Early Investing

The American Startup Surge

The American Startup Surge
By Andy Gordon
Date October 14, 2020

There’s no denying that the economy is weaker than it was pre-pandemic. While industries like gaming and work-from-home tech have soared, many other businesses have struggled to survive. But in the midst of all this economic hardship, something rather fascinating has happened in the U.S. 

The number of new startups is spiking. 

Based on the government’s most recently released figures on new business formation, “high-propensity” business applications hit their highest quarterly level on record — nearing 500,000. In the last five years, applications have ranged between 300,000 and 350,000… and in the previous five years to that, they were between 275,000 and 325,000. 

So what are high-propensity businesses? They’re businesses mostly likely to develop into real firms with real employees. With brick-and-mortar companies dropping out left and right, this is welcome news… and completely unexpected. 

In the last recession, the number of high-propensity business applications sharply declined. And over the past four decades, the rate of new-business creation has been trending down. So what’s caused the about-face?

I think I know what it is.

Startups are nursing cash and not hiring as much right now (top-level talent is an exception). Even the larger companies are taking baby steps in replenishing their workforce. 

And that means that highly skilled and ambitious people likely have fewer job prospects right now. Luckily, they have an option that was highly unrealistic a decade ago. They can start their own company. 

Creating a successful company is still incredibly difficult. But in the last 5-to-10 years, it’s become much more feasible. For one thing, it’s cheaper. D2C business models operating on modest budgets are thriving as never before… especially if they source directly from growers/manufacturers and don’t require a centralized physical inventory. 

The cost of running a consumer-facing business — in general — has also plunged. Cloud-based ops and management tools like Shopify — in addition to an expanding array of no-code and low-code software tools — have cut down on staff, product development and operational expenses.

Low-cost business models are a growing trend. Of every 10 new startups I review these days, only one or two have adopted capital intensive models. 

So far, the growth in startups seems to be an American phenomenon. But that’s not so strange. Truth be told, Europe and other parts of the world have done a better job than the U.S. of helping skilled workers keep their jobs. 

And when you take into account that the U.S. startup scene is thriving and more welcoming to adventurous entrepreneurs than anywhere else in the world, it makes sense that the number of startups in the U.S. is rising.

The surge in new startups won’t immediately make up for all the jobs that have been lost — or the companies that are either struggling or have gone under. But give it time. Large legacy businesses aren’t the main source of employment growth in the U.S. — startups are. Our economy has a much better chance of making a strong jobs-rich recovery with the surge in startups than without. 

This is no doubt good news. But as an investor, I do see one main concern. Backing passionate and committed founders is one of the keys to investment success. But the possibility that their startup is actually  their “Plan B” doesn’t exactly thrill me. 

Of course, I’ll probably never know. Founders present their origin stories in a way that illustrates their passion for what their startups are doing. It’s unlikely that any founder would admit their startup was their backup plan. 

I’ve decided not to agonize over this. I’ll judge startups on their own merits. If the startup is growing rapidly and has loads of upside, then it deserves consideration for investment capital.

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