An unexpected result of the pandemic era has been an increase in business activity. Since 2020, applications to start new businesses have skyrocketed, reversing a decades-long decline.
He reasons for the boom they are multiple. Millions of people were suddenly laid off, giving them the time and inclination to start new businesses. Personal savings soared, fueled in part by a bubbly stock market and government stimulus payments, giving would-be entrepreneurs the means to fulfill their visions. Rock-bottom interest rates made money cheap and widely available.
But the booming economic environment that helped foster this entrepreneurial spirit has given way to high inflation, rising interest rates and dwindling savings. That has left these start-ups to navigate challenging financial rip currents, and a potential recession, at a time when they are at their most fragile. Even under normal conditions, about half of new businesses fail within five years.
“Young companies are inherently vulnerable,” said John Haltiwanger, an economist at the University of Maryland who studies entrepreneurship. “They are likely to fail, and they are especially likely to fail in a downturn.”
In 2021, Americans filed applications to start 5.4 million new businesses, according to Census Bureau data. That was on top of the 4.4 million applications filed in 2020, which had been the highest by far in the more than 15 years the government had been tracking. (Last year’s filings through November were brought forward of 2020 but delayed in 2021; December figures will be released this week.)
Data on the creation of actual companies will not be available for several years, so it is not yet possible to measure the effects of the cooling economy on new companies. If these new businesses pick up, it could have far-reaching implications for the health and dynamism of the broader economy.
“Innovation drives increased productivity,” said John Dearie, president of the Center for American Entrepreneurship, an advocacy organization. “And innovation comes disproportionately from new businesses.”
But he warned that the Federal Reserve’s monetary policy, aimed at suppressing the fastest price rises in decades, is “intensifying the headwinds facing entrepreneurs into a gale crushing demand and raising the price of money.”
In the interviews, the businessmen expressed a mix of determination and resignation about the coming months. Some said they had learned lessons from the turmoil of the pandemic about how to weather financial adversity that they believed had protected their business models against recession. Others were clear that they needed external financing that they feared would no longer come.
“It’s been a bumpy ride, for sure,” said Jennifer Sutton, who opened a juice and wellness bar in Park City, Utah, in 2021. What worries her most is inflation, she said, as well as the prospect of a recession that could reduce the tourism on which your business depends. She opened a second location within a grocery store, in part because she required less start-up capital than opening another stand-alone store.
However, in many ways, Ms. Sutton is lucky. In large part, she financed her business, High Vibes Juicery and Wellness Bar, herself with her family’s savings and credit card debt.
Taylor Wallace, a Florida businessman, is in a different position.
After he was laid off from augmented reality company Magic Leap at the start of the pandemic, he reconnected with a friend, Mike Mayleben, who was looking to start a dog daycare business. In the fall of 2020, the two began acquiring dog kennels that were for sale, turning them into a new business called Paws ‘n’ Rec.
The company, which offers membership-based daycare, lodging and grooming, currently has two locations in the Tampa, Fla. area, with a third under construction. But the company wants to grow by opening more locations, just as inflation is driving up construction costs and rising interest rates are making loan terms more onerous. His borrowing costs on the company’s line of credit, which he expects to use soon, are based on prevailing interest rates and have increased by more than four percentage points from the previous year.
“The fact that the debt is more expensive will be a great challenge for us and for everyone,” he said. “When we started this, we were dealing with money being the cheapest it has ever been in the United States.”
Higher interest rates and uncertainty about the economy also appear to have dried up once-flowing sources of capital, some businessmen said.
When Lundon Attisha launched his first business, Bidstitch, a subscription-based online marketplace and vintage clothing news site, in the summer of 2021, he was quickly able to raise around $200,000 in venture capital and angel investment.
“I thought I was the star in raising capital,” said Mr. Attisha, who quit his job at a law firm after a month to start his company. “Space was kind of juicy at the time.”
Understand inflation and how it affects you
But investors seemed much more reluctant to put money into early-stage companies when he went to raise money again last year, he said. “The tone in the room with investors: There was a palpable change,” he said. He ended up selling Bidstitch in September to a holding company in Los Angeles.
That experience helped shape the business model for a second venture he started last year, Cita Reservations, an online reservation system for tables at in-demand restaurants. Instead of relying on outside funding, the company started charging people right away, selling reservations at some restaurants for $200. To get noticed, give bookings away to social media influencers.
“We have to be much more aware of where we are putting resources,” he said.
Census data shows that a large portion of new business applications were for sole proprietors who had no intention of hiring employees. Many presentations were also for companies in industries that have been affected by the pandemic, including retail, food service and logistics, some of which may have been replacing others that have gone out of business.
But despite a slowdown that could hurt new businesses, many economists are optimistic that the rush to start businesses that began in 2020 will still translate into job growth, innovation, and ultimately a more productive economy.
“Many of these startups continue to grow and hire,” said Luke Pardue, an economist at Gusto, a payroll and benefits platform for small businesses. “These startups are really driving job growth right now because they continue to grow and because they are ambitious in their future roles.”
Spencer Loveless, chief executive of a vacuum cleaner maker in Price, Utah, that his father founded in 1985, was frustrated during the early months of the pandemic as supply chain problems prevented him from sourcing parts from China. So he started using 3D printers that his company had on hand to make his own parts. Businesses that were similarly caught up in supply chain entanglements caught wind of what he was up to and began asking him to print items for them as well.
In November 2020, he founded Merit3D, a 3D printing company. The business originally had two employees, but has grown. Last year he had 20 workers; this year, he is aiming for 30 to 40.
His hiring plans don’t stop there. He wants Merit3D to eventually have 1,700 employees, which will help offset job losses at nearby power plants that will close in the coming years.
Mr. Loveless said his goal for this year was “to bring as much revenue as possible to the company so that it can support itself as soon as possible.” He was relatively indifferent to the prospect of an economic downturn.
“I think the recession is going to hit harder than most people think,” he said. “How we prepare for that is we become the best at what we can do.”