Our country’s economic engine runs best when policies are in place that allow aspiring entrepreneurs to start new businesses. Startup businesses are the main driver for innovations that drive growth and create virtually all net new jobs.
Unfortunately, between 2009 and 2019 the number of new businesses launched in the United States each year fell by about 100,000 below the historical trend, and the fraction of all U.S. businesses that are new has been in decline for 40 years. Sound pro-entrepreneurship economic policies are needed to ensure that Main Street emerges from the pandemic stronger and more equitable.
As Founder and President of the Center for American Entrepreneurship (CAE), John Dearie leads efforts to develop and promote policies that support new business formation, survival, and growth. Prior to forming CAE, he was the Acting CEO of the Financial Services Forum, a financial and economic policy organization composed of CEOs of the largest financial institutions operating in the United States.
I recently connected with John to discuss his vision for CAE and needed policies coming out of Covid-19. I appreciate him taking the time to speak with me and below is a summary of our conversation.
Rhett Buttle: For an aspiring entrepreneur, can you describe how policies at the state and local level enable or hinder starting a small business?
John Dearie: For years, the entrepreneurship and innovation community has regarded public policy as an annoying distraction or irrelevant at best. “Leave me alone and let me build my business,” was the standard posture with regard to Washington and even local government. In recent years, however, it’s become more and more clear that public policy is not only relevant to the success of entrepreneurs and startups, but critical – especially because research has shown that startup rates in the United States have been falling for several decades. Policies regarding research and development funding, commercialization and tech transfer, education and workforce development, immigration, access to capital, regulatory burden and complexity, and taxes all matter to entrepreneurs and their chances of success. Roundtables that my colleagues and I do with entrepreneurs in cities and towns across the country on a regular basis have made that reality very clear. Entrepreneurs around the country are awakening to the importance of public policy, but most are too busy launching their businesses and working hard to survive and grow to actively participate in local or national policy. And even if they wanted to, many don’t know how. Interacting with and effectively influencing government policy is a craft that entails its own skill-set and expertise, not to mention relationships with key policymakers and their staff which take time to establish and cultivate. That’s why I and my colleagues launched the Center for American Entrepreneurship in 2017 – to serve as the critical connection between American entrepreneurs and policymakers. Over the past year we’ve worked to increase government funding of research and development, create a startup visa, improve the geographic distribution of venture capital, address record student debt, and promote entrepreneurship in economically distressed areas of the country and among women and people of color.
Rhett Buttle: How has the Covid-19 pandemic impacted trends in entrepreneurship?
John Dearie: There’s actually something fascinating underway. In the initial months of 2020, entrepreneurship plunged as measured by new business applications, which is tracked by the Census Bureau. That’s exactly what happened during the 2008 Great Recession, so the initial plunge was not a surprise. But then starting in April of last year, new business applications began to surge, and the surge continued. For the full year, new applications reached nearly 4.5 million, a 24% jump from 2019, and 50% higher than the annual average over the previous decade. Lots of head-scratching by economists and people like me ensued regarding how to explain the 2020 surge compared to the Great Recession plunge, and what the surge might mean for American entrepreneurship. In my view, the difference between 2008 and 2020 can be explained by the nature of the two recessions. The Great Recession was caused by an historic financial crisis that nearly wrecked the banking system and caused home prices and financial markets to crash. So when millions of people lost their jobs, they had the occasion to become entrepreneurs, but not the capital they needed. By stark contrast, the 2020 recession was manufactured when the economy was shut down to combat the virus. There was no financial crisis and sources of startup capital available to people who lost their jobs – savings, financial assets, and home equity – were strong. The stock market plunged initially, but then recovered fairly quickly. So you had both the occasion for new business formation and the capital required. In fact, there’s evidence that many people used their unemployment checks to start new businesses. On the other hand, a large portion of the spike in new business applications has been in the “non-store retail” category – people selling products online – so many of these new businesses are sole-proprietorships unlikely to grow quickly or create many jobs. Given that reality, I’ve been skeptical about the longer-term significance of the spike. But more recent Census Bureau data has shown that not only has the surge in new applications continued in 2021, the number of applications by new businesses likely to be employers reached almost 1 million in the first six months of the year – an all-time record. So, something very exciting and promising is clearly underway. We’ll have to keep watching.
Rhett Buttle: How has the pandemic impacted entrepreneur-led economic development?
John Dearie: In addition to its devastating toll in human lives, the Covid-19 pandemic careened through the landscape of America’s new and small businesses like a run-away bulldozer in the initial months of last year. Between February and April of 2020, the number of active businesses in the United States plummeted by 3.3 million, or 22%, the largest drop ever – including 17% of white-owned businesses, 26% of Asian-owned businesses, 32% of Hispanic-owned businesses, and a staggering 41% of Black-owned businesses. Meanwhile, record numbers of startups failed or laid off employees, as many were shut out of the Paycheck Protection Program (PPP) and the Federal Reserve’s Main Street Lending Program. But there are signs of hope and even new life as entrepreneurs have done what they do best – improvise, innovate, and adapt. While some businesses have pivoted completely, re-working themselves to meet new Covid-generated demand – such as breweries producing hand sanitizer – many others have digitized their operations to survive and even thrive in a socially-distanced marketplace. New and small businesses have increasingly turned to online platforms like Facebook, Ebay, and Amazon to open digital storefronts, social media sites like Instagram and Twitter to market to customers, video conferencing platforms like Zoom and Microsoft Teams to interact with suppliers and pitch potential investors, and digital payment tools like PayPal, Venmo, and Square to facilitate sales. At CAE, we expect that this dramatic acceleration of technology adoption driven by the pandemic will likely be permanent. And, as I mentioned a moment ago, an historic surge in new business applications is underway.
Rhett Buttle: Can you describe the importance of digital resources in running a small business?
John Dearie: The trend toward the digitalization of business has been underway for years, but Covid has dramatically accelerated it. According to a recent analysis by consulting firm McKinsey & Co., the pandemic compressed into a few months the adoption of e-commerce by customers that would have otherwise taken a decade, with three out of four Americans having tried a new shopping method due to the coronavirus.
A State of Small Business Report published last May by the Small Business Roundtable and Facebook stated that 51% of small businesses reported increasing their online interactions with customers, 35% had expanded the use of digital payments, and more than a third of businesses that use online tools reported conducting all of their sales online. Last July, PayPal reported 1.7 million new merchant accounts in the second quarter – triple the typical quarterly growth.
Rhett Buttle: What types of policies are needed to emerge from Covid-19 with a more diverse and equitable Main Street?
John Dearie: On June 30th, I testified before the Innovation, Entrepreneurship, and Workforce Development Subcommittee of the House Small Business Committee on the importance of entrepreneurship to the post-Covid recovery. During the hearing, I was asked by U.S. Rep. Marie Newman (D-IL) for three suggestions for how policymakers could best promote thriving entrepreneurship. I answered that working to make entrepreneurship much more inclusive is the top priority. Entrepreneurship in American remains an overwhelmingly white and male phenomenon. That needs to change, for several reasons. First, entrepreneurship is a powerful driver of economic growth and job creation – we need more entrepreneurship, therefore, in economically distressed areas of the country. Second, entrepreneurship is a powerful pathway of economic and financial empowerment for entrepreneurs and their employees, and that opportunity needs to be open to all Americans. Finally, if we are to succeed in reversing the multi-decade decline in entrepreneurship, we need much higher rates of participation by women entrepreneurs and entrepreneurs of color. With all this in mind, CAE’s policy agenda includes ideas to address healthcare, childcare, and retirement security – which are major barriers to more women entrepreneurs – and to get more capital to women founders and entrepreneurs of color.
A recent example of legislation aimed at enhancing equity and diversity is the Next Generation Entrepreneurship Corps Act, which was introduced on February 23rd by U.S. Reps. Jason Crow (D-CO) and Troy Balderson (R-OH), and Senators Chris Coons (D-DE) and Tim Scott (R-SC). The Act will promote entrepreneurship and job creation in underserved communities across the country by way of a new competitive fellowship program that will select 320 entrepreneurs annually from diverse backgrounds. The selected fellows will receive startup capital, healthcare coverage, deferral of student loans, mentoring, and support from an advisory board of CEOs and venture capitalists to start new businesses in distressed or low-income areas.
Rhett Buttle: How does the research of the Center for American Entrepreneurship help inform policymakers on economic development at the local, state, and federal levels?
John Dearie: CAE is a nonpartisan research, policy, and advocacy organization, and each leg of that stool is important – supporting and informing the other two. Original research broadens and deepens our understanding of entrepreneurship – its importance to economic vitality and its challenges – which, in turn, informs our policy agenda, which then determines our advocacy efforts. And when we bring improvement ideas to policymakers and their staff, they always raise new questions, which opens up new opportunities for original research. And, of course, our research is critical to our efforts to educate policymakers – helping us connect the dots in their minds between new business formation, innovation, economic growth, job creation, and expanding opportunity.
An important mechanism for sharing our research and other insights with policymakers that we established in 2019 are the House and Senate Entrepreneurship Caucuses. A caucus is best thought of like a club – an informal framework within which policymakers interested in a particular topic can learn more by conducting inquiries, roundtables, and briefings. The membership of a caucus also serves as a list of potential co-sponsors for legislation pertaining to that particular topic. So, caucuses are an informal, but important part of the policymaking machinery in Congress. There are hundreds of caucuses in Congress and yet, unbelievably, there had never been an Entrepreneurship Caucus in either chamber of Congress until 2019. Correcting that glaring omission was a major priority for CAE in our first couple of years following our launch in 2017. And the new House and Senate Entrepreneurship Caucuses have been very active.
Rhett Buttle: Are there any resources you would recommend to help guide policymakers and entrepreneurs?
John Dearie: We’ve built CAE’s website to be something of a one-stop shop for all kinds of information pertaining to entrepreneurship. It includes all of our research reports, an explanation of our full policy agenda, all the op-eds and blog posts that we’ve written on a wide array of entrepreneurship-related topics and issues, as well as links to other key organizations and government agencies relevant to entrepreneurship. Our Twitter, LinkedIn, and Facebook feeds are also a great way to stay in touch with legislative and regulatory developments important to entrepreneurs and startups.
Rhett Buttle: What’s one other thing you want American entrepreneurs to know?
John Dearie: Entrepreneurship is a topic whose time has finally come in Washington, DC, for several reasons. First, all of the engagement and education of policymakers that we at CAE and other organizations around town have done in recent years has significantly enhanced awareness of the importance of entrepreneurship to the issues that policymakers care about. Second, as I mentioned a moment ago, the creation of an Entrepreneurship Caucus in both the House and Senate is a major development that helps drive the entrepreneurship agenda. Finally, the damage inflicted to the economy by Covid-19 and the need now to accelerate economic growth and job creation has moved entrepreneurship to center stage. Putting those three important developments together, at CAE we believe that we have an unprecedented opportunity to make major progress on an ambitious pro-innovation, pro-entrepreneurship agenda in 2021 and 2022.