Key Findings

1. Companies whose first year in business included the Covid-19 pandemic (2019-2021) were nearly as likely as companies whose first year ended before the pandemic (2016-2018) to significantly grow their workforce over their first two years. Of businesses that started between 2019 and 2021, 11% grew their workforce significantly during their first two years. This number is similar to the 12% rate for businesses that started between 2016 and 2018. 
2. High-growth firms that opened during the pandemic added two more employees during their first two years than the pre-pandemic group, on average. The average pandemic-era high-growth firm added 15 employees while the average pre-pandemic high-growth firm added 13 employees. 
3. Pandemic-era high-growth businesses alone created a total of 3.5 million jobs during their first two years. The elevated hiring rate for pandemic-era high-growth firms created 336,000 more jobs than expected. 
4. Other analysis shows that high-growth businesses were 33% less likely to exit by year four than steady businesses, and continued to grow moderately after their first two years. The average high growth and steady business grew by 10% in years two and three, but for high-growth businesses this meant 2.1 new employees while steady businesses only added 0.3 employees.

Introduction

At the beginning of the Covid-19 pandemic, new businesses looked like they were in trouble. Customers were spending most of their time indoors, lenders were increasingly cautious, and a disrupted supply chain was creating massive shipping delays worldwide. The idea that even the most successful new businesses would grow as quickly as the top new firms from the years before the pandemic seemed unlikely.

However, an analysis of companies that had their first year in business before or during the pandemic shows that the pandemic didn’t slow down the most resourceful entrepreneurs. Of businesses that started between 2019 and 2021, 11% grew their workforce significantly (we  refer to businesses in this group as “high-growth” firms) during their first two years. This number is similar to the 12% rate for businesses that started between 2016 and 2018. 

And remarkably, the average pandemic-era high-growth firm added 15 employees during its first two years. That’s more than the 13 employees the average pre-pandemic high-growth firm added. The resilience pandemic-era entrepreneurs demonstrated created an extra 336,000 jobs for the U.S. economy. 

Entrepreneurship is at an All-Time High in the U.S. 

Entrepreneurship is thriving in the U.S. Between 2015 and 2022, the number of new-business applications nearly doubled,¹ from 2.8 million to 5 million.² That far outpaced the growth of the U.S. population, which expanded by 5% during that period.³ As a result, the number of new businesses per 1,000 people grew from 9 to 16. This trend appears likely to continue, as entrepreneurs started 5.5 million businesses in 2023.

Even cities that already had strong startup cultures were part of this new-business boom. While the six cities we studied — Atlanta, Charlotte, Dallas, Denver, Houston, and Miami — had higher rates of entrepreneurship than the national average before the pandemic, each still saw an increase in the proportion of its residents that started a business during the pandemic.

Miami, for example, had 28 new businesses per 1,000 people in 2018. By 2022, that number had jumped to 41. Atlanta, meanwhile, saw its rate of new businesses per 1,000 people grow from 21 to 32 during that period.

The Pandemic Didn’t Hold Back High-Growth Businesses

New-business formation is a key sign of economic health, but to predict the long-term impact startups will have on their communities, it’s important to understand how many of them show the potential in their early years to become sustained job creators.

We focus on what we are calling “high-growth” businesses because some new companies with rapidly fluctuating headcounts may have a larger workforce at the end of their second year than at the beginning of their first, but will not sustain that growth. We define a high-growth business as one that increases its headcount at an annualized rate of at least 25% between its first and 24th month if it starts with 10 or more employees, or adds at least 7 employees over the same period if it starts with fewer than 10.⁵

At the beginning of the pandemic, it seemed likely that economic disruptions would hold down even the strongest startups. But that didn’t happen. Between 2019 and 2021, 11% of new businesses reached the high-growth threshold , just below the 12% rate between 2016 and 2018 (we included firms that started in 2019 in the pandemic-era group because many had to navigate the pandemic during their first year in business).⁴

In the cities we studied, the gap between pre-pandemic and pandemic-era startups varied. While the same percentage of pre-pandemic and pandemic-era businesses reached the high-growth threshold in Atlanta, the gap was wider than the national average in Dallas — in favor of pre-pandemic businesses — and Denver, where pandemic-era businesses held a sizable lead.

The types of businesses that were most common in certain cities may explain some of the variance. Charlotte and Dallas, for example, had a higher proportion of real estate and transportation firms,⁶ which were much less likely than average to reach the high-growth threshold during the pandemic.⁷ Denver, on the other hand, had a higher rate of professional services firms, which fared better during the pandemic.

High-Growth Firms Hired Faster During the Pandemic

Perhaps the most surprising result from our study was that high-growth firms that opened during the pandemic added two more employees during their first two years than the pre-pandemic group, on average. During their first two years in business, the pandemic-era companies added an average of 15 employees, compared to 13 employees for the pre-pandemic companies.

That trend held in many cities with strong rates of entrepreneurship. For example, high-growth businesses in Miami added 47% more jobs during the pandemic than in the years preceding it, while Atlanta’s pandemic cohort grew headcount nearly twice as much as the pre-pandemic group. An influx of health-care businesses, which were among the fastest growers during the pandemic, may explain those cities’ strong performances.

Pandemic-Era High-Growth Firms Added 336,000 Extra Jobs to the U.S. Economy

High-growth new businesses have a major impact on the economy, even when they’re just getting off the ground.⁸ Pandemic-era high-growth businesses alone created a total of 3.5 million jobs during their first two years, while pre-pandemic high-growth businesses created 3.3 million jobs in their first two years.⁹

But that gap doesn’t reflect the full impact the pandemic-era group had on job creation. If each pandemic-era high-growth business had added the same number of employees as the average pre-pandemic high-growth businesses, the pandemic-era businesses would have created just 3.2 million jobs. That means the pandemic companies’ higher growth rate created an extra 336,000 jobs for the U.S. economy.

As you can see in the chart above, some cities, like Atlanta and Miami, had an outsized impact on creating those extra jobs. But in Charlotte, pandemic-era high-growth businesses actually created fewer jobs, on average, than their pre-pandemic counterparts.

Conclusion

While it initially looked like the Covid-19 pandemic would hold down even the most successful new businesses, that wasn’t the case. The savviest entrepreneurs saw the pandemic’s challenges as an opportunity to serve their communities, and their businesses grew at an impressive rate as a result. Those founders proved that new businesses can have a positive impact on their communities under any conditions.

Methodology

Data

Publicly Available Data

We used the following data from the U.S. Census Bureau (Bureau) to measure new-business formation, entrepreneurship rates, and the number of new businesses in a given city:

• The Bureau’s Business Formation Statistics measure the number of Employee Identification Number (EIN) applications submitted each month, which allowed us to determine the number of businesses that were started each year between 2016 and 2021.
• We calculated the rate of new businesses per 1,000 people in the U.S. and in each of the cities we analyzed by using the 1-year population estimates from the American Community Survey.
• The Bureau’s Business Dynamics Statistics estimate the number of establishments that are less than 12 months old in each year, which allowed us to estimate the annual number of new businesses in the cities we studied. We understand that using the number of establishments that are less than a year old may slightly overestimate the number of businesses created in a given year.

Gusto’s Data

Gusto is an all-in-one platform that offers payroll and HR services. We used data from our platform to measure headcount growth for new businesses that operated for at least two years.  We only included firms that started between 2016 and 2021 and operated continuously for at least two years on the Gusto platform so we could get a full measure of their growth during their first 24 months. We determined firms’ headcounts by counting all W2 employees in each month.

To make sure we only measured new businesses, we only included firms that onboarded with Gusto within 12 months of receiving their EIN. 

Data Weighting

We adjust our samples of national and metropolitan statistical area (MSA) data using industry weights derived from Business Dynamics Statistics, specifically using the counts of the number of establishments under 12 months old. We calculate weights separately for pre-Covid (2016-2018) and Covid-era (2019-2021) periods by averaging the number of new establishments per three-year span within each two-digit NAICS sector.

Estimating New Jobs Created by High-Growth Firms

We used two-year headcount-growth data for the new businesses on our platform to determine the percentage of high-growth businesses nationally and in each of the cities we studied. We then multiplied the percentage of high-growth firms in each region by the number of businesses in each region that met the criteria for our analysis, using Business Dynamics Statistics, to estimate the number of high-growth firms during the pre-pandemic and pandemic eras.

Finally, we calculated, nationally and at the city level, the average number of employees the high-growth firms on our platform added during their first two years, then multiplied those averages by the estimated number of high-growth firms in each region to estimate the total number of jobs created.

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1. Business applications refer to the Census Bureau’s definition which includes all applications for a Tax ID number as received by the Internal Revenue Service. Business Formation Statistics – About the Data 
2. Business Formation Statistics Press Release 
3. American Community Survey 1-Year Data (2005-2022)
4. For convenience, we aggregate firms by founding-year cohorts, but we also ensured that our results were consistent for individual cohorts. Measured outcomes for firms started in 2019 more closely resembled outcomes for firms started in 2020 and 2021 than those started prior to 2019. This increased our confidence that their early growth periods were driven by pandemic-era realities.
5. This follows the method introduced by Richard Clayton, Akbar Sadeghi, David Talan, and James Spletzer in the Bureau of Labor Statistics’ June 2013 Monthly Labor Review. https://www.bls.gov/opub/mlr/2013/article/pdf/clayton.pdf  
6. Shares calculated by finding the average number of establishments in the composite years of the pre-pandemic and pandemic-era periods for each city via the Business Dynamics Statistics: https://www.census.gov/programs-surveys/bds.html 
7. Based on Gusto calculations. 4.4% of real estate firms nationally grew in their first two years pre-pandemic compared to 3.2% of real estate firms during the pandemic. Similarly, 13.6% of transportation firms nationally grew in their first two years pre-pandemic compared to 7.6% during the pandemic.
8. Decker et al
9. See methodology for details on how these values were calculated.