Black Americans share in flurry of business startups

There has been a surge in startups in America that experts have yet to fully explain. But a new study -- using data that allows researchers to more precisely track new businesses across time and place -- finds that the surge coincides with federal stimulus, and is strongest in Black communities.

Across a number of states, the pace of weekly business registrations more than doubled in the months after the The Coronavirus Aid, Relief, and Economic Security Act was signed in March 2020. Business registrations rose again, by 60%, around the period of the supplementary aid package signed in December. Coinciding with the third wave of stimulus in March, weekly business registrations have been up by 20%, but the data is less complete.

The pandemic might mark the end of a slump in entrepreneurship that has lasted for several decades. Steep job losses, a widespread shift in how people work and a big influx of federal spending could prompt the kind of disruption that changes how people think about work and what they want to do with their lives.

"The idea that the pandemic has kind of restarted America's startup engine is a real thing," said Scott Stern, an economist at the Massachusetts Institute of Technology and one of the authors of the research. "Sometimes you need to turn off the car in order to turn it back on."

The researchers caution that they cannot yet say that the stimulus measures caused the growth in new businesses, but they think the timing and the rise are so stark that it is hard to argue that it is merely coincidence.

The rise in registrations began shortly before the second and third bills were passed, but new entrepreneurs might have started anticipating the result after the first stimulus.

"People had already been through this once and had a better understanding of how this would work," said Catherine Fazio, director of Master of Business Administration programs at Boston University.

Although other factors are possible, the researchers say the stimulus checks and increased unemployment benefits shored up confidence in the economy enough that millions felt comfortable in starting a business despite being uncertain about when the pandemic would end.

"Startups have always fallen in recessions," said John Haltiwanger, an economist at the University of Maryland who studies business formation. "This is the only one I know where startups grew."

These results are based on an analysis of more than two years of business registration records from eight states (Florida, Georgia, Kentucky, New York, Tennessee, Texas, Vermont and Washington) by a team of economists from Boston University, Columbia, Rice University and MIT. The researchers chose the states because they had the most up-to-date records and together represented a reasonably large proportion of the national population.

The state-level registrations gave the researchers information on startup activity by week and ZIP code, a detailed view not usually available to the public. Most experts get their entrepreneurship data from the census, which is derived from tax identification numbers. That data is available only monthly and by state.

REGISTRATION BENEFITS

For aspiring business owners, registering a business with a state is a key step. In some states, it can cost a person a few hundred dollars to file. In return, the registration protects personal assets in the event of a bankruptcy; confers tax and banking benefits; and makes hiring workers easier.

The registrations were filed mostly as limited liability companies or partnerships -- the entities typically associated with small businesses -- and did not generally include people engaged in gig work.

Some part of the boom may be a catching-up process. At the start of the pandemic, the researchers estimate, the average ZIP code had an average of three fewer businesses registered per week than is typical. For comparison, when Hurricane Katrina hit the New Orleans area in 2005, affected ZIP codes registered only one fewer business per week than usual.

But after the CARES Act was signed, registrations in those eight states reached their 2019 levels as early as July.

A large part of this surge was in businesses providing services for people struggling to adapt to the pandemic, with the biggest shifts in online retail and personal services such as day care.

When the researchers mapped the data, they found the ZIP codes that experienced the greatest increase in business registrations were in areas with a majority of Black residents, particularly higher median-income Black neighborhoods. Even after controlling for other variables, the proportion of Black residents in a ZIP code had the strongest effect on the startup growth rate.

While the data does not directly disclose the race of the entrepreneurs, it does provide an address listed with the registration. Though that address is not necessarily the address of the establishment, for small businesses it tends to be.

A MATTER OF SURVIVAL

To Andre Perry, a fellow at the Brookings Institution, this flurry of small-business activity in Black communities may actually be a sign of struggle: "This is more about survival than it is about wealth creation. There's lots of people who have lost their jobs and lost their businesses. People are starting to realize that side hustles are businesses."

You can see some evidence of this in the data. Robert Fairlie, an economist at the University of California, Santa Cruz, tracks what he defines as necessity businesses and opportunity businesses. Necessity businesses are those whose owners were previously unemployed.

The share of businesses born out of necessity more than doubled, he said, to 30% in 2020 from 13% in 2019.

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