Small Business Labs

New Business Applications Surged Again in January

Over the past 6 months new business applications have surged. 

As the U.S. Census chart below shows (click to enlarge), the surge is continuing with 492,000 applications filed in January. This us up 73% compared with last January. 

Most of the applications are what the Census calls "applications other than high propensity" (grey in the chart).  These are applications from businesses that are unlikely to have employees, such as freelancers, independent contractors and other types of solopreneurs.

But employer small business applications (high propensity applications) have also surged.  

The business applications data comes from IRS Employment Identification Numbers (EIN) applications.  EIN's are the tax id number that identifies a business. 

Not all small/solopreneur businesses have EINs. Some, and especially independent workers working part-time, use their social security numbers instead.  But almost all employer businesses have EINs.  

While only about 15%-20% of applications have historically turned into actual small businesses, the surge indicates we should see strong growth in the number of independent workers and employer small businesses over the next 2 years.  

See our prior posts on the surge in new business applications for more details on the surge.

See the U.S. Census Business Formation Statistics site for more data. 

Nonprofit Sector Has Lost Close to Million Jobs During the Pandemic

The nonprofit segment is quite large, employing more than 10% of all U.S. private sector workers.  This is more workers than in the manufacturing, construction, or finance sectors.

So it's a problem that nonprofits have been hit hard by the pandemic.

The chart below (click to enlarge) comes from the Center for Civil Society Studies at Johns Hopkins University. 

It shows employment in the nonprofit sector has fallen by over 900,000 jobs since the beginning of the pandemic.

Other sources have the job losses greater than 1 million jobs.

And when a nonprofit closes or reduces jobs, the community it serves is also hurt.  Key quote from the Axios article Nonprofits in crisis amid the pandemic:

"When you lose a nonprofit job, you’re not only losing that job, but the community is losing a service," says Tim Delaney, president and CEO of the National Council of Nonprofits. "It’s a double whammy."

According to Johns Hopkins, the nonprofit sector's recovery will likely be slow.  They're projecting it will take 18 months after the pandemic for the sector to recover fully.

Nonprofits are mostly small businesses, which is why we cover them.  According to the National Council of Nonprofits, 88% of all U.S. nonprofits have less than $500,000 in annual expenses and only 8% spend more than $1 million.

Prior to the pandemic, the nonprofit sector had been growing more rapidly than for-profit SMBs. And hopefully, they'll get back on track.  

The Important Role Small Businesses and Independent Workers Play in Corporate Ecosystems

McKinsey's Ecosystem 2.0: Climbing to the next level summarizes ecosystem 2.0 as:

In the emerging world of Ecosystem 2.0, data are the holy grail, the breakdown of sector borders is a given, and successful players try to lock in control points to expand horizontally and vertically across the grid.

The article chart below (click to enlarge), which shows the 7 largest companies in the world by market capitalization, really jumped out at us. 

The reason is small businesses and independent workers are important business partners for all 6 ecosystem companies.  They are also important end customers for these firms.

The ecosystem roles small businesses and independent workers play varies across the 6 companies.   

Examples include using their marketplaces to sell their products and services (Amazon and Alibaba marketplaces; Apple and Google's App stores), acting as value added resellers (Microsoft and Apple) and providing value added services (marketing help for those using Facebook and Alphabet's ad and marketing services). 

And in most cases, SMBs and independent workers are integrated into the ecosystems of these companies in multiple ways.  

There's also a large and growing number of other ecosystem companies that are reliant of SMBs and independent worker business partners.  This includes well known marketplace firms like Uber, Etsy and Upwork as well as firms like Schwab, who has thousands of small and solopreneur wealth managers as part of their ecosystem.  

In fact, there are ecosystem companies in almost every industry and most have SMBs and independent workers as important ecosystem partners.  

The rise of ecosystem companies is one of the drivers behind the shift to barbell industry structures.  

These industry structures consist of a relatively few giant corporations on one end, a narrow middle consisting of a shrinking number of mid-sized firms, and a large and growing number of small, micro and one person (solopreneur) firms on the other end.

See our Industry Structure section for more on this topic.  

Business Applications Continue to Surge

There were 1.15 million applications to get a business tax ID (EIN) in Q4, 2020.  This is an impressive 27% increase compared with Q4 of 2019.

As the U.S. Census chart below shows, business applications fell from Q3 by 28%.  But Q3 of 2020 was a blow quarter by any measure.  So despite the quarter over quarter decline, the Q4 numbers still show very strong growth by historical standards.

When we reported on the Q3 numbers last November, we said:

It's too early to know if this surge is a one-time event, or it signals a substantial uptick in small/solopreneur business formation going forward.  

Two quarters is still not enough to declare a long term surge in small/solopreneur business formation.  But it's enough to say we're likely going to see a substantial near-term increase in small business formation over the next 2 years.

See our post the Q3 business formation numbers for more detail on the data.  

Key Findings from 10 Years of Studying the Gig Economy: The Rise of Microbusiness Exporters

Despite trade wars, tariffs, and the erection of other barriers to cross-border commerce, the past decade has seen a substantial increase in the number of U.S. microbusinesses and freelancers who export goods and services.

As the chart below (click to enlarge) from the MBO Partners State of Independence study series shows, the share of independent workers (freelancers, independent contractors and other microbusinesses) providing goods and services to customers outside the U.S. more than doubled since 2011.

The increase in exports is being driven by several factors:

• Online marketplaces have made it much easier to find and service customers outside of the U.S. They also simplify and facilitate transactions and payments.
• Collaboration software has reached the level where communicating with remote customers is easy and efficient. This has greatly increased the ability of service providers to serve customers outside of the U.S. 
• Improvements in outsourced logistics services have reduced the costs and greatly simplified the process of delivering physical products to pretty much any global destination.
• Global markets are enormous, with 95% of the world's population and 84% of the world's economic activity taking place outside of the U.S.

Most U.S. independent workers and microbusinesses who sell to customers outside of the U.S. start out as "accidental exporters".  This happens when a customer outside of the U.S. finds and buys from a U.S. based independent worker or microbusiness.

Often these first exports are done via online marketplaces like Amazon, Etsy, eBay or Upwork. 

Once exporting has occurred, it tends to lead to more exports. For example, according to eBay's 2020 United States Small Online Business Report:

"... 96 percent of small businesses on eBay in the United States export internationally, sending goods to an average of 17 foreign countries. Additionally, nearly 60 percent of eBay entrepreneurs ship goods to customers across four or more continents."

Not surprisingly, independent workers and microbusinesses who sell goods are much more likely to be exporters and those who sold services.  Almost half (48%) of those producing goods reported being exporters in 2020 compared to 16% of services firms.

Despite attempts to rein in or reduce global trade, the rise of microbusiness exports will continue.  The drivers and market opportunities behind this trend are simply too powerful for it not to continue to grow.

The Stunning Financial Success of Gig Economy Marketplaces

Last week Airbnb and DoorDash went public with breath taking valuations.  Airbnb closed Friday with a market capitalization of $83 billion and DoorDash's came in at $55 billion.

As the chart below shows, they aren't alone.  Other gig economy online marketplaces have also achieved huge financial success.

To put these numbers in perspective, Airbnb is worth more than Marriott ($42 billion) and Hilton ($29 billion) combined. 

Other notable firms to compare with include the global chemicals giant Dupont ($47 billion), the large financial institution Capital One ($41 billion) and the food and cereal giant General Mill ($36 billion).

Interestingly enough, the much maligned Uber ($92 billion) tops the list.  While their core business of rides has been hit hard by the pandemic, their food delivery business has benefitted. 

As the Financial Times article Airbnb and DoorDash IPOs leave gig economy issues unresolved points out, most of these firms are still not profitable.  Key quote on the combined losses of Airbnb, DoorDash, Uber and Lyft: 

But that has not translated into profits. Even the flattering financial metric these companies prefer to be judged by — adjusted earnings before interest, taxes, depreciation and amortisation — showed all four to be lossmaking in the 12 months leading up to their listings, with some $3.3bn in red ink between them. So are their business models half-baked, or just half-evolved?

And the Wall Street Journal article Sizzling Tech IPO Market Leaves Investors Befuddled also points that even the companies themselves are stunned and concerned about their valuations.

Stock prices and market caps are subject to rapid change (to say the least), and as the financial ads say, past performance is not an indicator of future results.

But the rapid rise (most of the firms on the chart above are less than 10 years old) and financial success of online gig marketplaces show how big and important the gig economy and independent work have become.

The Pandemic Accelerated Rise of Ghost (Cloud) Kitchens

The global marketing agency Wunderman Thompson's article Ghost Kitchens covers the growing popularity of delivery-first dining and the related growth of ghost kitchens, which are also called cloud kitchens.

Ghost restaurants are delivery only, online restaurants that skip storefronts and deliver food straight to the customer. 

And one reason we're covering this topic is yesterday the food delivery firm Door Dash went public in spectacular fashion, ending the day worth a stunning $60 billion.

The food delivery business has been growing for about a decade and the rise of ghost kitchens was already a trend prior to the pandemic.  But COVID-19 has massively accelerated this trend and greatly expanded the market.

And according to Euromonitor, the growth trend will continue. They're predicting food delivery will be $1 trillion global business by 2030.  Key quote from a Restaurant Business article on the forecast:

The firm predicts that by 2030, food delivery could account for up to a third of consumers’ $3 trillion food spend globally. That includes roughly 50% of drive-thru business, or $75 billion, and 50% of takeout, or $250 billion. It will also take share from frozen meals (35%),  packaged cooking ingredients (30%), dine-in (25%) and packaged snacks (15%).

The Wunderman Thompson article does a nice job of covering the trend, so we'll not bother rehashing their article.

But they end with a very positive view of the long term outlook for ghost kitchens:

Global head of food and beverage research Michael Schaefer predicts that ghost kitchens will define the restaurant industry over the coming years in the same way that third-party delivery services have marked the industry over the past 10 years.

The Surge in New Small Business Applications

Applications to get a tax ID as part of starting a business jumped a dramatic 77% in Q3 from the prior quarter. 

This was the largest increase ever in business applications - and there's nothing even close.

As the U.S. Census chart below shows (click to enlarge), both solopreneur business applications (referred to as "Applications Other than High-Propensity") and High-Propensity Business Applications (those indicating they are planning on hiring employees) significantly increased in number. 

An interesting aspect of this data is the difference between the current surge compared to the slight uptick in applications during the last recession (2008-2009).  

There are several likely reasons for this surge.  

First, it's much easier and cheaper to start a small/solopreneur business than it used to be.  This is especially true for gig economy businesses. 

Another reason is that the CARES Act stimulus started running out in late Q2, which meant the 30 million Americans relying on the added benefits needed to find alternative income sources.

A third reason, which comes from our interviews, is that many people see starting a small/solopreneur business as a better post-COIVD option than returning to a traditional job.  

The business applications data comes from IRS Employment Identification Numbers (EIN) applications.  EIN's are the tax id number that identifies a business.  Not all small/solopreneur businesses have EINs. Some, and especially independent workers working part-time, use their social security numbers instead.  But almost all employer businesses have EINs.  

An important point to note is that not all EIN applications result in a small business being started.  Census data shows around 15% of EIN applications lead to a small/solopreneur business being started over the following  2 years.

Our research on small business formation shows about 9% of those who say in surveys they plan to start a small/solopreneur business over the next 2-3 years in our surveys end up doing so. 

We've also found that people who have applied for an EIN and opened a business bank account are much more likely to follow through and start a business, with about 18% of those doing so.  So our data is pretty consistent with the Census.

It's too early to know if this surge is a one-time event, or whether it signals a substantial uptick in small/solopreneur business formation going forward.  

We are forecasting an increase in the number of small and solopreneur businesses post-COVID, but nowhere near Q3's 77% increase.

We'll have more on our forecast in the near future.

Work is Going Hybrid and it Will Have Major Economic and Societal Impacts

CNBC's JPMorgan will have staff cycle between office and remote work in a move that may remake Wall Street covers a plan by the bank to institute a rotational work location model that includes in-person and remote work. 

Key quote:

“We are going to start implementing the model that I believe will be more or less permanent, which is this rotational model,” Pinto told CNBC in a Zoom call from London, where he is based. “Depending on the type of business, you may be working one week a month from home, or two days a week from home, or two weeks a month.”JP Morgan isn't the only company planning on this.

According to a survey by the HR consulting firm Mercer, 73% of the firms surveyed plan to implement a hybrid work environment that includes both in-office and remote work.

And a Gartner study found that 82% of executives surveyed plan on allowing employees to work remotely at least some of the time. 

They are doing this, at least in part, because although most employees don't want to return to the office full-time, most want to return to the office at least some of the time.

Most companies also want employees to show up at the office at least some of the time.  They think it improves cultural, social cohesion, teamwork and innovation.  

So both employees and employers are saying they prefer the hybrid model.  

Axios also covers this topic in their article Remote Work Won't Kill Your Office.  Key quote:

The big picture: Since the onset of pandemic-induced telework, companies have oscillated between can't-wait-to-go-back and work-from-home-forever. Now, it's becoming increasingly clear that the future of work will land somewhere in the middle — a remote/in-person hybrid.

Surveys conducted in the six months since most people started working from home show that less than 10% of Americans actually want to work remotely all the time, according to a new Barclays analysis.

So it looks like the hybrid model is going to be the winner, at least over the next few years.  

If this happens, it will have major economic and societal impacts due to dislocations caused by changing commuter patterns and shifts in where people choose to live.

Urban centers will most likely be impacted the most due to the decreased number of workers commuting to city center offices. They will also see residents leave for cheaper places with more space.  

Suburbs will benefit due to existing suburbanites spending more time and money in their communities. 

Suburbs will also see an increase in new residents, due to people leaving the cities in search of lower costs and more space. But many of these workers will still need to be in commuting distance since a hybrid model means going to the office on a somewhat regular basis.

Smaller cities will also likely benefit because a large number of people will likely have enough flexibility to move even farther away from the office. 

The chart below, from LinkedIn's article So long big city! Handling a pandemic often means calling the movers shows these shifts are already happening.  

We're not at all suggesting the death of urban centers.  Many will still find them attractive places to live and a lot of people will continue to work in them.

But the remote work shift is going to have major social and economic impacts and we're still a long way from understanding what these will be.

The K-Shaped - and Swoosh-Shaped - Recovery

There's much talk these days about a K-shaped recovery. This is a recovery where professionals and those with higher wealth and income are hurt less by the recession and recover more quickly than moderate and low-income Americans.

The K-shape is driven, in part, because industries that employ high percentages of low and moderate wage jobs are not recovering as quickly as other industries.

The chart below is from the U.S. Chamber of Commerce article The K-Shaped Recovery and the Cost of Inaction.  Key quote:

"Long gone is the notion that we’ll have a V-Shaped Recovery—a deep economic decline followed quickly by a sharp rebound. Instead, what we’re looking at is a recovery that will be vigorous for some sectors while others remain in freefall."

The Chamber article illustrates this by pointing out that "the financial services sector, for example, has already recovered 94% of its pre-pandemic employment. Leisure and entertainment, on the other hand, has only brought back 74% of the workforce."

Another factor is remote work. A much higher share of high wage jobs can be done remotely than low wage jobs. This has resulted in much higher levels of unemployment among low wage workers.

Cutting the data by income reinforces the idea of a K-shaped recession.

According to an NPR survey and covered in their article Nearly Half Of U.S. Households Face A Financial Crisis 54% of those with household incomes below $100,000 reported serious financial problems due to the pandemic, compared with only 20% of those with incomes above that threshold.

And, of course, the stock market's recovery heavily favors the wealthier.  The top 1% of Americans in terms of wealth own over half of all stocks and mutual funds and the top 10% own about 87%. 

That doesn't leave a lot for the other 90%.

Recessions have always increased economic inequality and hurt the wealthy less than those with low and moderate-incomes.  

But this one seems particularly hard on the low to moderate-income group.  

In terms of the recovery's shape, we think it will be both a swoosh and K-shaped.  One reason it will be both is the k-shaped jobs and industry recovery will keep the overall economy from fully recovering quickly. 

We think the economy will get to 90%-95% of pre-pandemic levels by the end of the year, but the last %%-10% - which are big percentages in terms of the economy - will take much longer. 

Unfortunately for the small business sector, it over indexes in industries that are not recovering quickly.  This is one reason we continue to forecast that a large number of small businesses will close this year.