Key findings

• Previous Gusto analysis shows that high-growth businesses started during the Covid-era added 336,000 bonus jobs to the economy. This analysis looks at the next two years to understand these business’s continued growth.
• High-growth businesses moderate their headcount growth after strong starts, but continue to grow on average. In their third and fourth year in business, the average high-growth and steady businesses grew by 10%. This amounted to 2 employees for the average high-growth business and 0.3 employees for the average steady business.
• High-growth businesses were much less likely to exit by the end of their fourth year. Businesses that were high-growth in their first two years had exit rates 33% below businesses that were steady growth.
• Economic responses to the Covid-pandemic provides a playbook for supporting business growth. Supporting increased financial security, access to capital, and available labor can provide a playbook for creating an environment from which small businesses can succeed.

Headcount growth moderated after the initial high-growth start, but businesses continued to add to their payrolls.

High-growth business that started in 2020 and 2021 saw decreased growth in their third and fourth years in business. On average, they added 2.1 employees over the two year period compared to the 15 employees they typically added in their first two years. Similarly, steady businesses saw declines in their growth rate: about 0.3 new employees during the same period compared to the 0.8 new employees in their first year in business. 

Importantly, both the average high-growth and steady businesses experienced a 10% increase in their headcount by the end of year four; but this has very different implications for final headcount. High-growth businesses continued to benefit from their initial growth, even as the speed at which they hired new employees slowed to nearly 2 employees over two years while the average steady growth business added 0.3 employees. If this continues, it would take steady businesses another five years to create as many jobs as the moderated high-growth business.

On first pass, this may seem to be a reason for concern. However, this shows an important step toward business moderation and stability that is necessary for long term growth. For many small business owners, initial growth is something that happens to their business and may be quite jarring. Moderated growth allows them to benefit from a larger business while making plans for how to best ensure long-lasting success.

Even cities that saw high-growth businesses with the biggest change in their initial growth saw moderated growth in their third and fourth year in business. This further shows that the natural evolution of high-growth businesses to more moderated growth is part of the firm’s normal life-cycle.

In addition to adding more employees during years three and four, businesses that started their lives as high-growth are 33% less likely to exit than steady businesses. This means that the jobs created at these businesses are long-lasting, which adds to the overall quality and economic impact of the high-growth businesses.

Learning from the Covid-19 playbook can continue to support high-growth small businesses

Although below its peak, new business applications remain 50% higher than pre-Covid. Some of these new businesses will be high-growth, and understanding how to support them can help increase the likelihood of their success. Three national trends stand out that benefited businesses started in 2020 and 2021:

• Increased saving and government transfers meant entrepreneurs were more financially secure
• New businesses had access to qualified and readily available labor
• A window existed where access to credit was eased and credit was affordable

This playbook can be implemented before the next crisis. Ensuring financial security means that would-be entrepreneurs can separate from their wage employment to take a risk on their business idea, increased skill labor training can ensure that workers are available to grow with new businesses, and lower interest rates should continue to drive down the costs of both long and short term debt.

Not even the Covid-19 pandemic was able to limit the number of high-growth businesses, and our research suggests that covid-era high-growth businesses were in some ways stronger than their pre-pandemic counterparts. Entrepreneurs, regardless of when they start their businesses, are ready to do the work, we just need to make sure there’s an environment in which they can do so.

Conclusion

High-growth small businesses made the most out of the Covid-19 pandemic, and created jobs in their communities that underpinned the success of the U.S. economy in recent years. They benefited from this growth as they aged, and set themselves up for long term success through sustainable growth and lower exit rates. By understanding and learning from their growth we can replicate past success, ensuring that future businesses are able to realize their ambitions.