STARTUP WEEK 2020: Could the pandemic lead to more entrepreneurship?

The economic news these days is mostly terrible. The pain caused by the pandemic is real and visible, and the numbers we can put to it are staggering: the highest unemployment since the Great Depression, hundreds of thousands dead, and $16 trillion in economic damage in the US alone.

Yet there glimmers of good news if you pour over the data. New businesses are being formed at a higher rate than last year, both nationally and in Alaska.

Over the last five years, the state has fit a particular pattern of growth and decline, according to the Census Bureau’s Business Formation Statistics. When the economy was in recession from 2015-18, business starts were up.

When employment growth resumed in 2019, they fell. In 2020, business formation started off slowly and shot up by the middle of the year. Nationally, the spike in 2020 is even more dramatic. Clearly, some people are responding to a dismal economy by taking matters into their own hands.

In fact, some of the largest firms in the U.S. started during past recessions. Uber kicked off during the Great Recession; Microsoft during the oil embargo in the 1970s. In Alaska, Northrim Bank formed during the deep recession of the mid-1980s. In fact, a majority of the companies in the Fortune 500 started either during a recession or during a bear market. So the importance of today’s garage tinkerers and guest-room-to-office converters shouldn’t be overlooked.

It seems entrepreneurship during recessions is fairly normal. But why? The headwinds to entrepreneurship during a downturn seem obvious: consumers spend less and investment dries up. In the aftermath of the Great Recession that lasted from 2007 to 2009, economist Robert Fairlie studied this phenomenon in detail.

Fairlie examined several different variables to see which were most closely related to rates of entrepreneurship in localities around the U.S. He looked at home ownership, home prices, local unemployment rates, and whether the entrepreneur themselves was employed prior to starting a business.

Of these, the local unemployment rate showed the strongest effect on entrepreneurship. The worse the local job market, the more likely you were to start a business. Home ownership also mattered — after all, drawing home equity is an important means of obtaining capital — but less so than a lousy job market.

Why would high unemployment cause individuals to turn to entrepreneurship? The simplest and most likely explanation is that some people respond to a poor economy by creating their own job by starting a business. The security of a stable job might cause a would-be entrepreneur to postpone their dream of starting a business if it means giving up a paycheck to start a venture that might just fail.

Entrepreneurship during COVID-19 has important implications for our eventual recovery. New businesses are the major job creators of the economy. In a report two years ago, the Center for Economic Development found that a staggering 89 percent of all private employment growth in Alaska between 2005 and 2014 was the result of young firms in existence for five years or less.

As a group, mature firms tend to plateau in terms of job creation. Some may add jobs in a given year, but others contract, and the net effect is a wash. Without new firms, private sector employment is doomed to be flat, even in relatively good years.

Despite that, I think we would have been ecstatically happy with flat employment in 2020, a year that has numbed us to sharply declining indicators of all sorts. One of the most worrisome trends has been failure rates of small businesses. We don’t know exactly how many businesses have permanently closed, but the signs aren’t good.

The data tracker website Opportunity Insights indicates that the number of open businesses in Alaska has declined by a third or more since the pandemic began. We don’t know how many of those closures are permanent, but we do know that a shuttered business can’t hire anyone.

That puts more pressure on our entrepreneurs to fill the gap when the economy recovers. That’s a tall order. The hole left behind by the loss of nearly 40,000 lost jobs won’t be filled in during the next few months by today’s brave entrepreneurs. But neither can we rebuild a healthy economy without them.

Entrepreneurs are the people who make things happen even when the conventional wisdom seems to be against them. It takes courage, and lots of it, to start a business in 2020. Let’s cheer for those who do it.

Nolan Klouda is the Executive Director of the Center for Economic Development at the University of Alaska Anchorage Business Enterprise Institute. He is an expert in Alaska’s economy and deeply involved in COVID-19 economic recovery efforts in the state.

Updated: 
11/18/2020 - 9:28am