by Daniel Newman and Kenan Fikri
The country’s business startup rate, measuring the share of all firms that form each year, ticked up to 8.9 percent in 2021—the highest share since the Great Recession. In total, more than 476,000 new startups formed, which is nearly a 5 percent increase relative to before the pandemic and a promising sign that the ongoing surge in new business applications is translating into real business formation. These figures come from the latest release of the U.S. Census Bureau’s Business Dynamics Statistics (BDS), which establishes the most definitive baseline trend in business formation.
The new data provides one of the first authoritative looks at just how economically significant the pandemic-era jump in new business applications might turn out to be. (The U.S. Census Bureau provides data on business applications, or applications for Employer Identification Numbers (EINs), via their Business Formation Statistics (BFS) series; the “startups” captured here represent the subset of those applications that actually go on to launch and hire.) The long lag time between applying to start a business and actually becoming operational, however, means that this latest data (for 2021, but technically referencing March of that year) gives us only early hints as to how extensively the flood of new applications starting in mid-2020 translated into new businesses. Historically, the vast majority of business applications never become operational, so any resulting increase in the number of startups will only ever be a fraction of total applications. For instance, the number of new business applications surged by over 50 percent between 2019 and 2021, but a comparable swell in the number of startups over this time period would be extremely unlikely. What is more, application trends exhibited two distinct phases: an initial jump immediately associated with the pandemic, and then a longer, more stable, and more sustained increase in the years that followed. The 2021 BDS data gives us some evidence on the translation rate of applications to enterprises from the first phase, but it cannot yet say anything about the second.
Importantly, the latest data offers grounds for optimism that the number of startups should continue to grow at higher rates than before the pandemic given the sustained, elevated level of applications that has continued through 2023. The latest startup rate is therefore meaningful because it provides concrete proof that American entrepreneurship is quite likely on a new path away from the doldrums of the 2010s, when new business formation lingered near historic lows.
The startup rate ticked up to its highest level since the Great Recession, but firm closures also accelerated amid economic churn.
The startup rate in 2021 saw its largest year-over-year increase in nearly two decades, reaching 8.9 percent after essentially remaining unchanged for the prior five years. At the same time, however, the firm closure rate—the share of businesses that ceased operations in a given year—increased to 9.0 percent as businesses across the country reckoned with new economic realities brought about by the pandemic. This means that the increase in startups was effectively entirely offset by the increase in firm closures, resulting in little net change in the number of firms in the U.S. economy. An important caveat, though: The closure rate for the most recent year tends to be the noisiest and least reliable indicator in the BDS dataset. This is because businesses often close quietly, taking time to exit administrative datasets; the widespread temporary closures of businesses associated with the pandemic surely made the task of estimating total closures even more difficult.
The margin between the startup rate and the closure rate has much to reveal about the nature of pandemic-era business dynamism and how we should interpret it. The two measures symbolize the opposing yet complementary forces of creation and destruction. If the two forces are in balance, the increase in startup activity may demonstrate productive adaptation to the shocks of the pandemic, as the economy reallocates resources towards more productive endeavors amid changing economic circumstances. By contrast, if the startup rate healthily outpaces the closure rate, the surge may be more readily interpreted as a step-change increase in the country’s entrepreneurial tendencies.
Both scenarios are positive—heightened churn alone could help explain how the U.S. economy navigated the pandemic disruptions so seamlessly and emerged with such strong and healthy growth on the other side. However, a wider margin that provided evidence of a more sustained and structural shift towards greater entrepreneurship would be especially welcome given the doldrums in which entrepreneurship languished throughout the 2010s. Only with additional years of data will we be able to more conclusively characterize this period.
The pandemic did little to change the geography of American startups.
States in the South and West led startup formation in 2021, mirroring the elevated rates of business applications that have appeared in many of the same communities over the past three years. In general, startup rates tend to be higher in places experiencing strong population growth (new residents mean new workers, customers, and business opportunities).
The states with the highest startup rates were: Florida (11.7 percent), Nevada (11.4), Utah (11.1), Georgia (10.7), and Delaware (10.6). The ten best-performing states remained the same relative to before the pandemic, although the rankings shifted somewhat. Georgia moved up the most, jumping from the ninth-highest startup rate in 2019 to fifth place in 2021. Startup rates tend to be higher in metropolitan areas than in rural ones, and—despite the increased population growth enjoyed by many rural areas during the pandemic—the metropolitan startup rate increased (8.6 percent to 9.0 percent) by substantially more than the non-metropolitan one did (6.3 percent to 6.5 percent).
Regional startup strength can be seen at the metro scale, as well, with the leading startup economies heavily concentrated in Florida, Texas, Georgia, and the Mountain West. Nearly every major metro area in Florida, for instance, can call itself a startup leader in 2021., while fast-growing places in the Mountain West similarly dominate, led by Las Vegas, Phoenix, Boise, and Provo, UT. Except for Dover, DE, which sees elevated business formation rates due to advantageous incorporation laws in the state, no major metro area in the Northeast or Midwest exceeded the national startup rate.
The transportation and warehousing industry extended its lead as the sector with the highest startup rates despite the changing economic landscape of the pandemic era.
The transportation and warehousing sector registered the highest startup rate (15.2 percent) as well as the largest increase relative to its 2019 prepandemic rate. That increase reflects the strong growth in applications the sector recorded in the BFS data in the early stages of the pandemic as well. To be sure, the transportation sector was a startup leader even under normal conditions as it serves as the economy’s lifeblood, leading the integration of the physical and digital realms, serving e-commerce, delivery, and numerous other internet-powered transformations. But the sector took on new importance as the demand for home deliveries and places to store goods rocketed upwards. At the other end of the spectrum, the heavier, capital-intensive mining, manufacturing, and utilities sectors registered the lowest startup rates.
The share of total employment in startups reached its lowest point on record, reflecting a long-term trend toward startups with fewer employees.
New firms employed 1.7 percent of all U.S. workers in 2021, a figure that ticked down to its smallest share on record and extended a long-term decline that set in during the late 1980s. Startups have been trending toward fewer employees over time, consistent with what one might expect with the growth of new digital-native businesses, as well as a result of changes in productivity, industry mix, and outsourcing. Thus, even though the country launched about 22,000 more startups last year than in 2019, their employment footprint was significantly smaller (by around 250,000 jobs). This could reflect the difficulties in ramping up employment amid the pandemic’s labor market disruptions or differences in the nature of enterprises launched before and after the pandemic, and it is reflective of long-term trends.
Conversely, the share of all American jobs now housed in older firms (defined as those at least 16 years old) reached an all-time high in 2021, surpassing the three-quarters mark for the first time and underscoring some of the ambiguous impacts the pandemic had on American economic dynamism.
Uncertainty remains around the economic significance of the startup surge.
This release of 2021 BDS data provides the first major indication from the gold-standard dataset on business dynamism of how real the pandemic-era surge in new business applications is and how economically significant it may prove in terms of true employer startups and all the job creation and pro-innovation, -competition, and -productivity effects they entail. The latest figures show dynamism stirring and the rate and volume of startups rising well above the lows that set in after the Great Recession; yet, the healthy bump in startups in 2021 looks modest relative to the dramatic spike in total applications to start new enterprises. The fact that initial estimates have firm closures netting out firm starts also adds ambiguity to the picture. Timing remains an important variable, as new research from John Haltiwanger and Ryan Decker notes how the characteristics of startups from the initial wave of applications during the economic tumult of mid-2020 (likely captured in the BDS data discussed here) may be quite different from those started in 2021 and onwards once people had more clarity around the economic realities of a post-pandemic world. More recent datasets, including the Bureau of Labor Statistics' Business Employment Dynamics, all point to a continued, meaningful surge in employer enterprises that is only beginning to register in the window analyzed here.
Thus, the trend is positive, and the open questions are around the magnitude and meaning of the startup surge, not whether it is happening. As we wait for more data to fill in the picture, EIG will continue unpacking the latest estimates to help our audiences understand and interpret one of the most intriguing economic stories of the 2020s.