Covid, start-ups and tackling inequality

In the Brooklyn neighbourhoods of East New York and Brownsville, residents are starting new businesses at nearly double the pre-pandemic rate. Atlanta’s Fulton and DeKalb counties are also home to soaring numbers of entrepreneurs. In 2020, Americans applied for more than 4.3m employer identification numbers — a first step to launching a new business. That is a 24 per cent increase from 2019, with the largest increases coming in black communities.

Indeed, the US is enjoying an entrepreneurial renaissance during the pandemic, with strong growth in a sector prone to fluctuations. Some believe that this boom is driven by necessity, with an estimated 800,000 businesses, stores and restaurants closed in the pandemic’s first year, forcing employees to find new ways to keep food on the table. But my recent research with the Startup Cartography Project, which maps new business activity and trends, showed the pandemic has created fertile conditions for a transformation in who participates in the entrepreneurial economy.

The pandemic has presented the US with an opportunity. Entrepreneurship is key to the country’s economic development. High-growth entrepreneurship is a driver of innovation and increasing employment, and local entrepreneurship keeps cities and neighbourhoods vibrant, allowing access to much-needed goods and services. It serves as a solution to economic inequality and empowerment, and can produce meaningful wealth for those who succeed. Now is the time for policymakers, financial institutions and consumers to nurture this growth, and there are clear steps for how to do so.

New business growth has rocketed in areas with high-income neighbourhoods and also a high share of black residents

While entrepreneurship might be an individual decision, a number of trends are emerging nationally in the US. New business growth from 2020 is higher in non-store retail and warehouse businesses, which have accounted for a third of the recent business surge. This rise reflects the boom in ecommerce during the pandemic.

The geography of new business growth is also changing. Pre-pandemic, a larger share of this growth was in traditional business districts and city centres. That is now shifting to suburbs and neighbourhoods outside the centres. Growth has rocketed in areas with high-income neighbourhoods and also a high share of black residents.

We cannot say for certain why this boom is happening now, but there are some emerging hypotheses. Extensive lay-offs may have encouraged some people to make a living by pursuing a passion instead of rejoining the workforce. That may be especially true of black workers who, by June 2020, were unemployed at five times the rate of white workers. At the same time, technology has shifted the nature and location of work. The pandemic jump-started the market for products that foster remote work, particularly digital communication. Finally, the murder of George Floyd and a national focus on systemic racism sparked consumer demand to support black business owners and communities.

Yet, this early success requires several follow-up actions to make sure it translates into persistent economic growth.

First, it is time to steer more funding to non-white entrepreneurs. There is evidence that systemic obstacles obstruct people of colour and those from disadvantaged backgrounds from starting and growing new businesses. The three recent rounds of federal Covid stimulus payments unexpectedly addressed this barrier. While none of them was meant to encourage new business formation, they each delivered direct cash grants based solely on income, independent of historical inequities. Our research shows that more new business filings followed. It appears that improving access to capital for more diverse entrepreneurs may make a big difference.

Next, policymakers need to welcome more non-bank lenders. At the beginning of the pandemic, many minority-owned businesses struggled to secure Paycheck Protection Program loans from traditional banks. This is likely to be because these business owners start their companies with less initial capital, more personal debt and a small scale that limits their growth and profitability potential. Studies show they turned to fintech and non-bank lenders: Cross River Bank and Kabbage stepped in to keep these businesses afloat. If traditional banks refuse to help, online lenders can nurture entrepreneurship.

Finally, the US must increase its national investment in innovation. To maintain its position as the leading global economic power, it needs creative ideas around nascent trends such as working from home, healthcare innovation, climate change and automation. Worryingly, investment in research and development per capita is being increasingly outpaced by other countries. While the US was once the global leader, it now ranks 10th worldwide. Washington should expedite the US Innovation and Competition Act, which would provide essential funding to the National Science Foundation to compete with China.

Start-ups are vital for employment growth, innovation and economic resiliency. The future of the US economy will rely on a thoughtful policy to nurture and scale up more start-ups, leading to higher economic growth and a more robust recovery in future downturns.

Jorge Guzman is an assistant professor in the Management Division at Columbia Business School in New York