Pint-Size Startups Reshape the U.S.

"Small businesses are job creators. New businesses aren't creating as many of them.

The average number of people employed by the youngest businesses fell sharply during the pandemic, accelerating a decadeslong slide. The rise of these smaller ventures is one of the first signs of how pandemic-inspired businesses have reshaped the economy.

Businesses launched between March 2020 and March 2021 had, on average, 4.6 employees, compared with 5.3 employees a year earlier, according to Census Bureau data. That figure was 5.8 at the turn of the century and had been declining gradually until Covid-19 spurred a sharper drop.

The number of people taking initial steps to start a new business surged during the pandemic and remains elevated, as Covid created new opportunities and left people with more time and different priorities.

There are different reasons these new businesses are smaller. At some new companies, pandemic-related headwinds have slowed hiring. At others, entrepreneurs have chosen to keep their operations small out of a desire for a better work-life balance.

But the lower head counts also reflect more fundamental changes. The rise of remote work, the expansion of the gig economy and the proliferation of software tools all make it easier for entrepreneurs to operate with a leaner staff.

Daniel Quinones lost his job working for a major food brand at the end of 2019 and had just started as a contractor when Covid shut down the economy. He launched Miami Beach-based Front Page Retail in June 2020 to help food and beverage manufacturers with merchandising and in-store demos.

"I always wanted to become an entrepreneur," said Quinones. "The pandemic was the perfect opportunity." Quinones hired his first full-time employee at the end of 2021, a second this April and is adding two more employees this month. He also works with more than 30 independent contractors.

The emergence of the pint-size startup is consistent across most industries and geographies and is true in both rural and urban areas, according to a Wall Street Journal analysis of government data, which looked at firms with at least one employee.

The number of new startups "has increased much more dramatically than if you look at the jobs created," said University of Maryland economist John Haltiwanger. "There are more of them, but they are smaller."

Slater McLean and Jack Paley launched Oliver Charles, an online retailer, in February 2020 and sold their first sweaters that September. The pair are the San Francisco-based company's only employees; they plan to keep it that way for the foreseeable future.

"We can get four to five times bigger with the current setup we have, maybe adding a few more contractors either outside or within the U.S.," McLean said.

McLean and Paley initially thought about hiring an entry-level employee to help get their business off the ground. 

They soon discovered, via Twitter, now X, and entrepreneurial networks, that it was easy to build a workforce of contract employees spread across the globe.

U.S.-based freelancers craft blog posts for Oliver Charles. A contractor in the Philippines handles other tasks. A Brooklyn factory knits sweaters on demand, as orders roll in.

"The nature of the firm is changing," said Kenan Fikri, until recently research director for the Economic Innovation Group, a think tank. "New enterprises need to do less under their own roofs."

Nettie, a pickleball gear seller that launched in 2021, had two full-time employees. Founder Catherine Baxter decided not to replace them when one took another job and the other didn't work out. "It enables me to shift with the seasonality," said Baxter, who works with about 10 full- and part-time contractors. "I've purposely stayed more lean to be able to be agile."

Keeping head count down can make it easier for young businesses to adapt to the ups and downs of the economic cycle, said Robert Fairlie, an economist at the University of California, Los Angeles.

"At some stages of growth for a small business, it can be pretty valuable. They have that flexibility," Fairlie said. "At some stages of growth, it will hurt them."

Small businesses have long been known as job creators, responsible for more than 60% of net new jobs between 1995 and 2023, according to the Small Business Administration. Much of that growth comes from a small subset of businesses.

New business activity has fallen from its early pandemic peak but remains at elevated levels, according to monthly Census Bureau data through July that captures applications to the Internal Revenue Service for employer identification numbers, an early step in starting a new business.

"The increase in business creation is fantastic news," said Stanford University economist Nicholas Bloom. "For several decades now, we've been worried about a drop in [economic] dynamism."

Roughly 60% of businesses formed in 2021 or later were still active after one year, and 45% were still around after two years, according to Northwest Registered Agent, which helps entrepreneurs set up their businesses. That is an improvement from 2014 to 2018, when failure rates were ticking up, Northwest said.

Many of these young businesses have struggled, however. Companies launched during the pandemic were more likely than their predecessors to report they had been operating at a loss, according to surveys by the Federal Reserve Banks.

"Business owners have become pretty experimental and pretty savvy about how to do more with less," said Liz Wilke, principal economist at Gusto. "It's entirely possible we are moving towards a model where there are lots of businesses that are smaller."

Some entrepreneurs are opting for slow growth.

Helena Falangus Duffy launched Pottery by Eleni from her parents' garage in 2020, using Instagram to draw attention to her handmade items. Duffy's husband, Daniel, quit his job in 2021 to work full time at the company, which also offers pottery and prosecco classes.

The Lynnwood, Wash., business employs one contract worker full time and brings on as many as four others during the holiday rush. 

Duffy said she might eventually add one or two full-time employees, but is looking to balance running her own business with raising her first child, who was born this year.

"We generate enough income to support our family," said Duffy. "It's not in our dreams to expand and get our own warehouse. We like keeping it small and not working too hard as we used to."" [1]

1. Pint-Size Startups Reshape the U.S. Simon, Ruth; Overberg, Paul.  Wall Street Journal, Eastern edition; New York, N.Y.. 04 Sep 2024: A.1.