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Key Findings
- Women and entrepreneurs of color continue to drive new business creation: In 2020, we found that new business owners were much more likely to be Black, Hispanic, Latinx, and female than prior years, and that trend continued in 2021. Before the pandemic, in 2019, 28% of new business owners were female, compared to 49% in 2021. Similarly, in 2019, just 3% of entrepreneurs were Black or African American – in 2021 that share has tripled to 9%.
- Professional services dominate new business creation: During the initial stages of the pandemic, most new businesses were in Personal Services sectors such as Retail and Food & Beverage – the focus of much pandemic-related disruption. In 2021, however, 42% of newly-created businesses were in Professional Services, as economic growth shifts to these technology-focused sectors.
- Business opportunities, not layoffs, motivated entrepreneurs in 2021: In 2020, 35% of new business owners started a business because they were laid off from their jobs, the top reason for starting a business. This year, that share fell to 14% and the top reason for starting a business was entrepreneurs seizing a pandemic-related business opportunity (25%).
- From “The Great Resignation” to “The Great Creation:” As workers in all parts of the economy are quitting their jobs at record rates, this survey data indicates that many are leaving their positions to pursue business ownership. Over one-third of entrepreneurs (36%) started their business after voluntarily quitting their job. This trend is particularly focused in Professional Services, with 48% of entrepreneurs who quit their job starting firms in that sector.
- Black and Hispanic Entrepreneurs Have Been Left Out of Financing and Are Less Optimistic Than White Entrepreneurs: 11% of all new business owners received a private business loan to finance their startup, but that rate drops to 8% for Hispanic entrepreneurs and 6% for Black entrepreneurs, and the private loan approval rate for Hispanic entrepreneurs was less than half the approval rate for White entrepreneurs. Meanwhile, these owners were the ones most in need of funds: one-third of Black entrepreneurs and one-quarter of Hispanic entrepreneurs needed to take a side job in order to cover business expenses.
- Inflation and Supply Chain Issues Dominate Business Concerns: 29% of new business owners indicated that inflation was the top issue facing their business, the number one response, most common in Personal Services (33%) and Goods-Producing (35%) sectors. Among entrepreneurs in Goods-Producing sectors, supply chain disruptions also were top of mind, with 21% indicating that this issue was the top challenge facing their business.
Over 5.4 million new businesses were formed in 2021. This is an historic high, made even more impressive by the fact that it happened while the country remained in the midst of a once-in-a-century pandemic. What motivated these business owners to start a business during this time? How are they faring? And, how do they compare to pre-pandemic businesses? We asked these questions of new business owners in Gusto’s 2022 survey of new business owners, taken from Gusto’s customer base of more than 200,000 companies.
The Changing Face of Entrepreneurship
To better understand who the entrepreneurs are that started a new business, we looked at a variety of demographics including gender, race and ethnicity, the industry of their business, and their reasons for starting a new business in 2021. This year, we also examined the experience of entrepreneurs who identify as members of the LGBT community. Data surrounding the state of LGBT business owners, and LGBT new business owners in particular, is very sparse – despite the fact that there are an estimated 1.4 million LGBT-owned businesses, bringing in $1.7 trillion in revenue per year. In our survey, 7% of new business owners identify as members of the LGBT community.
As we found in last year’s study, 2021 saw a continued shift in the face of new business ownership towards women and entrepreneurs of color. Table 1 presents the gender distribution of new business owners in this survey, our 2020 survey, and data on new business owners from the 2019 Census Annual Business Survey, the latest year of publicly-available data. In 2021, 49% of entrepreneurs were women, a dramatic increase from the 28% seen in 2019. Table 2 breaks down the racial and ethnic composition of entrepreneurs, where we continue to see elevated shares of Hispanic and Black or African American new business owners, while the share of White entrepreneurs has fallen. In 2018, 78% of entrepreneurs were White Non-Hispanic, compared to 69% in 2021; conversely, in 2018 8% of entrepreneurs were Hispanic or Latino and 3% were Black or African American – by 2021, those shares have risen to 10% and 9%, respectively. These data indicate that the pandemic-driven spike in entrepreneurship among historically underrepresented groups was not a one-off spike, but the start of a sustained trend.
Table 1: Women have driven new business creation during the pandemic
Table 2: New business starts continued to see historically high shares of entrepreneurs of color
Although the demographic shifts seen last year have sustained themselves in several ways, there have also been important changes in the nature of entrepreneurship from 2020 to 2021. One important change is shown in Figure 1, which displays the industry distribution of new businesses. While the share of new businesses in Goods-Producing sectors (such as Manufacturing, Construction, and Mining) has remained relatively constant at 13% and Community Services firms (Education, Health Care, and Non-Profits) was little-changed at 26%, there was a significant shift from Personal Services to Professional Services in 2021. In 2020, 38% of new businesses were created in Personal Services (Retail, Leisure and Hospitality), but that number fell to 19% in 2021. Conversely, in 2020, 28% of firms were created in Professional Services (such as Legal, Consulting, Accounting, and Finance), and that rate rose to 42% in 2021. This shift likely reflects the shifting landscape of this mid-pandemic economy, in which the disruptions that drove entrepreneurship in the Personal Services space in 2020 – the closure of brick-and-mortar shops, for instance – have largely waned, while Professional Services firms continue to undergo profound shifts related to technology and remote work.
Figure 1: Industry Distribution of New Businesses
Figure 2 breaks down the industry distribution of new businesses across the race/ethnicity, gender, and sexual orientation of entrepreneurs. The distribution within each group of owners largely matches the overall industry breakdown, with some notable exceptions. Black or African American, LGBT, and female new business owners were significantly more likely to start a firm in Community Services sectors – Nonprofits, Education, and Health Care – with 33% of Black-owned businesses in these sectors, 35% of LGBT-owned businesses, and 32% of female-owned businesses, compared to 26% overall. Second, Hispanic and AAPI entrepreneurs were more likely than others to start firms in Professional Services, with 49% of each group owning businesses in these sectors
Figure 2: Industry Distribution of New Business, by Demographic Groups
A second important change in the new business landscape has been the reasons motivating entrepreneurship, as broken down in Table 3. Among all owners, the most common reason selected was that they seized a pandemic-related business opportunity, among 25% of all owners, an increase from the 21% who selected that reason in 2020. This rate was highest in 2021 among LGBT entrepreneurs, with 40% of these new business owners starting a firm to seize a pandemic-related opportunity. These entrepreneurs continue to respond to the disruptions created by the pandemic, meeting the needs of consumers, workers, and other businesses.
There was also a shift from creating a business out of acute economic need to starting one out of a more general concern surrounding financial stability. In 2020, the most commonly-selected reason for starting a business was that the owner was laid off from his or her job. In 2021, the portion of new business owners who started a firm because they were laid off dropped to 14% On the other hand, in 2020, 13% of respondents indicated they started a business because they were worried about their finances, while 24% of owners in 2021 selected that reason. Amid an unprecedentedly-tight labor market in 2021, where fewer workers than ever are being terminated, jobs loss has become a less significant driver of entrepreneurship.
By the same token, however, more and more owners have realized that business ownership, while surely a risky venture, can also be the key to lasting financial stability and to building generational wealth. Indeed, minority business owners – and Black or African American owners in particular – have seemed to take that message to heart, where 34% of Black or African American business owners started a business in order to improve their financial stability.
Finally in Table 3, 12% of all owners started a business because they were responding to child care responsibilities during the pandemic, compared to 6% last year. As school closures and other child care disruptions remained a fact of life for many parents into 2021, a growing share have found that the flexibility offered by business ownership can allow them to balance their many competing household responsibilities. The portion of entrepreneurs who started a business due to child care responsibilities was highest among female business owners who indicated that they have school-aged children at home: 28% of these new business owners created their business in response to increased child care responsibilities, the most-commonly cited reason among this group of entrepreneurs.
Table 3: Reason for starting a businesses, among those who started business as a direct result of the pandemic
The last aspect within these drivers of entrepreneurship that we examine is the relationship between this surge in new business creation and the recent increase in the rate at which workers have been voluntarily quitting jobs – a trend deemed “The Great Resignation.” It remains an open question where exactly these workers are going after they quit their job – whether to a new position within the same industry with better pay, to a job in a completely different industry, or out of the labor force altogether. While Gusto’s platform data of worker quit rates and hiring rates by industry indicates many workers are leveraging this tight labor market to switch jobs within the same industry to one with better pay or more flexibility, this survey shows that many workers are placing a premium on the flexibility and autonomy afforded by self-employment, and they are quitting paid employment in favor of entrepreneurship.
When asked if they started this business after voluntarily quitting their job, 36% of new business owners indicated that they did – suggesting that a substantial portion of new business formation is being driven by workers taking part in The Great Resignation. These former workers broadly share the same demographic profile as the larger population of new business owners, but they are slightly younger than those that did not quit their job (32% of workers who quit their job are 25-34 years old versus 29% of those who did not), and these owners are slightly more likely to be White (64% compared to 61% who did not).
Lastly, we examine the industry distribution among this subset of entrepreneurs. While the broader set of new business owners shifted towards Professional Services in 2021, this movement was magnified among those who quit their job to start a business: while 42% of all new business owners started a firm in Professional Services, 46% of those who quit their job to start a business were in these sectors. Furthermore, in this survey 71% of owners who started a business after quitting their job indicated that they started a business in the same industry as their prior job, suggesting that many workers taking part in The Great Resignation are in fact starting new enterprises within the same industries in which they used to work.
Figure 3: Industry Distribution of New Businesses: All vs. Those Who Quit Their Job
New Business Financing
Next, we examined the sources of these entrepreneurs’ financing for their new businesses – where they received funds, where they looked, and the roadblocks that exist to broadening access to financing. Table 4 presents the distribution of these owners’ sources of funds, overall and broken down by race. Among all owners, there was a significant reliance on personal savings to start their businesses, with 61% of all owners indicating they used personal savings to start their business, while around 10% relied on some form of private loan or capital investment and 5% received a SBA-backed loan.
There are several interesting and important differences in access to funds across groups, however. First, 67% of LGBT entrepreneurs and two thirds of Black or African-American entrepreneurs relied on personal savings to start their business. Black owners were also the least likely to access funds from family or friends (6%, compared to 10% of white owners) or private capital (5%). AAPI owners, on the other hand, were more likely to access funds from family or friends (12%) or a private business loan (15%).
Table 4: Sources of Financing, by Owner Race/Ethnicity
While there are not very large differences in rates at which business owners reported funding their business through a private business loan, those statistics mask significant differences in who might have applied for such a loan and the rates at which they are approved.
Table 5 displays application and approval rates for private business loans among new business owners. Despite receiving loans at similar rates, Black or African-American owners in fact applied for these loans at a higher rate – 17% of Black business owners reported applying for a private business loan, compared to 14% of White owners and 14% of all owners. As shown in the bottom panel, however, both Black owners and Hispanic owners experienced significantly lower approval rates: 55% of Black or African-American owners were approved for the private loan they applied for, and just 30% of Hispanic owners were approved, compared to 70% of White owners. LGBT owners experienced the highest loan approval rates, at 72%.
Table 5: Application and Approval Rates for Private Business Loans
This divide in application approval rates can magnify inequities in access to financing by deterring business owners who might need or desire funds from a private loan from applying in the first place. To be sure, we find in this survey that a significantly higher percentage of Hispanic and Black or African-American owners reported not applying for a private business loan because they did not think they would be approved. As displayed in Table 6, among all owners, 67% reported that they did not apply for a loan because they did not need one, but just 40% of Black owners and 55% of Hispanic owners cited that reason. Among all owners, 19% indicated they did not apply for a private loan because they did not think the bank would approve them, while 35% of Black or African-American owners and 30% of Hispanic owners did not apply because they believed they would be rejected. These data show that there is a clear demand for funds to grow and expand from business owners of color, but they face longer approval odds and are much more wary of applying for private loans because of these slimmer approval chances. Creating an equitable small business landscape in which owners of all backgrounds can succeed will necessarily involve creating a more equitable small business financing landscape.
Table 6: Why Did You Not Apply For a Private Business Loan?
Building and Growing a New Business
Next, we asked business owners about their operations since they have opened – their hiring decisions, benefit offerings, and time spent building company culture. This data reveals the dynamism of these firms that are sometimes less than a year old; these owners are growing their teams, adapting to the new economic landscape, and building company culture from the start of their business.
First, we asked owners about hiring in the past year, both of full-time employees and of contractors. Overall,48% of owners indicated hiring additional full-time employees and 37% have hired additional contractors since opening, as displayed in Table 7. This hiring of full-time employees is largely concentrated in Personal Services, Community Services (Education, Health Care, and Non-Profits), and Goods-Producing sectors, where 50%-60% of new businesses have hired additional employees. The majority of businesses across all sectors report hiring 1-2 new employees. Contractor hiring is higher in Goods-Producing Industries, where 45% of new businesses have hired a contractor in the past year, again with the majority of businesses hiring 1-2 new contractors since opening.
Table 7: Hiring Patterns Among New Businesses
We also asked about the work environment of these new employees, whether they are in a fully-remote role, hybrid, or fully in-person. There is an interesting divergence between full-time employees and contractors: among all firms hiring full-time employees, 65% have brought them on in a fully in-person capacity, while 40% of firms that have hired contractors brought them on fully in-person. Conversely, 16% of businesses hired full-time employees for a fully remote role, while 38% of firms hiring contractors have hired them for a fully remote position.
Table 8: Are these workers fully in-person, fully-remote, or in a hybrid role?
Next, we asked business owners about their current and anticipated benefits offerings. Table 9 presents results among all employees and by different business sizes. Overall, 29% of firms offer benefits to their employees, although the portion of firms offering benefits increases substantially as the firm’s size increases. Roughly 43% of firms with 11-20 or 21+ employees offer some form of benefits.
Table 9: Do you offer benefits to your employees?
Table 10 presents the types of benefits these firms offer, broken out again by firm size. Overall, the main form that firm benefits take is a flexible work schedule: 19% of all firms offering benefits offer a flexible work schedule, followed by 18% offering health insurance and 11% offering a retirement plan such as an IRA or 401k. There is both an increase in the prevalence of benefits (as shown above) and number of benefit offerings as firm size increases. Larger employers are more likely to offer a flexible work schedule (19% among all firms, compared to 28% among firms with 21 or more employees), health insurance (16% versus 44%), and retirement plans (11% versus 23%).
Table 10: If yes, what are they?
Looking at the barriers new firms face in providing benefits, cost is the primary factor: 51% of owners reported that they did not offer benefits because they were too expensive, while 15% indicated they did not because benefits were too complicated.
Although 29% of new business owners currently offer benefits, that share is likely to grow significantly in the future. As shown in Table 11, when these owners who do not offer benefits currently were asked if they anticipate offering benefits in the future 69% responded that they did. This increased portion is likely due to both the very tight state of the current labor market, in which employers must work hard to retain and attract talent, and these owners current and future growth plans, with benefit offerings becoming less expensive as firm size increases.
Table 11: Do you anticipate needing to offer benefits in the future
Finally, we asked business owners about the role of company culture, the shared beliefs and values within their organization. There is a clear consensus among business owners that establishing a strong company culture is crucial to the success of their business: 41% of owners indicated that establishing a strong company culture is extremely important, and 73% of owners think that establishing a strong company culture is either extremely or very important to the success of their business.
Figure 4: How important do you think establishing a strong company culture is to the success of your business?
This belief in the importance of establishing a strong company culture translates itself into time these business owners report spending on this task. As presented in Table 12, 32% of entrepreneurs spend 10%-25% of their time building company culture – and only 20% spend less than 10% of their time working on this goal. This distribution of time also shifts upwards as the size of the business increases and the complexity of establishing a strong culture increases. For instance, 21% of new business owners with 1-10 employees spend one quarter to half their time establishing company culture, but that number rises to 26% among owners with 21 or more employees.
Table 12: Since you opened your business, what portion of your time has been spent building company culture?
The Tools New Businesses Need To Succeed
Finally, we surveyed these entrepreneurs about their medium-term outlook, their plans for the future, and how policymakers can help them thrive. Overall, these entrepreneurs are optimistic about their prospects, particularly compared to the 2020 cohort of new business owners, but there remain wide divides in the experiences of White and Black or Hispanic entrepreneurs, and there is much that policymakers can do to provide support.
Tables 13, 14, and 15 present results of three different measures of the wellbeing of these businesses. First, we asked owners if their business was doing as they expected when they started it, better than expected, or worse than expected. Among all owners, 50% reported that their business was doing “as expected,” higher than the 35% reported last year, and 38% reported their business was doing “better than expected,” greater than the 30% last year. Only 43% of Black owners reported their business was doing as expected, however, and 19% of Black owners reported their business was doing worse than expected.
Table 13: Has your business done better or worse than your forecast when you started it?
Similarly, we find that higher portions of Black and Hispanic entrepreneurs have needed to take a side job in order to cover business expenses, and a greater share are concerned about the likelihood of their business failing within this first year. Among all owners, 22% have needed to take a side job to cover business expenses (below the 33% seen last year), but that share rises to one-third among Black entrepreneurs. Similarly, when we asked business owners how long they predicted they would be able to survive without additional financial support, 29% of all business owners indicated they could fail within a year. While that rate is below the 51% seen in last year’s survey, it is still above the 20% new business failure rate experienced in pre-pandemic times. Furthermore, that share of Hispanic entrepreneurs concerned about failing within the first year was 32%, and fully 44% of Black new business owners predicted they would have to close their business within the year without additional financial support.
Table 14: Have you needed to take a side job in order to help cover the costs of operating the business that you started?
Table 15: How much longer is your business able to survive without receiving financial support/government aid?
We also asked new business owners about what they consider the top issue facing their business right now, as presented in Table 16. Rising prices are at the top of entrepreneurs’ minds, with inflation chosen as the top issue by 29% of new business owners. This share is higher among owners in Personal Services (33%) and Goods-Producing sectors (35%), two industries particularly affected by recent price increases. The second-biggest issue among owners was their ability to dedicate time and attention to their business, chosen by one in five entrepreneurs overall, and 34% of entrepreneurs in Professional Services. The labor shortage also dominated owners’ concerns, as nearly one in five cited worker shortages as the top issue facing their business. Finally, as global supply chain disruptions continue, 21% of entrepreneurs in Goods-Producing sectors cited supply chain issues as the top issue facing their business.
Table 16: What do you consider the top issue facing your business?
Last, we ask entrepreneurs what tools they need most to grow their business. The number one need chosen among business owners was time to grow their business, selected by 45% of owners. Beyond that, owners expressed an overwhelming need for more government support in the form of additional tax credits (needed by 42% of owners) or government grants and loans (35%). This response is reflective of entrepreneurs’ general attitude towards policy support they have received. When asked if they believe the government is doing enough to support entrepreneurs, just 27% responded “yes,” and only 17% of Black entrepreneurs think the government is doing enough.
Table 17: What does your business need most right now in order to succeed? (Select top three options)
Table 18: Do you think the government is doing enough to support entrepreneurs?
As the economy continues to recover from the pandemic, entrepreneurs and small businesses across the country will continue to face headwinds. We are committed to supporting and advocating for policies that will aid small businesses and their employees as they navigate the new normal. To learn more about how Gusto is advocating for entrepreneurs click here.
Methodology
Data in this report was gathered from a survey of business owners using Gusto’s platform, who indicated that they had started a business in 2021. Responses from 2,646 new business owners were collected in two waves, from March 14, 2022 to May 31, 2022. The results of this survey were weighted to match the industry composition of all new businesses created in 2021 nationally using the Census Bureau’s Business Formation Statistics
