Investigating the Mystery of the Jump in Startup Applications

(Bloomberg Businessweek) -- When the coronavirus pandemic caused the deepest recession ever recorded in the U.S., something surprising happened: The Census Bureau reported a sharp increase in applications to start businesses. But why?

One intriguing possibility is that necessity has been the mother of invention—people who lost their jobs are trying to make some money on their own as instant entrepreneurs. Starting a business in hard times isn’t necessarily a recipe for disaster. The Founder Institute observes that Airbnb was founded in August 2008 and WhatsApp was released in January 2009, when the U.S. was in recession (although most of the 20-plus companies on this list weren’t actually founded during downturns). 

“I don’t think it’s impossible” that the pandemic has kickstarted some businesses, says Samee Desai, director of knowledge creation and research at the Kansas City-based Kauffman Foundation, which studies entrepreneurship. “There are people who know that their skills are still promising and they might be able to do something as opposed to waiting for the next full-time job.”

The correlation is certainly impressive. This summer, the four-week average of business-formation applications reported by the Census Bureau jumped almost 90% from their year-earlier levels. The applications have receded a bit but the four-week average was still up by 48% in the week ended Oct. 10 from the same period a year earlier.

But the case for the ancient proverb about necessity, motherhood, and invention is far from airtight. As Kauffman’s Desai says, “Unless you ask people you don’t really know why they’re starting businesses.” And Census doesn’t ask. “I don’t know what to make of it,” Desai says. “We’re all sort of marveling at the numbers.”

One problem is that talk is cheap. It’s free to apply for an Employer Identification Number, which is all you need to do to count in the Census Bureau’s data. Getting an EIN doesn’t mean you’re going to follow through and start a business, let alone hire anyone. On the plus side, there has been a solid increase in applications for businesses that Census believes have a “high propensity” to launch and grow, based on such factors as stating plans to hire, forming a corporation, or being in sectors such as manufacturing or retail. But it’s hard to know because Census data on actual formations of employer businesses—as opposed to applications—has been delayed and isn’t available for any part of 2020.

What’s more, it kind of makes sense that hard economic times might make people less willing to start businesses, since failure is more likely. Greg Horowitt, director of innovation design at the University of California at San Diego, says that while some entrepreneurs are “relentless,” others take into account risk—such as high levels of student debt—when they decide whether to launch.

An alternate theory for the jump in applications for EINs is uninspiring: Some people may be applying in hopes of cashing in on federal disaster aid to companies, either fairly or fraudulently. Bloomberg Businessweek reported in August that the government had given out more than $1 billion in Economic Injury Disaster Loan grants to phantom companies. The other big aid program is the Paycheck Protection Program. In August a man from the District of Columbia was arrested and accused of using more than $2 million in fraudulently obtained PPP loans to buy a rowhouse, a car, and a yacht. 

“Getting an EIN is costless, so perhaps people think that applying for one now will better position them for the next round of PPP money in 2021," Michael Mandel, chief economic strategist at the Progressive Policy Institute, who was economics editor of BusinessWeek, this magazine’s former incarnation, writes in an email.

Oh, well. I guess greed can also be the mother of invention.

©2020 Bloomberg L.P.