A spike in small business formations in Michigan that began in the early months of the COVID-19 pandemic continues and easily outpaces the national growth rate.
Small business formations grew 8.5 percent in Michigan from January 2020 to July 2022, which compares to a national growth rate of 3.1 percent, according to US Census Bureau data included in an annual scorecard on the state’s entrepreneurial economy issued by the Small Business Association of Michigan Foundation and Michigan Celebrates Small Business.
The data show that many people have “turned to entrepreneurship as an answer” from the economic turmoil and disruption the pandemic wrought and that the trend could alter Michigan’s economy, SBAM CEO Brian Calley said.
“Something special started to happen in July 2020, and that is new business starts were coming in higher than what we had seen before,” Calley said today during a virtual presentation of 18th annual entrepreneurial scorecard prepared by GrowthEcomonics Inc.
“Entrepreneurism has become more and more important to Michigan’s economy; the diversity of our economy, the health of our economy. More and more people are turning to it as the way they want to act within the economy,” he said. “Month over month, this is one of the major bright spots. We have seen people in the past that have turned to entrepreneurship in times of uncertainty, and so I don’t think it is particularly surprising in that sense. But just the girth of it and the consistency of it month over month since July of 2020 — I’m a believer that this is something that’s real and permanent and presents a real shift, potentially, in the proportionate nature of our economy and where the economic reliance is.”
Small business formation in Michigan, measured by the number of new companies applying for a tax identification number, “showed a significant trend decline” from 2010 to 2015 in the years following the 2007-09 Great Recession, then stabilized through late 2018 and began moving up.
When the pandemic hit the state in early 2020, and state-ordered lockdowns ballooned unemployment and disrupted the economy, the startup rate began to spike. The growth rate has since remained higher than 2020, although July saw “some slow down,” according to the SBAM report, which added that there “are many conceivable reasons for the surge in new business startups during this time”
“During difficult economic times, the relative risk of an individual starting a new business may be lower because other employment opportunities may have evaporated or are less desirable. As the pandemic disrupts business and so many other aspects of life, it would not be a surprise to see entrepreneurs meet those disruptions with innovations advanced through new businesses,” the SBAM scorecard states.
Growth in remote work, and the greater flexibility it provides workers, also may have led to an increase in independent contractors as well as more people starting a small side business on top of their job, the report states.
The unprecedented flexibility that remote work offers workers today is a major factor that wasn’t present in past spikes in new business formations, Calley said.
“The idea that there are tens of thousands of people whose W-2 work life became way more flexible allowed side gigs or side businesses to be started or developed in a way that presented way less risk than say in 2008-09,” Calley said .
As well, the economy has been “awash with cash” and personal savings rates have been at all-time highs, providing prospective entrepreneurs with the capital that new businesses need and a “better chance overall at making it past the first few years,” he said.
‘We think it has legacies’
That trend for a higher number of business formations is typical to what occurred during the Great Recession and past economic downturns, said Graham Toft, president of GrowthEcomonics.
The question is whether the spike in new business formations in Michigan is a permanent change or “part of the cycle,” Toft said. If it’s more permanent, the trend could return Michigan to an era generations ago when small businesses were the primary economic driver, Toft said.
“The business structure, the organization structure of businesses in the state, has changed to be less reliant on the large corporate world and more reliant on the mid-sized company and smaller company, which basically moves the state back to where it was a century ago” Toft said. “We think it has legs, but those legs are going to get weak sometimes and they’re going to get stronger other times.”
The SBAM scorecard also indicates that annual revenues for small businesses in Michigan grew 24.2 percent from January 2020 to July 2022, or triple the national growth rate of 8 percent.
The trends in the SBAM report create a greater need for entrepreneurial support organizations for small businesses that help them sustain themselves through the first five years, Toft said.
“It’s an opportunity that’s created for you every recession. There’s more small business starts,” he said. “The key is to find ways we can better organize ourselves constantly to make that environment as conducive as possible for the small businesses to prosper.”
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