The Startup Boom That Didn’t Hire

The conventional narrative of the pandemic’s impact on small business is a story of devastation. Congress created the Paycheck Protection Program because it feared a wave of permanent closures. Media outlets ran wall-to-wall coverage of restaurants shuttering, retail strips going dark, and a generation of entrepreneurs watching their dreams evaporate. The fear was not misplaced: in the second quarter of 2020, 326,000 establishments died — the highest quarterly death count in the BDS dataset — while only 228,000 were born. The net loss of nearly 100,000 establishments in a single quarter was genuinely unprecedented.

But what happened next was equally unprecedented, and received far less attention. By the third quarter of 2020, births had already rebounded to 278,000 — back to their pre-pandemic pace. Then they kept climbing. Q1 2021: 308,000. Q2: 351,000. Q3: 359,000. Q4 2021: 380,000 — the all-time record. In a single year, 1.4 million new establishments were born, more than in any year since the BDS began tracking in 2000. The Census Bureau’s High-Propensity Business Applications data (which tracks new employer identification number filings) tells the same story from a different angle: applications surged from 3.5 million in 2019 to 5.4 million in 2021.

The surge wasn’t a brief spike. Quarterly births remained above 300,000 through all of 2022, 2023, 2024, and into Q1 2025 (328,000). This is structurally above every single pre-pandemic quarter in the dataset. The previous peak had been 269,000 in Q4 2019. In other words, the post-pandemic floor is higher than the pre-pandemic ceiling. Something fundamental changed about the rate at which Americans start businesses.

What changed? Several forces converged. Remote work unlocked the geography of entrepreneurship: a web developer in Topeka could now serve clients in San Francisco without relocating. E-commerce platforms like Shopify lowered the barrier to launching a retail business to essentially zero capital investment. Pandemic layoffs and early retirements pushed millions of workers out of corporate employment and into self-employment, and many of them discovered they preferred it. The stimulus checks and expanded unemployment insurance provided a financial runway that previous generations of would-be entrepreneurs never had. And culturally, the pandemic seems to have loosened the grip of the traditional employer-employee relationship, making the leap to independence feel less terrifying.

If you stopped at the birth count, the story would be unambiguously triumphant: American entrepreneurship is thriving. But the Business Dynamics Statistics tracks something else that complicates the picture: how many people these new establishments actually employ. And that number has been falling relentlessly for a quarter century.

In the first quarter of 2000, the 227,000 establishments born that quarter collectively employed 1,942,000 workers — an average of 8.6 jobs per new establishment. These were businesses that opened with a real workforce: a restaurant with a cook, two waiters, a busboy, and a dishwasher; a small manufacturer with a dozen machine operators; a professional services firm with half a dozen associates. By 2019, average jobs per birth had fallen to 5.3. By 2022, at the peak of the startup boom, it hit 4.5. In Q1 2025, it stands at 4.8. The typical new business today starts with fewer than five employees.

This shrinkage has enormous implications. The total employment created by new establishments in Q1 2000 was 1.94 million. In Q1 2025, despite 44% more births, it was only 1.59 million — 18% fewer jobs. More firms are being born, but the collective employment impact is smaller than it was a generation ago. It’s as if the economy replaced a fleet of delivery trucks with a swarm of bicycles: more vehicles on the road, less cargo being moved.

Why are startups shrinking? The rise of platform and gig-economy businesses is part of the answer: an Etsy shop or an Instacart driver registers as a new establishment with one employee. The shift toward service businesses and away from manufacturing means fewer startups need warehouse space and production workers. Technology has replaced headcount: a two-person startup can now use cloud computing, AI-powered customer service, and automated accounting to do work that would have required ten employees in 2000. The declining average is not necessarily a sign of weakness — a lean startup that grows quickly is arguably better than an overstaffed one that doesn’t. But in aggregate, the trend means that the startup boom is creating fewer jobs per unit of entrepreneurship than any previous era.

The startup boom was not evenly distributed across the economy. The surge in new business formation was concentrated in a handful of sectors, and the pattern reveals the particular kind of entrepreneurship the pandemic unleashed.

Information sector births doubled between 2019 and 2022 — a 100% increase, from 7,000 to 14,000 per quarter. This is the sector that includes software companies, digital media, data processing, and telecommunications. The remote-work revolution made it trivially easy to launch a tech startup from a laptop, and the venture capital boom of 2021 provided the funding. Professional and business services surged 53%, from 58,000 to 89,000 per quarter — consultants, accountants, marketing agencies, staffing firms. These are the quintessential “laptop businesses” that the pandemic made possible: low fixed costs, location-independent, scalable without physical infrastructure.

Financial activities saw a 40% surge (20,000 to 28,000), driven by the explosion of fintech, cryptocurrency, and independent financial advisory practices. Manufacturing, despite its reputation as a declining sector, posted a respectable 33% increase in births (6,000 to 8,000), possibly reflecting the reshoring trend and supply-chain diversification that followed the pandemic’s disruption of global logistics. Even construction posted a 14% increase, reflecting the housing boom and infrastructure spending that characterized the early 2020s.

The sectors that barely participated in the startup boom are equally telling. Retail trade births rose just 12.5% — unsurprising given the acceleration of the shift from physical retail to e-commerce. Natural resources and mining showed zero growth in new establishment formation. And leisure and hospitality, despite being the sector most devastated by lockdowns, managed only a 10.5% increase in births. Opening a restaurant in 2022 meant navigating labor shortages, supply-chain chaos, and lingering customer caution about indoor dining. The pandemic startup boom was primarily a white-collar, technology-enabled phenomenon.

Raw birth counts can be misleading. If the total number of establishments in the economy is growing, you’d expect the absolute number of births to grow too, simply because there’s a bigger base. The more informative metric is the birth rate: new establishments as a percentage of total establishments. And the birth rate tells a more nuanced story than the raw counts.

The establishment birth rate was 3.6% in 2000 — meaning 3.6% of all private-sector establishments were brand new that quarter. It fell steadily through the 2000s, reaching a nadir of 2.7% in 2009 and 2010 during the Great Recession’s aftermath. The recovery was gradual: 2.9% by 2014, 3.2% by 2019. Then the pandemic pushed it to 3.9% in 2022 — the highest rate since the early 2000s. By 2025, it had settled at 3.5%, which is essentially back to where it started in 2000.

This reframing matters. The record-breaking birth counts of 2021-2022 are partly an artifact of a larger economy: there are simply more establishments today (roughly 9.4 million) than in 2000 (about 6.3 million), so hitting 350,000 births requires a lower rate than hitting 227,000 did back then. The birth rate in 2022 (3.9%) was impressive and genuinely above its 2000 level (3.6%), but the difference is much smaller than the raw count numbers (350,000 vs. 227,000) would suggest. And by 2025, the birth rate has returned almost exactly to its Y2K starting point.

The death rate adds another dimension. In 2000, 3.1% of establishments died per quarter. By 2022, the death rate was 2.9%, and by 2024 it had risen to 3.0%. This means that net establishment formation (births minus deaths) is running at about 0.5 percentage points — almost exactly the same as in 2000 (also 0.5). The startup boom is real in absolute terms, but in relative terms, it has essentially restored the pre-pandemic level of business formation without materially exceeding it. The question for Episode 4 is whether these new businesses will survive — because death rates are starting to climb, and many of those pandemic-era startups are now entering the high-mortality zone of their second and third years of operation.

The post-pandemic startup boom is real, and it matters. More Americans are trying their hand at entrepreneurship than at any point in modern history. The barriers to starting a business — capital requirements, geographic constraints, regulatory complexity — have genuinely declined for certain types of enterprises, especially technology-enabled service businesses. The cultural shift toward independence and self-employment appears durable, not fleeting.

But the boom is not reversing the long-term decline in dynamism documented in Episode 2. The overall gross job creation rate in Q1 2025 stands at 5.6% — the lowest in the dataset. The startup boom is creating more firms but not more jobs per firm, and the expansion rate at existing establishments continues to fall. It’s as if the economy developed two parallel tracks: a vibrant startup track where new businesses form at record rates, and a sluggish incumbent track where existing firms hire and fire less every year. The startup boom is running on one track. The decline in dynamism is running on the other. And the incumbent track is much, much bigger.

Consider the mathematics. In Q1 2025, new establishments created 1,589,000 jobs. Expanding existing establishments created about 5,852,000 jobs (the expansion rate of 4.4% applied to roughly 133 million workers). Openings account for about 21% of total job creation; expansions account for 79%. Even if the startup boom doubles in intensity, it would need to overcome the ongoing decline in the expansion rate to move the total needle. So far, it hasn’t come close.

The most important question about the startup boom isn’t how many businesses are starting — it’s how many will survive, and how many will grow. A business that starts with 4.5 employees and grows to 50 within five years contributes enormously to dynamism. A business that starts with 4.5 employees and stays at 4.5 (or dies within two years) is a statistic, not a growth engine. The BDS data on establishment deaths — the subject of our next episode — will tell us which outcome is more common.