Covid, start-ups and the fight against inequalities

In neighborhoods of Brooklyn, East New York and Brownsville, residents are creating new businesses at a rate nearly double the pre-pandemic rate. Atlanta’s Fulton and DeKalb counties are also home to a growing number of entrepreneurs. In 2020, Americans applied for over 4.3 million Employer Identification Numbers – a first step in starting a new business. This represents a 24% increase from 2019, with the largest increases occurring in black communities.

Indeed, the United States is experiencing an entrepreneurial renaissance during the pandemic, with strong growth in a sector prone to fluctuations. Some believe this boom is driven by necessity, with around 800,000 businesses, stores and restaurants closed in the first year of the pandemic, forcing employees to find new ways to keep food on the table. But my recent research with the Startup Cartography Project, which maps new business activities and trends, has shown that the pandemic has created fertile conditions for a transformation of people who participate in the entrepreneurial economy.

The pandemic has presented the United States with an opportunity. Entrepreneurship is the key to the country’s economic development. High-growth entrepreneurship drives innovation and increased employment, and local entrepreneurship keeps cities and neighborhoods vibrant, enabling access to much-needed goods and services. It serves as a solution to economic inequality and empowerment, and can produce significant wealth for those who succeed. Now is the time for policymakers, financial institutions and consumers to foster this growth, and there are clear steps to get there.

Although entrepreneurship can be an individual decision, a number of trends are emerging nationwide in the United States. New business growth from 2020 is highest in non-store retail and warehouses, which accounted for a third of the recent increase in business. This rise reflects the boom in e-commerce during the pandemic.

The geography of new business growth is also changing. Before the pandemic, more of that growth was in traditional business districts and downtowns. This is now moving to the suburbs and neighborhoods outside the centers. Growth exploded in areas with high-income neighborhoods and also a high proportion of black residents.

We can’t say for sure why this boom is happening now, but some hypotheses are emerging. Massive layoffs may have encouraged some people to earn a living by pursuing a passion instead of re-entering the workforce. This may be especially true for black workers who, in June 2020, were unemployed five times more than white workers. At the same time, technology has changed the nature and the place of work. The pandemic has revived the market for products supporting remote work, especially digital communication. Finally, the murder of George Floyd and a national focus on systemic racism has sparked consumer demand to support black business owners and communities.

Yet this early success requires several follow-up actions to ensure it translates into sustained economic growth.

First, it’s time to direct more funding to non-white entrepreneurs. Systemic barriers are proven to prevent people of color and people from disadvantaged backgrounds from starting and growing new businesses. The three recent rounds of federal Covid stimulus payments have unexpectedly resolved this hurdle. Although none of them were designed to encourage the creation of new businesses, they each provided direct cash grants based solely on income, regardless of historical inequality. Our research shows that more new business filings followed. It seems that improving access to capital for more diverse entrepreneurs can make a big difference.

Second, policymakers need to accommodate more non-bank lenders. Early in the pandemic, many minority-owned businesses struggled to get Paycheck Protection Program loans from traditional banks. This is likely because these business owners are starting their businesses with less initial capital, more personal debt, and a small scale that limits their potential for growth and profitability. Studies show they have turned to fintech and non-bank lenders: Cross River Bank and Kabbage have stepped in to keep these companies afloat. If traditional banks refuse to help, online lenders can foster entrepreneurship.

Jorge Guzman is an assistant professor in the Management division of Columbia Business School in New York.

Jorge Guzman

Finally, the United States must increase its domestic investment in innovation. To maintain its position as the world’s leading economic power, it needs creative ideas around emerging trends such as working from home, healthcare innovation, climate change and automation. Worryingly, investment in research and development per capita is increasingly being exceeded by other countries. While the United States was once the world leader, it now ranks 10th in the world. Washington should speed up the US Innovation and Competition Act, which would provide essential funding for the National Science Foundation to compete with China.

Startups are vital for job growth, innovation and economic resilience. The future of the US economy will hinge on thoughtful policy to nurture and grow more start-ups, which will lead to higher economic growth and a more robust recovery in future downturns.

Jorge Guzman is an assistant professor in the Management division of Columbia Business School in New York.