Pandemic Start-Ups Are Thriving, and Helping to Fuel the Economy

Pandemic Start-Ups Are Thriving, and Helping to Fuel the Economy

A record surge in new businesses has helped drive job growth, and could have longer-term benefits.

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By Ben Casselman and Sydney Ember

Hector Xu was on track for a career in academia when the pandemic upended his plans.

Tired of endless Zoom meetings and feeling cooped up in his Boston apartment, Mr. Xu decamped for New Hampshire, where he began taking lessons to fly helicopters. That led to a business idea, converting traditional helicopters into remotely piloted drones.

Mr. Xu’s company, Rotor Technologies, now has nearly 40 employees — including his former flying instructor — and about $1 million in revenue this year, a figure it expects to increase twentyfold next year. Gov. Chris Sununu was present for the first test flight of one of its drones.

“Covid hit, and it really changed my perspective,” Mr. Xu said. “You ended up spending most of your time in front of your computer rather than in the lab, rather than interacting with people, going to conferences. And I think it made me really yearn to do something that was more impactful in the real world.”

Mr. Xu, 30, is part of what may be one of the pandemic’s most unexpected economic legacies: an entrepreneurial boom. Stuck at home with time — and, in many cases, cash — to burn, Americans started businesses at the fastest rate in decades.

What happened next might be even less expected: Those businesses thrived, overcoming supply chain disruptions, labor shortages, rapid inflation and the highest interest rates in decades.

Businesses formed from 2020 to 2022 had created 7.4 million jobs by the end of 2022, according to data released by the Census Bureau last month, contributing to the strong rebound in the broader labor market. More timely but less comprehensive data suggests that these businesses have continued to add jobs in the past two years.

That resilience, combined with the high rate of start-up activity even after the pandemic ended, has made researchers increasingly optimistic that the U.S. economy might be emerging from what had been a decades-long entrepreneurial slump. If they are right, it could have lasting implications: Historically, new businesses have played a crucial role not just in job growth but also in innovation, making the economy more productive and adaptable.

“They’re the key experimenters,” said John Haltiwanger, a University of Maryland economist who has studied how entrepreneurship affects the economy. “We have to figure out how we’re going to do things differently, and I think start-ups play a critical role in that.”

Few predicted it at the time, but the pandemic proved fertile ground for would-be entrepreneurs. The break in their routines gave some people the chance to pursue long-delayed dreams, or to consider possibilities they might otherwise have dismissed. Low interest rates made it comparatively easy to raise money to fund a business. And the pandemic itself created business opportunities large and small: Millions of Americans suddenly needed ring lights, face masks, exercise bikes and something, anything, that could keep their children entertained for a couple of hours.

“New businesses — they are created because somebody sees an opportunity in the market,” said Jorge Guzman, an associate professor at Columbia Business School who studies entrepreneurship.

Serena Huynh was a teacher at a public elementary school in Los Angeles in December 2020 when a co-worker asked if she knew of any tutoring centers where he could work to supplement his income. That gave her an idea.

“I was like, wait, why don’t I just start my own?” she said.

Ms. Huynh, who was still working on her master’s degree and in only her second year of teaching, had wanted to start her own tutoring business eventually. But the pandemic afforded her a more immediate opportunity: Remote learning would allow her to start her company without much overhead since she and her future employees could conduct tutoring sessions through Zoom.

“If the pandemic didn’t happen, I don’t think I would have taken that leap until I was a lot further in my career,” she said.

A month later, she officially created her business, Elevate EDU, offering online tutoring in skills like English and math. Parents soon began reaching out to her company because they worried that their children had suffered learning loss during the pandemic school closures. That fall, Ms. Huynh opened her first physical location, in an office building in San Marino, Calif. Her paycheck from teaching covered the rent.

Now, Ms. Huynh, 30, has 11 employees, with aspirations to open two more locations and roughly triple her head count. Ninety students, from 3-year-olds to high schoolers, attend tutoring sessions each week, she said.

“The pandemic showed that there are a lot of different, creative ways to make money,” she said, adding, “You don’t have to think inside the box.”

But while economists applauded stories like Ms. Huynh’s, many were initially skeptical of their long-term effect. They thought many of the businesses might turn out to be little more than side hustles or short-term sources of income during the depths of the lockdowns. Others might merely be replacing businesses shut down by the pandemic.

But evidence is mounting that such expectations were misplaced. New data from the Census Bureau shows that the businesses created in 2020 were smaller on average than those created in the years before the pandemic. But there were far more of them, and they grew as fast as their pre-Covid counterparts, if not faster.

In a brief research note last month, Mr. Haltiwanger, the University of Maryland economist, and a co-author wrote that the new data provided “overwhelming evidence that the pandemic and its aftermath featured a surge in genuine entrepreneurial employer business creation.”

Data from Gusto, which handles payroll and related needs for small businesses, tells a similar story. Economists there found that businesses created during the pandemic era were roughly as likely to experience rapid growth as those founded before the pandemic. And those “high-growth” businesses grew even faster than their prepandemic peers, resulting in hundreds of thousands of additional jobs.

“We’re still seeing these businesses add to their local economies,” Nich Tremper, a senior economist at Gusto, said. “They are creating these jobs, and they are keeping these jobs.”

That success may partly reflect the lasting shifts in economic activity that the pandemic set in motion. Businesses that sprang up to serve surging demand for e-commerce, for example, have continued to grow because Americans are continuing to do more of their shopping online than before the pandemic.

In other cases, the pandemic served merely as a catalyst, spurring entrepreneurs to pursue ideas that weren’t directly connected to the health crisis.

“A lot of the entrepreneurial journey is taking that first step,” Christian Reed, an entrepreneur in Boston, said. “You’re like, ‘Oh, I don’t know if I want to take that plunge.’” The pandemic, he said, was the nudge that many would-be business owners needed to take the risk.

He and a friend started Reekon Tools in 2020 in Mr. Reed’s basement in Chelsea, Mass. The company, which makes digital tape measures and other equipment and software for the construction industry, benefited from the home-improvement boom early in the pandemic.

But the idea for Reekon predated Covid, and Mr. Reed’s ambitions extend far beyond it. Most homes in the United States are built more or less the way they were decades ago, a lack of productivity growth that has contributed to the shortage of affordable homes. Mr. Reed hopes to help change that by bringing digital tools to construction sites.

Such innovation is a key benefit of entrepreneurship, economists say. That was one reason they were concerned by the decades-long start-up slump that preceded the pandemic. They pointed to the low rate of business formation as one reason for the slow recovery after the 2008 financial crisis, and for the anemic pace of productivity growth that the United States has experienced for most of the 21st century.

Economists weren’t sure what was behind the decline in entrepreneurship, and they said it was too soon to conclude that the slump was over for good. It is possible that as the disruptions of the pandemic fade further into the past, the economy will return to its old patterns. But that hasn’t happened yet, which is making economists more hopeful that the change could prove lasting.

“In the summer of 2020, when this entrepreneurship boom happened, there was a lot of talk about, well, this is just people replacing wage employment for jobs while they get back on their feet, and then this will likely back down,” Mr. Tremper, the senior economist at Gusto, said. “And we haven’t seen that. This entrepreneurship boom seems to be here to stay.”

The rate of business formation cooled somewhat over the past year, as high interest rates made it more difficult for entrepreneurs to borrow and discouraged investment in new businesses. But while high rates have dampened the boom, they have not extinguished it. Census data shows that applications for new businesses have fallen from their peak but remain well above prepandemic levels.

And while high-growth new businesses have tempered their hiring — and in some cases retrenched to optimize revenue — most are still expanding, although more slowly, according to Gusto.

Rotor Technologies, the autonomous helicopter company, has felt the effects of high interest rates. With financing harder to come by, the company turned its attention to generating revenue, laying off some software engineers who were focused on longer-run projects and hiring its first sales team.

“I think you need to acknowledge that a lot of these start-ups are struggling today,” Mr. Xu said. Some have failed or are risking failure. But the ones that survive, he said, will emerge stronger for the experience.

“Tough times make good businesses,” he said.