recession levels until 2012-2013, demonstrating a lagging recovery.
If the 2009 recession is instructive at all, it is a long and difficult path ahead for American entrepreneurs. However, entrepreneurship is a special category of business formation for a reason. Entrepreneurship is unique in its flexibility and resilience, which can often manifest in surprising ways. With this in mind, the current crisis also presents opportunities in new business areas, such as healthcare and delivery logistics as examples that immediately come to mind. Additionally, there is considerable research demonstrating that some entrepreneurial firms can evolve through improvisational tactics they employed during disasters and crises, strengthening their business in the post-disaster recovery.
It should also be mentioned that compared to 2009, many more firms have been born and exist solely in the digital realm. This reduces their exposure to the impacts of store closures, which may help their resiliency. Additionally, a recent study of 20 million websites hosted by the domain platform GoDaddy, demonstrates that US counties substantially benefit from these virtual businesses existing in their community, even when factors such as income, ethnicity and education are removed. It also demonstrates that communities with higher levels of these virtual businesses recovered faster from the 2009 recession. This can offer much needed hope in a time of such uncertainty.
Forrest Wright is a Data Manager for GEM. Special thanks to Donna Kelley, Professor of Entrepreneurship at Babson College and GEM US Team Member, who provided commentary and underlying data for this post.
Donna and Peter Josty from GEM Canada will be taking part in a special webinar on June 1 focused on how policymakers can support entrepreneurs in the USA and Canada in the midst of the Coronavirus crisis. Learn more and register.