Episode 28
Episode summary
Gusto’s third annual New Business Formation report found that the entrepreneurship surge that began during the COVID-19 pandemic continued in 2023. Caleb and Liz discuss some of the report’s key findings, including the impact of artificial intelligence and remote/hybrid work.
Shownotes
2024 New Business Formation Report [Gusto]
Transcript
Liz Wilke (00:00:31) – Hi, I’m Liz Wilke.
Caleb Newquist (00:00:35) – And I’m Caleb Newquist.
Liz Wilke (00:00:37) – And this is the Gustonomics Podcast. In each episode, we bring you a little bit of economics knowledge so you can be more informed, use the information in your business or work, or to drown out the sounds at the dentist office.
Caleb Newquist (00:00:53) – Please remember to rate, review, and subscribe to the show or share it with an economics curious friend. Anything you can do to spread the word about the podcast is greatly appreciated. Okay, Liz, I’m going to dispense with the pleasantries and get right into this. This is an exciting time of year for the Gustonomics team because you release an annual report on new business formations from the previous year. So a lot going on in your world, right?
Liz Wilke (00:01:22) – Yeah, it’s a very busy time. It’s a sort of like a flagship report for us. It’s also really unique because there aren’t a lot of surveys or research reports out there that really look at the experience that we’re looking at, which is of new businesses, right, that have started in the last year.
Caleb Newquist (00:01:37) – Yep. And for the listeners who are not familiar with this report at all, can you just briefly summarize what it is?
Liz Wilke (00:01:43) – Briefly, we survey businesses that started in the last calendar year. So in January 2024, we sent out a survey to businesses who had started their business in 2023, in any month in 2023. And we asked them a bunch of questions about why they started their business, how it’s going, if they’re using AI, which is a new question for us this year, what their hiring plans are, et cetera, et cetera, to just really get a whole picture of how these new businesses are doing every single year.
Caleb Newquist (00:02:14) – Outstanding. Okay, cool. And then remind me, this is the third edition?
Liz Wilke (00:02:18) – This is the third edition.
Caleb Newquist (00:02:19) – All right. So let’s get into it. So for this edition, why don’t you just start with some of the key findings? What are the big kind of notable findings from this year’s survey?
Liz Wilke (00:02:29) – You know, I think the first big finding is actually not a big finding from this year. It’s actually the big finding that we found in every single year, which is that approximately half of the people who have started new businesses in the last year are women. And that was not true before the pandemic. Before the pandemic in 2019, that number was only 29%. So it’s a near doubling of the share of women who are starting new businesses. And I think when we first saw this number, we thought it was a blip.
Liz Wilke (00:02:59) – Maybe it was people lost their jobs and they just needed to do something. But this is the third year that we’ve seen this really big jump. And it means that not only are we seeing a lot more business applications, but we’re also seeing a lot of women participating. And that was really long. So we can just cut it back from this sort of big jump. It’s the third year. We’ll put it in the Redux notes. Another big item that we looked at this year was AI. So ChatGPT burst onto the scene in November-ish of 2022, if my memory serves me right.
Liz Wilke (00:03:31) – And what we really wanted to know is, one, are small businesses building these AI tools? But really of importance is, are they using these AI tools to start and run their business? Because you could think there’s a big productivity gain potentially, and we really wanted to dig into that a little bit. And I can talk about that a little bit more. And then I think what we also saw, interestingly, this year is a sort of jump in the number of people that are doing side hustles.
Liz Wilke (00:04:00) – They didn’t quit their full or part-time job when they started the business in order to start the business. So they’re actually starting and growing the business before they leave their job for once the business is sustainable. And that’s a notable jump up from last year. I think it’s about 44% this year of new businesses actually didn’t quit their old job before they started a business.
Caleb Newquist (00:04:23) – This year, the public health emergency officially ended in May of 2023. But more or less 2023 was kind of the first kind of, let’s just call it post pandemic year. And we know that during the peak pandemic years, there were lots of business starts so many business starts. In fact, they were like record numbers of them. So how does the how does the number of businesses in 2023? How did the number of business formations kind of compare? And I don’t necessarily mean just in terms of raw numbers, but like, how do you distinguish or how should we think about the businesses being started during that pandemic era and like where things are kind of now.
Liz Wilke (00:05:07) – So the first year we did this survey, a much higher share of businesses we surveyed said they started their business because they lost their job. No big surprises there. What’s really interesting actually, though, is because we survey the folks that are on Gusto’s platform, and Gusto is a payroll provider, you know, these are not the vast majority of small businesses that you think about where it’s just sort of one person hanging out their shingle or doing a small business. That’s actually most small businesses.
Liz Wilke (00:05:37) – The small businesses that we’re looking at are, you know, employers or mere employers, right? They’re very likely to eventually hire someone. And so to think about people in that category starting their business, not necessarily because they saw a huge opportunity, but because the pandemic maybe pushed them sooner than they were ready or pushed them to start a business because they lost their job is, I mean, I think is really not surprising, but also not a great story to tell about, you know, why people become employers. But that was the story in 2020.
Liz Wilke (00:06:13) – And we’ve seen that really level off, right? So in 2022, and even in 2023, we’ve seen these big upticks in people that are looking for a business opportunity, or who said that technology actually lowered the barriers to them to starting a business. And so we’re really seeing the same level, right? So there were lots of businesses formed in 2020. There were lots of businesses formed in 2023.
Liz Wilke (00:06:36) – But the composition of those businesses is changing over time much more towards opportunity and, you know, people seeing ways to build businesses by choice rather than by necessity. Right.
Caleb Newquist (00:06:47) – And yeah, that’s a pretty key distinction. Correct me if I’m wrong, but economists, do they have strong feelings about entrepreneurship, necessity versus opportunity? Do they distinguish between those two? Or are they both kind of equally good things?
Liz Wilke (00:07:02) – We think about them as being, as serving very different functions in the economy, right? And we think about like the dynamics as being different for them. So somebody who starts a business, I mean, one of the nice things about being able to start your own business is that if you lose your job, you can kind of always start a business, right? And generate income for yourself. And economists often think about this as being kind of like a release valve for tough economic times, right? Or for people being laid off, or what have you.
Liz Wilke (00:07:33) – And that’s an important thing in the economy, people can still, you know, strike out on their own and earn their own income if they don’t necessarily have an employer, if they get let go.
Caleb Newquist (00:07:45) – Right, because if it was too difficult to start a business, those people would be put in very difficult circumstances.
Liz Wilke (00:07:52) – Yeah, it would be very difficult, right? And economically, right, people being out of work for extended periods of time is not great, because their skills get stale, you know, they lose connections, etc. And it’s also bad for their like mental health, right? Lots of people have a loss of identity associated with that.
Caleb Newquist (00:08:11) – Right.
Liz Wilke (00:08:12) – But we also think that when employment prospects get better, these people will just transition back to employment for a company, because they didn’t necessarily start their business because they wanted to run and own and grow a business, they did it because they didn’t have a job. So once jobs become available, they’re just going to go back to that, which is okay.
Liz Wilke (00:08:34) – Opportunity-based entrepreneurship, right, or entrepreneurs or business owners who start because they see a business opportunity are really economically important, because one, if you get enough of them, you get really important productivity gains in the economy. So new businesses entering with an ambition to sort of grow and seize opportunities is a really good signal that you’re going to get some good productivity growth in the industry where you see a lot of entry. And two, it’s good from an employment perspective, right?
Liz Wilke (00:09:04) – Because these businesses don’t just end up employing their own owner, their own founder, they end up employing other people too. And that creates more employment overall in the economy. And so opportunity entrepreneurship is really important for those reasons.
Caleb Newquist (00:09:21) – Yeah, I want to go back to something that you mentioned a little bit earlier, and that is that technology is now what. Something you learn from the survey is that technology is opening the door to kind of this new set of entrepreneurs. I wonder if you can talk a little bit more about that and go into a little more detail about what that is.
Liz Wilke (00:09:38) – Yep, so when I say that, I mean in a couple of different ways. I think one of the first and most positive ways that technology is sort of open doors is for folks with disabilities. So the entrepreneurs that reported to us that they had a disability of some kind- it can be a physical disability, it can be a mental or psychological disability, it can be any kind of disability.
Liz Wilke (00:09:59) – There are lots of covered disabilities- they were much more likely to say- about twice as likely as the average- to say that they had started a business because technology had lowered the barriers for them. I suspect that has to do both with generative AI and also the technology associated with remote and flexible work, because if you can work from anywhere, that means you can work in your own environment on your own schedule with your own adaptations. Right, you can accommodate a lot more about.
Liz Wilke (00:10:30) – You know how your business runs with extra technological tools, and you might even have assistive technology in the form of generative AI right to help you do things that you’re not quite as strong at because of your- of whatever your- disabilities are. So I think that’s actually an incredibly positive story about how technology is sort of opening up the space for entrepreneurship for people who previously would have found it much more difficult.
Liz Wilke (00:10:53) – One of the other things that I think is really interesting about technology reducing barriers is when we asked businesses whether or not they were using AI technologies- generative AI- about one in five of them said that they were purposefully incorporating AI tools into their business. Well, of course, we wanted to know what they were doing with it, and by far the easiest- you the the most prevalent use case- is marketing right.
Liz Wilke (00:11:23) – So generating content for your blog, generating your website right, doing you know, marketing emails and sending them out- all of those things are things that play to the strengths of current generative AI tools like chat, GPT, yep, the entry barrier to use those technologies is exceedingly low. You just have to go to chat GPT and type in a prompt and fiddle around with it a little bit until you get something that you want. So it’s: anybody can do it and they won’t.
Caleb Newquist (00:11:54) – And they won’t push back on you, right, they won’t argue, they won’t get tired. You can ask them. You can ask them to write all the marketing copy copy in the world and they they won’t say no, you’ll get tired of asking it to write marketing copy before it gets tired of writing marketing copy for you. That’s exactly right.
Liz Wilke (00:12:12) – Yeah, but this is also very time-consuming for a lot of people, right, and so you know, marketing is incredibly important for a young business because it’s so central to revenue generation. When you start a business, the first thing you need to do is figure out how to bring customers and revenue into the business. So it’s a critical function that is made much easier by this technology and which basically anybody can access, and I think that is really driving right a lot of businesses to sort of start faster. But I think it’s also enabling side hustles.
Liz Wilke (00:12:46) – Right, because now I don’t need to spend the amount of time and effort that I would have had to spend to generate that revenue. Right, I can do that sort of. It’s almost like a side job, right to do that. And once the business gets established, then I can maybe jump to that full-time thing.
Liz Wilke (00:13:02) – The second most common use case is sales right: writing customer emails, sending sales motions, which is again attached to revenue generation and is also really time-consuming, and so those two things together really indicate to me that the use of these new technologies is really facilitating a lot of small business formation and acceleration for companies that are actively and intentionally using it.
Liz Wilke (00:13:26) – One of the things that I think is worth calling out for companies and entrepreneurs and business owners- since this is a podcast focused on them- is that only one out of five businesses said that they were actively using these tools in their business, which means that four out of every five- eighty percent- of businesses that are new, right and young are not actively and intentionally using these tools.
Liz Wilke (00:13:50) – So the question is: why not- and for any business owner out there- right, that’s not actively and intentionally thinking about these use cases- how can you use these tools right to your own advantage?
Caleb Newquist (00:14:03) – How can you use
Caleb Newquist (00:14:04) – Awesome. Okay, last thing I wanted to ask you about was, did you ask about remote and hybrid work again this year? And if so, what were the findings compared to, you know, those pandemic years where virtually where the remote and hybrid stuff was, was very new, and it was kind of kind of, that was the big story. So where, where is it now with this year survey?
Liz Wilke (00:14:26) – We definitely did ask this year about remote and hybrid work. We always ask businesses if they’ve hired anybody and in what capacity they’ve hired them. So fully on more than a third of new businesses in this last year hired fully remote workers. And let me repeat, that is not a hybrid worker. That is a fully remote worker. That number is a jump on last year, which was a jump on the year before.
Liz Wilke (00:14:52) – And to be honest, I think it’s really in contrast with the hiring patterns of much larger businesses that are pulling back right on fully remote work for sure, but are also getting a little stricter about hybrid work and days in the office, etc. I think this is the result of two things. One, a new business doesn’t start with a physical office most of the time.
Liz Wilke (00:15:18) – So if you’re a new business, you’re cost conscious, and you are now in a world where workers do not only not really expect to go into the office if they can help it, but would actively prefer, right, the level of flexibility that working from home or working remotely can offer them. You can avoid the costs entirely. And the benefit to you as a new business is that you don’t have any of the architecture of in person work set up already. You don’t have a habit of stand up meetings at 9am. You don’t have a habit of post work happy hours to build culture.
Liz Wilke (00:15:56) – It’s a blank slate for you, which means that you can build a culture that’s sort of remote from the very beginning. And so you’re not carrying around a lot of the baggage right that pre pandemic companies sometimes are about in person work. So it’s a lower barrier. I think the second reason is that getting someone to come and work for your brand new startup business is tough in even the best talent markets, right? And remote work really seems to be coming to be a differentiator for talent. It’s still a very tough labor market.
Liz Wilke (00:16:34) – The number of people or the share of people in any labor market who are willing to come work for a very young business is not that not that high. And I think that businesses that have just started and are looking for really niche, great people have figured out that they can expand their talent markets considerably by offering remote work. Not only it gets them a better talent match than they could otherwise get, and it’s less costly for them because they don’t have any of the systems around in person work that pre pandemic companies did.
Liz Wilke (00:17:10) – So we keep seeing this trend up and to the right for new businesses hiring remote work and also hybrid work, but remote work is really their defining feature. And I don’t see an end to that trend.
Caleb Newquist (00:17:27) – Okay, Liz, that was great. For anyone interested, the gusto new business formation report is on our website and there’s a link in the show notes. Definitely check it out. And so that’s it for this episode. We hope that you learned something new and useful for your business. And let us know what you think of the podcast by leaving a review or sharing it with a friend. And thanks for listening. I’m Caleb Newquist.
Liz Wilke (00:17:54) – And I’m Liz Wilkie. Thanks for listening, y’all.
