(This column originally appeared in The Hill)
In November and ahead of Small Business Saturday, President Biden announced that, under his administration, “there were a record 14.6 million applications filed to start businesses.” Like any politician, was quick to take credit for this “boom” in startups.
“(It’s) a sign that the historic investment in small businesses is driving confidence and optimism from entrepreneurs, and generating more resilient and competitive markets,” the president said in a statement.
He’s right about one thing: startups are certainly booming.
In 2020 — and before Joe Biden took office — there was a significant surge in new business formation applications in the United States. Data from the U.S. Census Bureau shows that over 4.3 million new business applications were filed that year, representing a more than 24 percent increase compared to previous years.
In 2021, that trend continued, with nearly 5.4 million new business formation applications filed. In 2022, the number then dropped to around 5 million. The number of new business formations through October, annualized, are on the same pace.
There’s little debate that businesses have been starting up at levels not seen since the 1990s. The question is, why? And is this really a boom? Is it because of the president’s economic policies? Or is there something else going on?
Until more research is done, there are still few concrete answers to these questions. But I think I know the real reasons behind all these startups. All it takes is a deeper look at the numbers.
The most recent data from the Small Business Administration and the U.S. Census Bureau shows that there are approximately 33 million businesses in the United States. About 4 million – 12 percent – only had less than five employees. Other analysis show that 27.2 million had no employees at all. Based on this reality, the “startup boom” is really a bunch of freelancers, independent contractors and sole operators who will likely never employ more than five people.
So why all the new entrepreneurs? There are a few factors playing their part.
For starters, the pandemic accelerated a rise in remote workers and the internet powered their mobility. Online tools sitting on top of cloud-based applications now make it possible for people to work independently — they no longer have to commute to an office. Corporate employees working from home no longer had to account for every minute of their day and, while not being watched by their supervisors, had to the time to realize their dreams of becoming part-time entrepreneurs, online sellers and creators, while still collecting their paycheck and retaining their health insurance.
The “boom” of mostly individual entrepreneurs isn’t because of President Biden or even his predecessor, former President Trump. It’s because of the changing workplace.
There are other factors contributing to the rise in startups that are related directly to President Biden. Unfortunately, I don’t think they’re the kind of factors that will endear him to the hearts of these entrepreneurs.
Economic slowdowns in real estate, technology and manufacturing, paired with massive corporate layoffs as well as wage gains that have not been keeping up with high inflation, have left many people short of cash. So they’re forced to do things like sell items on Etsy or become Uber drivers to make ends meet. Their startups were not created because of their dreams. They were started to buy groceries and gas.
But that’s not all of the president’s contribution.
Although his administration has been doing everything possible to protect workers, its policies — along with many blue states following suit — have contributed to a substantial rise in minimum wages, an increase in union activity, a proliferation of mandated time off regulations and a slew of onerous rules for safety, discrimination, harassment and other workplace practices. All of this has increased costs for employers and motivated many of them to limit who they employ, to to double down on technology and seek services from independent contractors and other outside services. We’re seeing this play out, with job openings falling to their lowest levels since 2021 and are continuing to decline.
Now, 99.9 percent of independent contractors, mom and pops, sole proprietors and Etsy shopkeepers are not going to turn into the next Airbnb or Facebook. They may employ a few people, but it won’t be significant. The true startup companies that make an economic difference are the ones funded by private investment. And, unfortunately, there’s not great news for the president’s economic policies here either.
According to data published last week, venture capital funding had its worst year since 2019. Bloomberg reports that “data released by research firm Pitchbook showed that venture capitalists invested $170.6 billion in the US in 2023, over an estimated roughly 15,000 deals. That deal value is down by about 30% from 2022. Fundraising for VCs also fell last year. Money raised by US venture investors declined by almost two-thirds from 2022, and by almost half globally. US venture funds raised $66.9 billion in 2023, and globally funds raised $160.9 billion.” Higher interest rates and an overall lack of positive business sentiment are blamed for the fall.
So yes, startups have “boomed” in the past few years, and it’s always great to see a rise in entrepreneurship. But unfortunately for the president, these entrepreneurs aren’t starting businesses because of his policies. They’re doing so in spite of them.
