Survey: Inflation Driving New Business Creation in 2022 As Entrepreneurship Continues to Surge

Luke PardueEconomist, Gusto

Download slides with the key findings of this survey here:

Key Findings

  • Women continue to drive entrepreneurship, creating half of new businesses,  while the share of Black or African-American entrepreneurs dips: In 2022, 47% of entrepreneurs were women, about the same as the 49% share seen in both 2020 and 2021 and far above the 29% of entrepreneurs that were female prior to the pandemic. The share of Black or African American entrepreneurs dipped from 9% to 5% but still remains above the 3% share seen in 2019.
  • Inflation is driving new business starts and side hustles: As rising prices cut into household budgets, the share of entrepreneurs starting businesses out of financial concerns rose substantially in 2022: 41% of owners started a business because they were concerned about their financial stability or wanted to supplement their household income, up from 24% last year. These concerns in particular are driving the 27% of businesses started as a side hustle, where 56% of owners said they started the business out of financial concerns.
  • Burnout is leading mid-career workers to start their own businesses: As workers continued to re-evaluate their professional path in the wake of the pandemic, the share of entrepreneurs who quit their job to start their own businesses rose from 36% in 2021 to nearly half (49%) in 2022. Younger workers 25-34 were the most likely to quit their jobs, largely to make more money in their own business, but mid-career workers 35-54 were most likely to say they started their own firm because they felt burnt out from their jobs (46%).
  • Women and entrepreneurs of color are left out of financing opportunities: Even as groups historically left out of entrepreneurship opportunities continue to fuel new business starts, they also remain blocked from many funding opportunities. Men received private capital investments at rates 2.3 times that of women (6% vs. 14% of women), and White business owners saw capital investment rates 2.5 times that of Black entrepreneurs.
  • Remote and hybrid hiring accelerates among new businesses: Even as larger, more established firms push for a return-to-office, new businesses are increasingly finding talent by hiring in hybrid and remote roles. 48% of businesses who have hired full-time employees did so in a hybrid or remote role, compared to 35% in 2021. Furthermore, in 2022, 75% of owners who hired contractors did so hybrid or fully remotely, compared to 50% in 2021.
  • Black and AAPI Entrepreneurs report declining confidence in business performance: As the economy cooled in the second half of 2022, fewer new business owners reported doing better than expected than those who started in 2021 (38% vs. 31%), and that decline is the largest among Black/African-American entrepreneurs (from 37% to 28%) and Asian American or Pacific Islander (AAPI) entrepreneurs (36% to 20%). 
  • Owners are building up cash buffers and keeping an eye on the economy: When asked about the top issue facing their business, 36% of owners pointed to uncertainty about the path of the economy, the most common response. As owners prepare for an uncertain year, rather than trimming staff or closing locations, they have primarily been building cash reserves (30% of all owners). 

2022 Entrepreneurs: An Overview

Americans created 5 million new businesses in 2022, as the US continues to see a surge in entrepreneurship in the years after the COVID-19 pandemic. Although this spike in new business creation has continued, much has changed in the economy in the past few years. Inflation has taken a larger bite out of household budgets, the leveling-off of remote and hybrid work has opened opportunities for new businesses to gain an edge in the talent market, and the potential for a slowdown in economic growth has led companies to prepare for an uncertain environment. All of those factors shaped entrepreneurship in 2022, driving the type of businesses these entrepreneurs create and their plans for the future.

At Gusto, we surveyed business owners who started their companies in 2022 – our third annual survey of entrepreneurs – to gain a deeper understanding of who these entrepreneurs are, what drove them to start new businesses, and how they are planning for a potential economic downturn.

A Profile of 2022 Entrepreneurs

New Business Owners and Their Firms

First, this survey explored the demographics of this latest cohort of entrepreneurs, specifically looking at the gender, race, and ethnicity of these owners. In 2022, we found that women and entrepreneurs of color continued to create businesses at elevated rates compared to those seen before the pandemic. In 2022, women made up 47% of new business owners, virtually unchanged from the 49% rate seen in 2021, and significantly higher than the 29% found in comparable pre-pandemic data. Similarly, we found that Black or African American entrepreneurs made up 5% of new business owners, a dip from the 9% in 2021, but above the 3% 2019 rate. The share of Asian American or Pacific Islander (AAPI) entrepreneurs rose from 9% last year to 14 in 2022. The potential reasons for these shifts may be related to the reasons different groups created businesses in 2020 and 2021, which we explore below.

Women Are Starting Businesses at Elevated Rates
Gender 2022 2021 2019 (Census)
Male 53% 49% 71%
Female 47% 49% 29%
Share of Black or African American and Asian American or Pacific Islander (AAPI) Entrepreneurs Remains Elevated
2022 2021 2019
White 69% 69% 78%
Black or African American 5% 9% 3%
AAPI 14% 9% 12%
Hispanic 8% 10% 8%

Looking by industry, in 2022 there was continued growth among firms in Professional Services industries (such as Accounting, Legal, and Consulting), in which 48% of new businesses were started, up from 49% in 2021 and 28% in 2020. Conversely, in 2022 12% of firms were started in Personal Services (such as Retail, Salon & Spa, and Food & Beverage), the lowest rate of any industry group. In the immediate wake of the pandemic in 2020, Personal Services sectors saw the highest rate of new business creation (38% of new firms), as entrepreneurs seized opportunities created by disruptions in those sectors. As disruptions like remote and hybrid work have taken hold in Professional Services industries, new business creation has shifted in parallel.

Professional Services and Goods-Producing/Logistics Sectors See Growth

Looking at the sector distribution by demographic groups, many groups follow the overall industry distribution, but we see that women and LGBTQ+ entrepreneurs are significantly more likely than other groups to have started a new business in the Community Services sector (Education, Healthcare & Social Assistance, and Non-Profits). Overall, 15% of businesses were started in these industries in 2022, but that rate more than doubled to 33% for women and for LGBTQ+ entrepreneurs. As the benefits of business ownership are expanded to groups traditionally left out, those business owners tended to start businesses to serve community needs. 

Women, LGBTQ+ Entrepreneurs Concentrated in Community Services Businesses

As in past years, we also explored the motivations that drove entrepreneurs to start their businesses in 2022. Amid three main motivations – flexibility, financial need, and opportunity – two top trends emerged. 

First, the flexibility that entrepreneurship allows was the top driver of starting a new business, cited by 63% of all owners. Second, there was a shift in financial motivation this past year from starting a business because of layoffs to more generally starting a business to supplement household income and/or improve financial stability. 

Flexibility and Financial Concerns are Motivating Entrepreneurs in 2022:
FlexibilityWanted or needed to supplement household incomeWanted financial stability/build an assetLost job/partner lost jobSeized business opportunityTechnology advances lowered the barriers to starting this business
Side Hustlers62%35%40%3%29%11%
Non-Side Hustlers63%13%32%6%42%8%

In 2021, 19% of new business owners started a business because they or their partner lost a job; in 2022 that rate was 5%. On the other hand, last year 24% of owners started a business out of financial concerns, which rose to 41% in 2022. As layoffs remained low through most of 2022, but inflation hit a decades-long high, rising costs became the primary financial motivator to start a business. 

Financial concerns rise as a motivation in 2022
Worried about finances Laid off or partner laid off Seized business opportunity Flexibility
2021 Survey 13% 39% 33% 61%
2022 Survey 24% 19% 37% 65%
2023 Survey 41% 5% 39% 63%
Source: Gusto Survey of New Business Owners (2021, 2022, 2023)

Side Hustles

The financial motivations that are driving new business creation more generally are also leading workers to start businesses while working for a different employer in 2023 – as a “side hustle.” Overall, 23% of workers started this business while also working full-time or part-time, and among these workers, financial concerns played an even greater role: 57% of those starting this business while still employed did so to supplement household income or build financial stability, compared to 36% of others.

More than a quarter new businesses are started as side hustles
Yes, full-time 15%
Yes, part-time 12%
No 73%
Financial concerns are the main reason owners start side hustles
FlexibilityWanted or needed to supplement household incomeWanted financial stability/build an assetLost job/partner lost jobSeized business opportunityTechnology advances lowered the barriers to starting this business
Side Hustlers62%35%40%3%29%11%
Non-Side Hustlers63%13%32%6%42%8%

Looking at the rates of those starting side hustles by individual industry, there was a broad mix of Professional Services, Community Services, and Personal Services firms at the top. Accounting was the top industry, where 54% of new business owners started this firm while still employed, followed by Non-Profits, Healthcare & Social Assistance, and Food & Beverage. Food & Beverage and Healthcare are two industries that drove employment growth in 2022, signaling that these entrepreneurs are taking advantage of economic opportunities to meet their financial needs.

Accounting is the top industry for side hustles
Industry                % of New Business Owners Starting as a Side Hustle
Accounting                          54%
Non-Profits & Associations          37%
Healthcare & Social Assistance      33%
Food & Beverage                     32%
Retail                              32%
Education                           31%
Salon & Spa                         30%
Transportation & Warehousing        29%
Consulting                          26%
Real Estate 26%

Great Resignation

Among owners who are not starting this business as a side hustle, an even larger portion quit their full-time job to start this business than last year. In 2022, 49% of entrepreneurs responded that they quit their last job to start this business, up from 36% in 2021. As the labor market remained tight in 2022, with near record-high quit rates, many of those workers left 9-5 work in favor of entrepreneurship. 

There were interesting differences in rates of workers quitting their jobs and reasons for doing so by age: the highest rate of quitting was among the youngest group of owners explored here, 25-34 year-olds. More than half of these workers (55%) quit their job to start a business. That rate was just above “mid-career” workers 35-54, where 48% of entrepreneurs had quit their job. 

There were further differences in the reasons these workers quit as well. When asked specifically why they quit, younger workers were much more likely to do so to pursue economic opportunity: 51% said they quit because they could make more money owning a business. Among mid-career workers, burnout was the top reason: 46% said they burnt out from their last job.

More workers are quitting their jobs to start businesses in 2022
2022 2021
Yes 49% 36%
No 51% 64%
Younger workers 25-34 are the most likely group to quit their job and start a business
Group
25-34 55%
35-54 48%
55+ 39%
White 49%
Black 40%
Hispanic 54%
AAPI 53%
Men 47%
Women 52%
LGBTQ 46%
Mid-career workers are motivated by professional burnout

New Business Financing

Beyond a profile of the identities and motivations of entrepreneurs, this survey also explored the sources of funds these businesses used to get started, from savings to government stimulus funds to loans and capital investments. Overall, the main source of funds for new business owners is personal savings, which 63% of all entrepreneurs relied on to start their companies. The second largest sources of funds were private business loans and private capital investments, each of which was received by 10% of all entrepreneurs.

There were large and striking disparities in the rates at which owners received private capital investments by gender and race. Men received private capital investments at rates 2.3 times that of women (6% vs. 14% of women), and White business owners saw capital investment rates 2.5 times that of Black entrepreneurs. Importantly, these differences exist even accounting for industry and type of firm. For instance, looking at companies that employ multiple workers within Professional Services, men are 1.7 times more likely to receive capital investments than women. 

Removing these disparities in funding is important first and foremost to improve the equity of the entrepreneurship landscape, but also because, as noted above, women and entrepreneurs of color are more likely to start businesses in Community Services industries – like Healthcare, Non-Profits, and Education – industries that meet their local community’s needs. Improving access to new business funding sources can create opportunities for more individuals to reap the benefits of business ownership while also serving their communities at the same time.

Large Disparities in Capital Financing Exist Between Men and Women, White and Black/African American Entrepreneurs
SourceAllMenWomenWhiteBlack/ African AmericanHispanicAAPILGBTQ
Personal Savings63%61%66%65%70%62%55%72%
Private business loan10%10%9%9%11%15%6%3%
Government Stimulus/ Unemployment Insurance1%1%1%0%2%4%0%1%
Loans from family/friends5%5%5%5%4%8%5%6%
SBA backed loan3%4%2%3%5%2%4%1%
Private capital investment10%14%6%10%4%4%18%13%
No funds were needed23%23%22%23%16%23%23%24%

Building and Growing a Business

Remote and Hybrid Hiring

Young, small businesses account for the largest share of jobs added every month in the US economy. Even as economic uncertainty grew in the second half of 2022, this survey shows that growth within these new businesses did not slow down. Among all industries, 49% of firms indicated that they hired additional full-time employees, and 30% have hired contractors since opening – in line with the 48% and 37% of firms who hired W-2 employees and contractors last year.

There was a large increase among firms started in 2022 in the share of firms that hired these workers in remote or hybrid roles compared to last year. Among firms started in 2021, 35% of W-2 employees were hired in hybrid or remote roles, which increased to 50% in 2022. Among those who have hired contractors, 75% did so in a hybrid or remote role, compared to 50% of firms who started in 2021. Even as the remote work shift has slowed among older companies, these flexible roles have proved to be a way for new businesses – that often don’t have the resources to compete in wages or traditional benefits – to gain a leg up in the competition for talent.

Half of Firms Have Hired W-2 Employees, Nearly One-Third Have Hired Contractors
Have you hired additional W-2 employees?
All Personal Services Professional Services Community Services Goods-Producing
Yes 49% 58% 38% 49% 69%
Source: Gusto 2023 Survey of New Businesses.
Have you hired additional contractors?
All Personal Services Professional Services Community Services Goods-Producing
Yes 29% 24% 35% 20% 40%
Source: Gusto 2023 Survey of New Businesses.
Hybrid and Remote Hiring is on the Rise Among New Businesses
Full-time employees: 
AllPersonal ServicesProfessional ServicesCommunity ServicesGoods- Producing
All in-person51%72%30%47%70%
All remote22%8%44%17%11%
Hybrid26%20%26%35%19%
Contractors:
AllPersonal ServicesProfessional ServicesCommunity ServicesGoods- Producing
All in-person25%33%7%29%57%
All remote55%37%79%38%29%
Hybrid20%30%13%32%13%

New Business Benefits

We also asked business owners whether and what type of benefits they offer the employees they have hired, including health insurance, retirement plans, flexible scheduling, child care assistance, and profit-sharing. Overall, just over one-third of business owners offer such benefits to their employees, about the same as 29% of companies last year. 

The most commonly selected benefits offered among these companies were health insurance (71%), a flexible work schedule (60%), and retirement plans (47%). There were notable increases in businesses offering health insurance and retirement benefits of these benefits, with the rate of health insurance provision rising from 59% to 71% and retirement plans rising from 32% to 47%. 

Health Insurance, 401ks, and Flexible Schedules are the Top Benefits Offered
Type 2023 2022
Health Insurance 71% 59%
Flexible Work Schedule 60% 67%
Retirement Plans (410k or IRA) 47% 32%
Childcare (subsidies/on-site) 2% 3%
Profit-sharing 13%
Other 15%

The reasons for this rise in benefits are likely related to the reasons business owners choose to offer these benefits in the first place. When asked to choose why they offered these benefits, 86% said in part that it was because offering benefits was the right thing to do, but the second reason, selected by more than half of owners, was because offering benefits help with employee recruitment and retention. Over the past year, employers faced a historically-tight labor market. Even as hiring slowed, business owners needed to work hard to retain the staff they had – and these owners are finding that benefits are an increasingly cost-effective way to retain staff. As Gusto’s research on retirement benefits bears out, adding an employee 401k plan can reduce the likelihood that an employee quits within the first year by 40%.


Majority of Owners Offer Benefits to Aid Recruitment and Retention
Reason
I believe it is the right thing to do 86%
Helps with employee recruitment and/or retention 53%
Increases morale 45%
Increases productivity 24%
Reduces absenteeism 10%
Other 10%

Entrepreneurship Amid Economic Uncertainty

The past year has been a year of two halves in the economy, with strong job gains and wage increases giving way to a cooler economy and fears of a slowdown ahead. In the final section of this survey, we asked owners how they felt their business has done relative to expectations, the issue that is top of mind today, and the actions that they are taking now to address those concerns. 

As noted above, new businesses have continued hiring W-2 and contractors at a similar rate to last year, but have seen a small downward shift in owners’ perception of their business expectations. By and large, most business owners (55%) feel that their business has performed as expected, compared to 50% last year. That increase has primarily come from the decline in workers who feel that their business has gone better than expected. Last year, 38% of owners felt that their company had done better than expected, compared to 31% this year. 

While this decline could be attributed to entrepreneurs who started a company at the beginning of 2022, which are entering 2023 in very different economic conditions, the decline is also concerning because it is largest among Black or African American entrepreneurs, where it fell by 9 percentage points to 28%.

8 in 10 Business Owners Say Their Business Has Done As or Better Than Expected:
AllWhiteBlack/African AmericanHispanicAAPIMenWomenLGBTQ+
Better than expected31%34%28%38%20%28%34%36%
Worse than expected14%15%15%13%15%15%13%12%
As expected55%51%57%49%65%57%52%51%
Fewer owners saying their business has been doing better than expected in 2022:
All OwnersWhite OwnersBlack OwnersHispanic OwnersAAPI OwnersMale OwnersFemale OwnersLGBT Owners
2023 Survey31%34%28%38%20%28%34%36%
2022 Survey38%40%37%31%36%34%41%43%

As these owners face a very uncertain medium-term outlook, that uncertainty remains at the top of their minds at the start of this year. When asked what the top issue facing their business was this year, from economic uncertainty to inflation to the labor shortage and supply chain disruptions, owners across industries chose uncertainty about the path of the economy as the number one issue (36% of all owners). The highest rate of owners choosing this issue was in Professional Services, an industry particularly sensitive to the Federal Reserve’s interest rate hikes this year, with the rate entrepreneurs seeing economic uncertainty as their top issue at 42%.

There are, however, interesting differences across industries in the secondary issues owners have on their minds. Inflation is the second-highest rated issue in Personal Services such as Retain and Food & Beverage, as owners deal with still-high food and raw materials costs. In Community Services, such as Healthcare and Education, businesses are growing faster than average but are constrained by a continued shortage of educators and healthcare workers, which showed up as the number two issue in that sector. 

Economic Uncertainty Tops New Business Owners Concerns
AllPersonal ServicesProfessional ServicesCommunity ServicesGoods-Producing/Logistics
Uncertainty about the path of the economy36%26%42%26%35%
Inflation17%20%13%19%11%
Finding and/or retaining talent15%15%7%19%18%
Access to affordable capital/financing9%4%9%9%10%
Supply chain issues4%11%2%2%11%
Uncertainty about the path of COVID1%0%1%3%0%
Other18%16%19%18%7%

It is clear, however, that economic uncertainty is the number one issue facing new business owners, and we asked owners what they were doing to prepare for a possible downturn: trimming staff, reducing investments, stocking up on cash, or none of those. Overall and in each sector, owners are either not taking any of these actions (52% overall) or increasing their cash reserves (30%). Although the economic situation is clearly at the front of their minds, most owners have not actively taken steps to trim their businesses yet. These statistics are encouraging because young, small businesses are the drivers of economic growth, in good times and bad, and how they fare now will largely determine whether we can continue to see employment growth or face a much stronger downturn in the months ahead. This data paints an optimistic picture. 

Have you taken steps since opening your business to prepare for a possible economic downturn? Select all that apply.
AllPersonal ServicesProfessional ServicesCommunity ServicesGoods-Producing/Logistics
Hired fewer staff members10%9%12%7%11%
Reduced investment in my business9%16%9%5%9%
Increased cash reserves30%31%31%28%30%
I have not taken any of these actions52%46%50%61%46%

Entrepreneurship in 2023

In the three years since the pandemic began, the US has seen 15 million new businesses formed, when in the three years before the pandemic it has seen 10 million. As the Council of Economic Advisors recently put it, each of these applications is an act of hope, an aspiration by an entrepreneur looking to improve their lives, their families, and their communities. We’ve seen these business owners swerve with each curve thrown at them, from the layoffs in the wake of lockdowns in 2020 to the budget crunch they feel from inflation today. Nevertheless, in each new survey, we see these folks remain unrelentingly persistent and optimistic – committed to their aspirations. And what we invest in them we will reap in orders of magnitude more: in jobs, in economic growth, and in our future.

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 2022. Responses from 1,590 new business owners were collected in two waves, from February 7 to March 14, 2023. The results of this survey were weighted to match the industry composition of all new businesses created in 2022 nationally using the Census Bureau’s Business Formation Statistics

To increase comprehension and statistical power, individual industries are collected into sector groups in this analysis. The groups are defined as follows:

Personal Services Food & Beverage; Retail, Salon & Spa; Sports, Entertainment & Recreation; Tourism & Accommodations; Other Personal Services)
Professional Services Accounting, Consulting, Technology,  Finance & Insurance,  Legal,  Real Estate, Other Professional Services
Community Services Healthcare & Social Assistance, Education, Child Care, Non-Profits & Associations
Goods-Producing/Logistics Construction, Facilities, Manufacturing, Transportation & Warehousing, Utilities, Wholesale, Other
Luke Pardue Luke Pardue was an Economist at Gusto, researching how public policies help small businesses and their workers thrive. He received his Ph.D. from the University of Maryland, where he studied the effects of government programs on disadvantaged populations’ housing and labor market outcomes.
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