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Will Small Businesses Stay Closed Post-Pandemic?

Can the United States stand to lose the four million small businesses Oxxford predicts?

August 22, 2020

More than one million. That is how many small businesses have closed in the United States, due, in one way or another, to the COVID-19 pandemic.

According to New York-based Oxxford Information Technology, as many as 1.4 million small businesses closed their doors or temporarily suspended operations in the second quarter. By the end of the year, four million small businesses could be lost. This means job loss of epic proportions: In June, the number of people working at companies with fewer than 500 employees (e.g. the “small business” threshold) dropped by nearly 11 percent from its February peak.

Millions and millions of previously employed Americans are being affected, to say nothing of those who enter the job market every year, who they are now competing with.

Unfortunately, the short-term economic bleeding could be even worse than anticipated. Thousands of small businesses are closing their doors without reporting closure, which Bloomberg’s Madeleine Ngo describes as “silent failures.” In Ngo’s words: “This wave of silent failures goes uncounted in part because real-time data on small business is notoriously scarce, and because owners of small firms often have no debt, and thus no need for bankruptcy court.”

While the immediate economic picture is anything but rosy, the stubborn persistence of the coronavirus also raises longer-term questions. Namely, how will a “black swan” event like the COVID-19 pandemic impact entrepreneurship in the years and decades to come?

Entrepreneurship is already an uphill battle. One in five small businesses fails within the first year. By the end of their fifth year, roughly 50 percent have been wiped out. Within a decade, only about a third survive.

Then, there is generational difference. The Millennial generation was already more risk-averse than its predecessors, with many young professionals choosing a traditional work arrangement over the turbulence of business formation. Interestingly, Millennials do fancy themselves as entrepreneurial, with 60 percent of Millennials considering themselves entrepreneurs and 90 percent recognizing entrepreneurship as a mentality.

However, they are not walking the walk: In 2015, the share of people under age 30 who own private businesses reached a 24-year low, plummeting from 10.9 percent in 1989 to just 3.6 percent. More recently, Guidant Financial found that 12 percent of America’s small business owners are Millennials, although they comprise half of the U.S. workforce.

Of course, the Millennial generation’s risk-aversion is not one-dimensional. From student loan debt to an inability to gain market share, there are many explanations for slumping start-up rates, and some are certainly valid. At a time when “cash on hand” is more valuable than ever, entrepreneurship may simply be a bridge too far.

Which brings us back to the COVID-19 pandemic: Where does entrepreneurship go from here? More likely than not, an already risk-averse generation will take in a “black swan” event and decide to mitigate risk even further. The sudden vulnerability of America’s labor market will be reason enough, for Millennials and many other Americans, to opt for the “sure thing” of traditional employment, rather than the great unknown of entrepreneurship.

Look at it this way: In 2001, only 24 percent of Americans then aged 25-to-34 claimed that fear of failure was keeping them from starting a business. By 2014, 40 percent of the same demographic reported that fear—a 16 percent increase between generations. The COVID-19 pandemic is unlikely to diminish those anxieties, when business failure has become so mainstream.

None of these trends bode well for U.S. economy, one dependent on the growth potential of human innovation. There will always be exceptions to the rule (see: Mark Zuckerberg), but would a younger Mark Zuckerberg decide to become an entrepreneur in today’s business climate? Perhaps not.

One thing is clear: A large-scale shift away from entrepreneurship is sure to undermine America’s long-term gross domestic product, job creation, poverty, and other economic indicators. Without the entrepreneur, America’s once-extraordinary economic experiment begins looking like the rest.

Luka Ladan is the President and CEO of Zenica Public Relations and a Catalyst Policy Fellow. Prior to founding Zenica, Ladan served as Communications Director at a leading public affairs firm in Washington, D.C.
Catalyst articles by Luka Ladan