Kim Benoy’s job as a supervisor at a home health care provider was making her miserable. Even after she had gone home for the day, difficult questions from work gnawed at her.
The Hudson, Wisconsin, woman had been a nurse for nearly 30 of her 50-plus years, and she had grown disillusioned with the health care business. The pandemic didn’t affect her as much as it did frontline care providers, but it was enough to nudge her from dreaming about a new career to starting a new career.
“I realized, you know, at midlife I do have a lot of time left. But I want to make it good time and do what I want to do, and what I love to do, and what I’m passionate about,” she said. Her passion is motivating people, and teaching about wellness, which she distilled into a podcast called Midlife With Courage and sales of essential oil blends.
She joined millions of other Americans who started their own business during the pandemic. U.S. Census Bureau data show that entrepreneurs around the United States have filed nearly 12 million business applications—tax forms often used by new businesses—since late March 2020. More than 250,000 were filed in the Ninth District. Despite a tight labor market, high inflation, and higher interest rates, applications continue to be filed at a higher rate than pre-pandemic (Figure 1).
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Like Benoy’s, most of these new businesses tend to be very small and without any employees. Economists call these “likely nonemployers” to distinguish them from "likely employers." The Census Bureau itself doesn’t use these terms but distinguishes applications from businesses with a “high propensity” to hire from all the rest. Economists subtract the high-propensity applications from the total number of applications to get the number of likely nonemployers.
Since the Great Recession, applications from likely nonemployers have grown at a fast clip, accelerating with the rise of the online platform economy in the 2010s—examples include drivers for Uber, Lyft, and Grubhub—and yet again with the pandemic. Despite an increase in applications from likely employers in the past couple of years, applications from likely nonemployers remain far more common (Figure 2).
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Rapid growth but limited impact
Part of the reason for the growth in likely nonemployers is these businesses are much easier to start than employer businesses. They tend to be very small and don’t require much startup capital. Not having employees, which avoids a host of rules and regulations, reduces both the learning curve and the cash needed to make payroll.
“Solopreneurs have a very low threshold to entry, meaning it's simple, fast, and inexpensive,” said Katherine Fossler, director of the Small Business Development Center (SBDC) at the University of Wisconsin–River Falls. “It is also a way to test the waters—and it can be done while you have a full-time job as well.”
“Solopreneurs have a very low threshold to entry, meaning it's simple, fast, and inexpensive.”
—Katherine Fossler, SBDC director, University of Wisconsin–River Falls
But because of their small scale, likely nonemployers as a group have a much smaller impact on the economy than likely employers, according to economists. For one, likely employers are, by definition, likely to create jobs when they begin operations. The Census Bureau considers a business application to be from a likely employer if, among other things, the applicant expresses an intent to hire or if the business will be in an industry in which most are employers, such as heavy construction.
Nonemployers, which don’t show those signs, may eventually become employers as well, but the odds of that happening are lower. One study found that, over a seven-year period, only 3 to 14 percent of nonemployers ever hired anyone, and if they did, most did so in the first year. After that, the odds drop to zero or close to zero.
It may be that many nonemployers just aren’t growth oriented. Studies have found that, for example, many started simply as a way for an unemployed person to make ends meet. Owners of nonemployer businesses may also have started the businesses to supplement income from their primary jobs; gig economy workers are a prime example.
From necessity to opportunity
Early in the pandemic, the increase in business applications both for likely nonemployers and employers was linked to unemployment around the country.
“When we had the shutdown and people couldn’t work, they started thinking about what they could do to create income,” said Jennifer Stephens, director of the SBDC at the University of Montana in Missoula. Many, she said, redeveloped old skills they hadn’t used in the jobs they lost or learned new skills to start new businesses.
But the economy soon rebounded and fewer entrepreneurs started businesses out of necessity. Many chose to leave their jobs to start businesses.
“When we had the shutdown and people couldn’t work, they started thinking about what they could do to create income.”
—Jennifer Stephens, SBDC director, University of Montana
“There was a significant level of excitement about economic growth and consumer confidence in the second half of 2020 and through 2021,” Vicki Hagberg, associate director of the Northland SBDC in Duluth, Minnesota, said in an email. “Many entrepreneurs were excited to try to capitalize on that growth and the opportunity they saw around them in their communities and beyond.”
Fossler of UW–River Falls said many of the “solopreneurs” who have consulted with her since the start of the pandemic are, like Benoy, workers seeking change after the turmoil of the pandemic. Spending more time at home led many people to reflect on their values and appreciate being with family, she said, and that ”really put people in that place of being open to things.”
She has worked with many people who endured the pressure of the pandemic as frontline workers, such as those in health care and elementary education, she said. Many have developed “side hustles” that they hope will allow them to change careers, she said. “People are looking for something – a bridge, I think, to their new life.”
Adapting to a changed economy
The opportunities they found reflect the changed economic landscape left by the pandemic.
One opportunity is what some SBDC consultants describe as the “micro food” sector, also known as cottage food. That usually means a solo entrepreneur making a specialty food item at home, such as elderberry syrup, smoked spices, or tea mixes. During the pandemic, many states, including Minnesota, Montana, and South Dakota, loosened restrictions on cottage food producers as part of a larger trend toward deregulating home-based businesses in response to job losses early on.
For many entrepreneurs, their new business aligns with their passion. Fossler described an educator she knows who enjoyed baking sourdough as a hobby because that kind of bread is tolerable to people who usually can’t tolerate gluten. That client is now seeking to turn the hobby into a full-time job, she said.
“All of those outdoor activities were in demand and sometimes exceeded demand, so there was space for people to launch additional services in that industry.”
—Jennifer Stephens, SBDC director, University of Montana
In western Montana, which benefited from the attention of pandemic-weary outdoor enthusiasts, Stephens said she saw a big increase in clients seeking to start outdoor-recreation businesses, including guides and outfitters for activities ranging from hunting to rafting, and even RV parks; guides help people enjoy outdoor activities while outfitters provide gear, lodging, and food, in addition to guide services. “All of those outdoor activities were in demand and sometimes exceeded demand, so there was space for people to launch additional services in that industry.”
Another field of interest for entrepreneurs is remote services, according to Hagberg of Northland SBDC. Her team met with clients seeking to provide online training, nutrition counseling, mental health services, and other content, such as blogs and videos.
Benoy said she ended up podcasting after plans to be a motivational speaker fell through. “I thought ‘Well, I like to get up and talk in front of people.’ I’m a nurse. I teach. I teach about oils and all that. But, of course, it was COVID, so ‘Hello? You can’t get up in front of anybody.’”
Publicly available Census Bureau data on the industries the business applications are associated with is not available at the state level. But national data hint at broad changes in the economy. In both numbers and percentages, there have been significant increases in applications for businesses that plan to engage in non-store retail, truck transportation, accommodation and food services, administrative and support services, and personal and laundry services (Figure 3).
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More detailed sectoral data isn’t available, but these broader categories allude to many trends already identified in government and industry reports. For example, non-store retail alludes to the surge in e-commerce widely reported in the pandemic when many shoppers preferred to stay out of brick-and-mortar stores. Personal and laundry services allude to pet sitters, whose services were in high demand when office workers who bought pandemic pets returned to the office. Accommodation and food services allude to the boom in food trucks, which were able to offer hungry customers a kind of dining out experience minus the indoor seating that was at times prohibited or avoided because of COVID-19.
Headwinds aren’t stopping startups yet
The surge in business applications is happening in spite of some strong headwinds that have raised the cost of starting a business.
The challenges include supply chain disruptions forcing many businesses to stockpile more inventory than in normal times, and inflation driving up the cost of that inventory. In an April survey of U.S. small businesses, 79 percent said they had seen a moderate to large increase in the price of goods and services over the past six months.
Borrowing the funds needed is also more difficult with higher interest rates because borrowers must ensure their business plans provide enough revenue for higher monthly payments.
Fossler said she hasn’t seen higher rates stop any of her clients but they might have to start their business with less cash than planned. After prioritizing must-haves such as rent, she said, they might be tempted to scrimp on marketing and other “soft costs.” “They’re having to cut corners like that with less startup capital and operating capital. That puts them in a little riskier position for being successful.”
Another trend forcing businesses to borrow less than planned is lenders requiring bigger down payments, Stephens said. Even putting up a third of the total project cost isn’t enough for some lenders, she said.
But a slowdown in business startups may come soon, according to Hagberg. Startups take many months of planning, and that momentum may keep entrepreneurs going despite higher rates. But those not so deep into planning may balk. “I expect within weeks we’ll start to see some deals fall apart with the additional rate hike [in late July],” she said.
The exceptions are very small businesses that do not require financing, like most of her clients, she said.
That’s where Benoy is at. A lot of her investments are in time and energy learning how to podcast, developing content, marketing her podcast, and seeking sponsorships.
“I had to literally write into my planner, ‘Don’t work on Sundays,’ or ‘Don’t work on the weekends,’” she said. Working from home means she’s always reminded of things she could do for work, she said.
It sounds a lot like her old job but she said there is a difference: “I’m creating, and I’m having fun, and I can say, ‘Yes, I am a business person now.’”