Small Business Labs

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.  

Braintrust - a Coop Online Freelance Talent Marketplace

Braintrust is a new entrant in the online talent marketplace space, but with a twist. 

Instead of being owned by investors and founders, Braintrust is a non-profit and the founders say it will be user-controlled by their talent.  

In other words, Braintrust is a coop, which is a business owned and controlled by the freelancers that they serve. 

Braintrust focuses on high-end IT projects and works with an impressive list of large corporations.  According to the company, their clients include Deloitte, Nestle, Netflix, Nike, Four Seasons, and Task Rabbit, NASA, Porsche, PWC, and Pacific Life. 

They also (naturally) have a blockchain and cyber token angle. 

Freelancers using the site will be issued tokens in exchange for working on the site or bringing new talent or clients to the site.  These tokens equate to voting rights on Braintrust's corporate actions and decisions.  This is how power will be distributed to the workers.  

Braintrust argues that by being a coop, their freelancers will earn more and have better control over their work than they would using a traditional for-profit marketplace.  

Establishing a coop online talent marketplace is not a new idea.  In 2014- 2015 the concept of "platform cooperatisim" was widely discussed in sharing economy circles.  

Shareable's 2016 story How Platform Coops Can Beat Death Stars Like Uber to Create a Real Sharing Economy nicely covered the topic.

It pointed out at that time a number of online talent marketplace coops existed.   These included New Zealand's Ensprial, a cooperatively owned and operated freelancer network, and Loconomics, a now-defunct (at least in the U.S.) coop version of Task Rabbit.

And, like Braintrust, the article argued that coops would provide workers with more income and control.  But 4 years later, coops haven't made a dent in the online talent marketplace industry.

But many great ideas and business concepts fail a couple of times before succeeding.  Maybe the same thing will be true with coop online labor platforms.

We hope so. Alternatives are always good, especially ones that are worker-friendly.

For those who want to learn more, Harvard Business School's Future of Work project has an excellent podcast interview with the founders of Braintrust.

The Census Bureau's Small Business Pulse Survey is Back and Shows the Pandemic is Still Taking A Toll on SMBs

The U.S. Census started a COVID-19 impact survey back in April to measure how the pandemic was impacting small businesses.  The weekly surveys ran until the end of June.

Unfortunately, the pandemic wasn't over by then.  But after skipping 6 weeks, they're back with what they are calling phase 2 of the surveys.

Things haven't improved much over the 6-week layoff according to the small businesses surveyed - 34% of the respondents said the pandemic has had a large negative effect on their business and 45% said it a moderate negative effect.  Only 6% said it had a positive effect.

More interesting, 11% said in the week prior to the survey they had decreased the number of employees at their firm and only 7% said the number of employees had increased.   

The combination of only 7% saying they increased employment coupled with 11% saying it decreased shows the economy is still struggling. 

The Census added a new question in phase 2 asking whether or not small businesses had increased their use of online platforms and marketplaces since the beginning of the pandemic.

As the Census chart below (click to enlarge) shows, only 25% of the SMBs surveyed said they increased their use of online platforms, while 35% said they had not increased their use. 45% said they didn't use online platforms in their business.  

This surprised us a bit.  Other surveys have shown a greater share of SMBs increasing their use of online platforms.  Since it's only one week's worth of data, we'll continue watching this to see if these numbers change.

The pulse survey is well worth following.  The Census even provides some simply analysis and visualization tools so you can play with data and/or track it over time.

The 2nd phase of this survey will run through October 15th.  We suspect, unfortunately, that there will be a third phase. 

MIT Economists on the Impact of COVID-19 on Labor Markets

The Hamilton Project essay The Nature of Work after the COVID Crisis: Too Few Low-Wage Jobs is authored by MIT economists David Autor and Elisabeth Reynolds. 

The essay covers four shifts being accelerated by the COVID-19 pandemic and their impact on labor markets. 

And, according to the authors, all four potentially have significant, negative consequences for low wage workers, economic inequality and overall employment. 

The four are:

1.  Telepresence: The essay points out that the shift to remote and telepresence is " is so self-evident that it might escape notice." But if there is a substantial reduction in the number of people working in offices and/or traveling to meet in offices, there will be much less need for the workers who feed, transport, clothe, entertain, and shelter people when they are not in their homes.

2.  Urban De-Densification: While stressing that "the death of cities have been greatly exaggerated over many decades," changes caused by COVID-19 will likely lead to a reversal in the growth of large urban centers due to people moving to the suburbs as well as smaller towns.  This, too, will result in less need for many workers who support those living in urban areas.

3.  Employment Concentration in Large Firms: Because of their stronger balance sheets and ability to raise capital, large firms tend to do better in economic downturns than smaller firms.  As we've pointed out, this recession is hitting small firms hard and many will likely permanently close this year.  

4.  Automation Forcing: Due to social distancing requirements and labor lock-outs, firms are quickly adopting automation technology (such as delivery drones) to keep their businesses running. This will likely result in leaner staffing in retail stores, restaurants, factories, and other places where companies have invested in labor-saving automation systems.

The authors suggest these four shifts will reduce the demand for low wage work, which will increase income inequality and long-term unemployment while also reducing economic growth.

Not good.

The essay ends on a positive note explaining that policy interventions at the federal, state and local levels could limit the negative impacts. 

NPR's economics show The Indicator has an excellent segment on the essay.  Also, see the essay for specifics on the policies they believe will be needed.

It's Looking Like a "Swoosh" Shaped Recovery for the U.S.

It's looking much less likely the U.S. will experience a sharp, V-shaped recovery. Instead, a growing amount of data is indicating a slower, "swoosh" shaped recovery is likely.

The swoosh refers to the shape of Nike's logo and indicates a recession that starts with a steep decline and is followed by a gradual recovery.

According to the Wall Street Journal's Economic Forecasting Survey, 70% of economists think the recovery will be swoosh shaped.

The reason is the continued outbreaks of COVID-19, which is leading to less economic activity.

The Opportunity Insights chart below (click to enlarge) shows an estimate of the percent change of total U.S. consumer spending.  

You can easily recognize the famous Nike swoosh in the chart.

You can also easily see that consumer spending stalled in mid-June and is running at about 6.4% below pre-COVID levels.  While much better than earlier this year, this is in a range that indicates we're still in a deep recession.  

Other data also supports a swoosh shaped recovery.  

The chart below is from Oxford Economic's U.S. recovery tracker.  The tracker looks at 6 economic sectors to develop an overall economic score.  

It again illustrates the swoosh.  But more ominously it also shows the U.S. economy has declined a bit over the past month.  Key quote:

"The foundations to this recovery are cracking under the weight of a mismanaged health crisis. Our Recovery Tracker fell for the third time in five weeks in the week ended July 10. The health index declined for the fourth consecutive week; demand fell for the second consecutive week, its largest decline in four months; and employment was unchanged."

Other data also points to a slower recovery, especially unemployment claims which have averaged well over 1 million a week over the past 4 weeks and rose last week over the prior couple of weeks. 

The resurgence of  COVID-19 likely means a full economy recovery won't happen until a vaccine is available and - and this is a big and - widely distributed.  This combination will likely not happen until at least Q2 of next year, and it could easily take longer.  

We, of course, hope the economy recovers quickly. But businesses of all kinds need to be prepared for the recession lasting well into next year.

Online Mental Health Marketplaces Democratizing Therapy

The COVID-19 pandemic has led to a substantial increase in mental issues.  According to a Kaiser Family Foundation study:

"Over half of U.S. adults (56%) report that worry or stress related to the coronavirus outbreak has caused them to experience at least one negative effect on their mental health and wellbeing, such as problems with sleeping or eating, increased alcohol use, or worsening chronic conditions."

Several online marketplaces are trying to make it easier and cheaper for people looking for a therapist to find one. These firms match therapists with patients and provide billing and telemedicine solutions for mental health practitioners.

Frame, for example, is a new startup based in Los Angeles. 

They use answers to an online patient questionnaire to match potential patients with therapists.  

Denver based Sondermind also matches patients with therapists. 

As an added service they check to see if the patient's insurance covers all or part of therapy costs.   

They recently raised $27 million in venture funding.

Both firms are attacking two big problems customers face when shopping for a mental health provider. 

The first is finding a provider who is a good fit.  This is the common matching problem faced by all online talent marketplaces. 

Both Frame and Sondermind do this by asking patients to fill out questionnaires and based on the answers provide multiple therapist alternatives.  

Key quote from the founder of Frame in Yahoo Finance's article This startup works like a dating site for therapy:

“We facilitate free intro calls,” she said. “Our users typically call two to three therapists ... You get to talk it out and make sure it's the right fit for you so that you feel comfortable. And then you can make your decision.”

The second problem is cost.  Therapy is expensive.  Both firms offer telehealth solutions, which cuts down on the cost.  And as mentioned above, Sondermind also helps patients access and use insurance if possible (a feature Frame will no doubt also have at some point).  

By making it easier to find and connect with mental health professionals - and by reducing patients costs - both firms are trying to allow more people the ability to access mental health professionals.  This is part of the broader democratization of services trend we've long covered.  

At this point, there are few - if any -  professions that don't have specialized online talent marketplaces connecting service providers with customers.  Lawyers, doctors, dentists, wealth managers, mental health providers of all kinds, engineers of all kinds, etc., etc., etc. all have industry specific online marketplaces.  

There's still much work to be done before the use of most of these marketplaces is mainstream.  Matching, for example, continues to be an issue. 

But it's clear the use of online talent marketplaces is rapidly moving to the mainstream. 

Zagat's Future of Dining Study

Zagat, the restaurant review site favored by foodies, recently released a Future of Dining Study. 

The study looks at the impact of COVID-19 on the eating habits of consumers and how they may evolve post-COVID.  

Zagat's report chart below (click to enlarge) shows that consumers plan to return to dining out post-COVID, but at a lower rate than pre-COVID.

These results are not surprising. Nor are the reasons. 

Simply put, diners miss the experience of dining out - and especially the social side of dining out.

And as the chart below shows, they also miss their favorite places.

But while consumers want to return to restaurants, they've also learned some new behaviors thanks to the shutdowns.  More people are cooking at home - and most are saying they plan on cooking more after the pandemic ends than they did before the shutdowns. 

Food delivery has also accelerated. And again, most say they plan on continuing using food delivery services at higher rates when the pandemic is over than prior to the pandemic.   

Restaurants are, obviously, one of the most COVID impacted industries.  Because of this, they are interesting to watch and learn from.  

Thrasio's "Platform on a Platform" Rolling Up Fulfillment by Amazon Small Businesses

Thrasio is a large and fast-growing acquirer of small consumer product companies that are part of Amazon's Fulfillment by Amazon program (FBA).  They recently raised $260 million in a funding round that values the company at $1 billion.  

Thrasio's business model is fairly straight forward.  They find and buy category-leading consumer product small businesses that operate on Amazon's platform. 

Key quote from Crunchbase's article on Thrasio's recent funding:

"... the company has acquired nearly 60 Amazon businesses, including 17 in the last quarter. In addition, more than $300 million in pro forma revenue and 6,000 products, makes Thrasio one of the top 25 sellers on Amazon ..."

After acquiring the firms, they integrate them into their systems and marketing programs.  This makes the individual firms more efficient and provides Thrasio with economies of scale. 

One of the things we find most interesting about Thrasio is they are building a platform business on top of Amazon's FBA platform.  This "platform on a platform" business model is not rare, but still somewhat unusual.  And even more unusual is Thrasio's size and ambitions. 

Most platform on a platform companies are relatively small. Thrasio is looking to be a very large firm and has the financial backing to do so.  

Thrasio's success will likely lead to others following its roll-up approach.  These new entrants will add layers of business complexity for anyone operating on or running a business platform or ecosystem.  

Thrasio itself, of course, has to dance with an elephant (Amazon) without getting crushed. But small businesses in the FBA program now have to contend with both Amazon and Thrasio - as well as potentially a number of Thrasio imitators.  

In our Top 10 Small Business Trends of 2017 we wrote:

Platforms have become so important that small businesses need a platform strategy. For most this will consist of identifying the best platforms to participate in and the right ecosystem roles to play. These decisions will increasingly play a key role in small business success.

This has become even more true today.