The COVID-19 pandemic is the worst event to have rocked the global economy since the economic crisis of 2008.
The business world has been crumbling under the disastrous impacts of the disease as it spread throughout the world, forcing businesses to close shop (or at least, go remote) for months on end. In Q2 2020, the US GDP dropped by an unprecedented 32.9%.
No one would have thought that this series of unfortunate events would provide the impetus for people to start businesses. Yet, this, in all its counterintuitiveness, is exactly what has happened. This is true for a good number of new entrepreneurs surveyed by Azlo.
In its The COVID Economy report, Azlo, a banking platform for freelancers and small businesses owners, noticed 81% of entrepreneurs started a new business between April and June, during the peak of COVID-19.
Of these new entrepreneurs, only 22% were laid off so, definitely, the vast majority of new entrepreneurs didn’t start a business as a survival tactic. Instead, 40% claimed to have been motivated by COVID-19 and 90% had always wanted to start a business.
According to the Census Bureau, there were over 500,000 applications for an employer identification number between March and May. Though this is almost a 20% reduction compared to last year’s figures, it is telling, due to the obvious circumstances of the present. Nevertheless, in the UK, there was a record-breaking 47% increase in business formations.
This unexpected trend is reminiscent of the idea of ‘antifragility’, propagated by Nassim Nicholas Taleb. In his book, Antifragile, Taleb writes: “Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty.”
Perhaps entrepreneurship is one of these things that benefit from shocks and disorder. After all, the US experienced a similar uptick in entrepreneurship at the peak of the financial crisis eleven years ago. In 2009, there were 550,000 new businesses, against all odds. That economic depression gave us the business giants Uber, Airbnb, and Square.
The important question here is why does this happen? What is it about a global tragedy such as the COVID-19 that motivates people to found businesses? After all, lay-offs didn’t have much of an impact. The next points explain how new businesses are springing up because of (not despite, though both are valid) COVID-19.
Creativity in Problem-Solving
The COVID-19 has altered reality in different ways. Certainly, its impacts are far more negative. But the challenge has also provided opportunities for innovation.
As observed by researchers reporting for the World Economic Forum, “people and companies have devised new ideas to respond to existing or emerging needs insufficiently addressed by governments and incumbent institutions.”
Therefore, the entrepreneurship boost could be attributed to a rise in creativity due to meeting peculiar needs occasioned by the pandemic crisis. Basically, many new businesses are helping consumers navigate the prevailing circumstances and adapt to the new normal.
The bane of entrepreneurship is to solve a problem or meet a need. Now, there are simply more problems to be solved and more needs to be met. Or put differently, we now have different types of problems and needs than we used to.
Free Time to Explore
Of the new entrepreneurs in the Azlo survey who claimed to have been motivated directly by COVID-19, 50% explained that the reduction in activities gave them free time to run their business.
As any entrepreneur can tell, founding a business can be very daunting, taking a significant amount of time and effort. It is therefore not surprising that the increased free time allowed the new entrepreneurs to explore business opportunities available to them.
According to the Azlo report, 30% of the founders started a business as a side hustle to augment the income from their employment. And 32% wanted to make more money than they would in traditional employment. Either way, money is a clear motivator. Somehow, this point is tied to the previous.
Because of lockdown restrictions, the majority of companies had to make their operations remote. Being without the expectation of going to an office every day, new entrepreneurs can have more time to pursue a side business simultaneously as they work on their day jobs. After all, most of the new businesses being established are digital as well.
Building Resilient Businesses
It is a really bold move to start a business during a global crisis. It is as though the founder has set themselves up for failure. However, a business that survives the crisis could go on to become a real force, having been tried by fire, according to Dane Strangler, a fellow at the Bipartisan Policy Center, Washington DC. The negative circumstances may create more resilient companies.
Crises, of course, come with numerous challenges including lower revenue and lack of access to capital. This period is when startups must learn to be flexible and focus on priorities in order to improve cash flow management.
As new businesses proactively adjust to the current circumstances, they also position themselves for the long-term. That’s why it is no wonder that some of the biggest companies today began during or after a major crisis.
To survive the pandemic, my advice for new entrepreneurs are these:
- By all means, try to survive, but play to thrive. Think long-term always.
- Don’t be obsessed with high profits. Just keep the cash flow steady. If you don’t hit your revenue targets, then cut costs.
- Optimize supply chain management.
- Remain creative. Every crisis brings opportunities.
In any case, the vast majority of Azlo’s new entrepreneurs (96%) would keep their businesses running, even after the economy rebounds. Perhaps, despite all its negativity, COVID-19 might give us the next big company. Maybe a pandemic might be the best time to start a business.
What the government should do now is to make policies that encourage the growth or startups, rather than stifle innovation. COVID-19 or not, entrepreneurship remains the backbone of any economy.
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