By Kenan Fikri and Daniel Newman
Americans filed 5.5 million applications to start new businesses in 2023, nearly 1.8 million of which are highly likely to hire employees. Both figures are series highs, slightly surpassing 2021’s banner year when the disruptions wrought by the pandemic pushed early-stage entrepreneurial activity to its prior record.
The latest data from the U.S. Census Bureau’s Business Formation Statistics through December 2023 provide further evidence that the background rate of startup activity in the U.S. economy has settled at much higher levels than before COVID-19 struck. In total, 484,000 more likely employer business applications were filed in 2023 than in 2019, an increase of 37 percent. Last year’s haul was also 8 percent higher than 2022’s.
Monthly applications trended upwards over the year and peaked in September, the best month since May 2021. Just over 6.3 million likely employer applications have been filed cumulatively since the start of the pandemic.
Industry
Entrepreneurs are filing new business applications at an elevated pace across nearly every sector of the economy. Among major industries, the largest increases relative to 2019 (pre-pandemic) are in the accommodation and food services (+66 percent), retail trade (+55 percent), and health care and social assistance (+45 percent) sectors.
Arts and entertainment (+3 percent) and information (+2 percent) are two sectors that have seen some of the smallest bumps. The arts and entertainment sector may be struggling from an adverse shift away from in-person activities towards home-based entertainment. The relatively lackluster performance of the information sector, which includes many high-tech industries, is harder to explain. It could be that entrepreneurship in this sector frequently gets captured in other categories for statistical purposes (i.e., flagged as a professional services application or a likely nonemployer, if it looks like an independent contractor). Information tends to be one of the smallest sectors in terms of absolute numbers of applications, as well.
The industry sectors driving the startup surge have changed over time. While transportation and warehousing is cycling down after an early pandemic-era boom, entrepreneurial activity in accommodation & food, retail, healthcare, and construction ramped up in 2022.
Geography
The number of likely employer applications rose in every state last year except Alaska, Mississippi, and Kansas. Colorado and Wyoming registered the biggest upticks with the quantity of applications rising by more than a quarter (as a favored state for business incorporation alongside Delaware, Wyoming often leads the pack).
Compared to 2019 levels, the startup surge has been led by two clear belts of states in the Mountain West and Southeast, respectively. Arizona, Colorado, New Mexico, and Wyoming all saw at least 50 percent more new likely employer business applications filed in 2023 than they did in 2019. The same goes for Alabama, Georgia, Mississippi, and South Carolina in the Southeast. Indiana and Delaware round out the list of states where new business activity has risen by at least half over the past five years.
In some respects, this geography of the startup surge tracks with broader patterns of economic growth. States such as Georgia and Colorado lead the nation on indicators of population growth and economic dynamism. In other cases, the surge may be a function of more subtle demographic or socioeconomic factors. Mississippi and New Mexico are both high-poverty states that perform poorly across measures of economic dynamism. In these areas, the observed increase in business applications is likely driven by a different set of factors than the increase in more opportunity-rich areas, just as the strong performance of Wyoming and Delaware are more a function of state corporate law than their economic fundamentals.
The resulting geographic diversity of the startup surge suggests that it is far from a uniform phenomenon, even though it was catalyzed across sectors and geographies around the same time. Instead, the startup suge is both powered and shaped by numerous local forces and policies that will affect its long-term economic impact on communities, as well.
For more EIG analysis and interpretation of the startup surge, see:
