During the pandemic, popular content on social media quickly transformed from constant comedy, made predominantly by teenagers, to engaging posts produced by small business owners, detailing the behind-the-scenes work of their business, promoting their product, or simply sharing funny anecdotes. 

That was just one indicator of what economists now call “The Startup Surge” – that is, the sudden rise in small business creation in the United States which occurred during the pandemic. Yet, what has baffled economists is not the initial surge itself, but rather, its persistence in the post-Covid era. Despite the disappearance of the factors that many thought were driving this surge, it continues to be prevalent in the modern day – why is this happening, and what are its effects? 

The Startup Surge: Looking at the Numbers

Business applications are a widely used metric used to quantify the popularity and rate of business creation. In the United States, these applications are the filings that small businesses make with the Internal Revenue Service (IRS) to approve their businesses for employer status. They are what, in the eyes of the government, officially mark the creation of a new business.

The statistics regarding business applications prove that small business creation was already on the rise in the years leading up to the pandemic. Between 2005 and 2016, annual applications fluctuated around 2.6 million, never surpassing 3 million. However, in 2017, matters took a turn for the better; from 2017 to 2019, the average number of business applications rose to 3.4 million. 

Yet, the pandemic-induced economic shock of 2020 led to an extraordinary, unprecedented surge in entrepreneurial initiatives. Business applications soared to nearly 4.5 million by the end of 2020, marking a staggering 24.3% increase from the previous year and a substantial 51% rise above the 2010-2019 average. 

The pandemic’s impact on business creation is further underscored by a divergence from historical patterns observed during economic crises. This rise in business creation stands in great contrast to the effects of the Great Recession of 2008 when business applications declined by 20%. 

This oddity was due to a combination of factors unique to the pandemic-induced downturn. Economic fundamentals – including a healthy financial system, buoyant housing, asset prices, and continued credit flow – played a role in sustaining entrepreneurial momentum. Furthermore, the integration of technology into various sectors contributed to the surge. 

Interestingly, this substantial growth wasn’t uniform across all industries, with sectors such as retail trade experiencing a significant 54% increase in applications, and sectors such as construction only experiencing a 3% increase. Nevertheless, these statistics collectively highlight the unexpected resilience and dynamism of American entrepreneurship in the face of unparalleled challenges. 

Yet, to truly understand these statistics, it is important to dive into the catalysts behind them. 

Why did the pandemic specifically cause such a surge? 

The surge in startup activity during and following the COVID-19 pandemic can be attributed to a confluence of factors, encouraging both producers and consumers. 

Specifically, on the producer side, layoffs due to the pandemic encouraged many newly unemployed individuals to create their own businesses. One of these such instances is that of Makala Jones, a woman from Lexington, Kentucky, who, after losing her serving job, started her small business, called “Sweet Dreamz,” where she sells homemade bath bombs. 

Furthermore, new technology minimized startup costs, government-provided pandemic relief gave people capital to start businesses, and, with more free time on their hands due to virtual work, many realized that they could turn their favorite hobbies into businesses. 

For instance, Adam Sarkis, a man in Chicago who had always liked both drawing and basketball, created a business selling paintings of N.B.A. players. Similarly, Kayla Swisher, a student at the University of Maryland, enjoyed making earrings from pressed flowers. During the Coronavirus pandemic, she found she had ample time and decided to begin selling these earrings, quickly turning this craft into a profitable business.  

On the consumer side, more and more people started using social media, making social media a simple, effective, and free way for business owners to promote their products. Torri Burrell, a student at Temple University who, during the pandemic, transformed her hobby of baking into a small business, explained that not only did quarantine provide her time to improve her baking skills – what she calls “perfecting the craft” – but also single-handedly enabled the growth of her business. “Social media has helped me grow my online presence and grow my exposure to the public…most of my sales are from people messaging me on social media,” Burrell said. 

Moreover, when the pandemic occurred, consumer demand increased and diversified, creating more market opportunities, and spending habits changed, blowing up the stay-at-home market. Many businesses were born out of the sheer demand for these services; for instance, Jeff Neal, a pet owner in Pennsylvania, realized that many pet owners were unable to obtain pet food during the pandemic, as local pet stores were closed – thus, he created The Critter Depot, a business which provides pet food for many. 

Likewise, Prodima, a company that provides digital marketing services, was created due to an increase in desire for digital products. Benjamin Poirrier, CEO and Founder of the company, explained, “I was expecting the world to become more and more digital due to remote work and social distancing. Businesses had to initiate their digital transformation to make it through…I started this business to satisfy growing demand.” 

Overall, the pandemic underscored the importance of digitalization, leading to a surge in online retail and other tech-driven sectors. Notably, though, this era of digitalization and entrepreneurship lasted far beyond the year 2020.

The Continuation of the Startup Surge in the Post-Pandemic Era

Contrary to popular expectations, the startup surge persisted in the post-pandemic era. This was largely due to tech layoffs, persistent demand for the digital market, low startup costs, and the vivid entrepreneurial spirit that people of the modern-day continue to possess. 

In particular, the changes in work and lifestyle brought about by the pandemic, such as the widespread adoption of remote work and shifts in consumer behavior, opened up new opportunities for innovative startups. Entrepreneurs, often adept at identifying and capitalizing on sudden market shifts, found fertile ground in the evolving economic landscape.

Ongoing government support for businesses has also been a crucial lifeline for startups. For instance, the American Rescue Plan continues to provide millions of dollars worth of legal, financial, and advisory services to tens of thousands of businesses nationwide, helping them obtain loans and investments. The financial stability offered by these initiatives empowers aspiring entrepreneurs to navigate the uncertainties associated with starting a new venture. 

Furthermore, the continued development of digital transformation, accelerated by the pandemic, has created a long-lasting conducive environment for tech-driven businesses to thrive. The adaptability of entrepreneurs in leveraging these technological advancements has continued to facilitate the survival of startups in the post-pandemic era. 

However, economists disagree on the future of this surge – will it become permanent, or will the United States begin to experience a decline in business applications, reaching pre-pandemic numbers? 

One significant concern is the escalating levels of student debt, which may act as a deterrent for aspiring entrepreneurs, particularly among younger demographics. Rising student debt can limit the financial flexibility of individuals, making it more difficult for them to secure the necessary capital to launch and sustain a startup. The burden of repaying substantial student loans may divert potential entrepreneurs from pursuing riskier ventures, leading to a decline in business creation. This is especially relevant now, as payments on student loans just restarted in October 2023 after a three-year hiatus. 

Moreover, the withdrawal or alteration of government support and stimulus measures, which played a pivotal role in sustaining the startup surge during the pandemic, may impact the ability of new businesses to weather challenges. 

Changes in economic policy, including shifts in taxation and financial regulations, could also influence the startup ecosystem. Balancing these potential hurdles will be crucial for ensuring the continued growth and resilience of entrepreneurship in the post-COVID era.

The Impact of the Surge

To many, the startup surge may seem insignificant, and its effects may have only been evident through changes in social media content. However, new businesses during the COVID-19 era helped revive our economy, creating millions of new jobs to replace the ones previously lost. 

In fact, small businesses are key to our economic growth. Studies prove that small businesses are responsible for nearly 65% of job growth in the United States every year, and generate 44% of all economic activity in the country. 

Furthermore, small businesses are found to be thirteen times more innovative per employee than large firms, helping to develop new technologies and innovations that become the backbone of society.

Moreover, small businesses provide jobs for those who traditionally face barriers to gaining employment at other larger, more selective firms. Small businesses are less reluctant to take risks and thus more likely to hire individuals without college degrees and individuals with criminal records, consequently promoting income equality within the nation.

Focusing on a smaller scale, these businesses not only promote the wealth of an entire nation but also of their local communities. For every dollar spent at a small business, 68 percent funnels back into the community, compared with just 46 percent at larger firms.

What’s more, business creation is often a great experience for entrepreneurs. Mr. Neal, owner of The Critter Depot, described how the experience was “eye-opening” for him, stating that he found it to be extremely rewarding. 

Thus, it is evident that the startup surge has brought about nothing but prosperity for our nation and its people, and it’s in the best interest of the country to continue fueling it – whether that be through canceling portions of student debt, as the government has done in recent months, economic stimulus, or other measures. 

As many economists warn of an upcoming recession, it is key to sustain the same miraculous surge that has kept our economy stable for the past four years. Unfortunately, though, if there is anything this surge has shown us about the economy, it is its unpredictability – ultimately, only time will tell the future of small business creation.

To many, the startup surge may seem insignificant, and its effects may have only been evident through changes in social media content. However, new small businesses during the COVID-19 era helped revive our economy, creating millions of new jobs to replace the ones previously lost.