Nearly 55 million people in the United States started a new business in 2019, according to the 2019/2020 United States Global Entrepreneurship Monitor (GEM) Nationa Report published by Babson College. This represents the highest levels of entrepreneurial activity in the United States in over two decades of GEM data collection. Additionally, established business activity in 2019 was up by more than one-third of the prior year’s level to 10.6%, also the highest level ever reported in the United States by GEM.
In a “typical” year, one might expect this increase in entrepreneurship to continue. However, the arrival of COVID-19 early this year has changed all of this. GEM U.S. Team Leader and Babson College Professor Donna Kelley outlines what we can expect moving forward and other key findings from the report in the below Q and A.
In your opinion, what is the biggest takeaway from the US 2019/2020 GEM National Report?
Kelley: Entrepreneurship was thriving on multiple dimensions in the United States before COVID-19 hit. The United States reported the highest rating on cultural/social norms among the 32 developed economies participating in 2019. Societal attitudes and self-perceptions remained high. This shows the extent to which positive views about entrepreneurship were seen widely in the United States.
Across phases, both intentions to start in the next three years and TEA were up 10% to all-time highs. Established business rates were up over one-third, also representing the highest level since GEM started 21 years prior.
This reflects the economic situation before 2020 — unemployment was low, GDP showed consistent growth throughout 2019 and the economy remained strong despite fears of recession at the beginning of the year. This is important because it represents the thinking and actions of Americans before anyone even knew about COVID-19. We might therefore expect a greater shock to entrepreneurship in response to COVID, versus a context where, for example, we were already in a recession.
Why do you think we saw such an increase in entrepreneurship and established business ownership? Moving forward, how might this trend be impacted due to COVID-19?
Kelley: Economic conditions and societal impressions clearly impact ambitions to start a business. When unemployment is low, prospective entrepreneurs have fall back options for employment if their ventures don’t work out. They are more likely to have the resources to start a business in a strong economy. Market conditions are attractive as consumers have disposable income and stable jobs. Positive cultural and social impressions also mean support from the wider array of stakeholders in society that entrepreneurs depend on: co-founders, employees, investors, suppliers, and so forth.
The above points could be reflected in startup motives in 2019: 69% started their businesses to generate high income and build wealth, suggesting that current conditions could enable this goal. At the same time, 66% stated they were motivated to make a difference, which could mean that building a high impact business is possible. This motive may also mean there are people who want to make a difference socially and they are financially stable, and thus in a better position to help others.
In a recession, unemployment is high and people with jobs are more likely to hang onto them, especially in a riskier environment. As we saw with the 2007-2008 recession, there was in increase in necessity-driven entrepreneurship, a motivation driven by a lack of good job options. However, this was countered by a much larger decrease in those entering entrepreneurship by choice, resulting in an overall decline in entrepreneurship rates
With COVID-19, we have a social crisis driving the economy into recession. There will most certainly be an overall effect across the business community, but also an element that is uneven, dependent on the business one wants to start or already owns. While consumer spending overall is declining, there is greater demand for products and services in the health care sector and increased interest in things people can do while social distancing, like hiking, bicycling, camping, online workouts, and puzzles and games people can participate in with family and their friend pods. People may trade off going to restaurants, bars and movies with take out, trips to the liquor store and streaming movies. While brick and mortar shopping is restricted, online shopping is thriving.
Entrepreneurs might start smaller and slower, hedging their bets and minimising resource needs. But change brings opportunity, and others will take risks that, if these pan out, could enable them to emerge very successfully when the economy pulls out of the recession. So entrepreneurship may not see the extent of decline we saw after the great recession, but this may be an optimistic view that will only be confirmed, or not, with time.
In 2019, the rate of women’s entrepreneurship was 16.6%, compared to 18.3% for men. This is one of the lowest gender gaps in the world. Why do you think the United States does so well in this area? Based on lessons from previous crises, how do you think the US female entrepreneurship rates will be impacted by the pandemic?
Kelley: Women entrepreneurs are not highly visible in the US media, besides female celebrities who are not role models most women can relate to. However, there are increasingly more events, programs and other mechanisms that connect women to those they can relate to. For example, Babson College has its Center for Women’s Entrepreneurial Leadership, in which seasoned female entrepreneurs provide mentoring to aspiring women entrepreneurs, along with events, coaching and other support. Women are increasingly studying business; we are seeing this at Babson in the increased enrollment of women in the past several years.
The GEM results show high societal attitudes and self-perceptions among women for many of the indicators. These will be important to continue tracking over time because they reflect the readiness and willingness of women to start a business. For women who face career constraints and lower pay than men for equal work, entrepreneurship provides a way to have more control over the nature of their work, and their income potential, independence and self-fulfillment.
After the 2007-2008 recession, the effects on gender were mostly similar for the GEM entrepreneurship indicators. When we consider that, with COVID-19, there is a high need for innovation in industries that tend to attract women, like health care and education, we might see a positive gender effect in these sectors.
In 2019, the GEM United States team added a question about serial entrepreneurship to capture prior business startup activity. In the United States, 55% of the adult population had started at least one business in their lifetime and 26% said they had started two or more. Did you think this is surprising?
Kelley: I guess it shouldn’t be surprising when we look at all the GEM results. In my classes at Babson, I always tell the students that they are building entrepreneurial skills and inspiration that will serve them throughout their careers. Many of our students don’t start businesses right out of graduation. They gain experience and build resources and connections and see opportunities they pursue some years out. Given that people have many careers throughout their lifetimes, it perhaps makes sense that at least one of those involve entrepreneurship.
Babson College has now been involved in publishing 21 consecutive years of reports. How has your approach to conducting research evolved during that time to enable the institution to provide value for policymakers and other stakeholders interested in the state of entrepreneurship in the United States?
Kelley: Frankly, I’d like to see more involvement in the United States. GEM has a lot of rich data and our team generates results based on real evidence that could help policymakers and other stakeholders better understand the detailed nature of entrepreneurship here, and that could help in their decision making and plans. GEM is not just an academic research project; it has so many practical implications. I’d like to see more partnerships and cooperation between academics who understand the practical side, and policymakers and other stakeholders that can evolve the entrepreneurial ecosystem in the United States.