America is in the midst of an extraordinary startup boom

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The Economist | May 12, 2024

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An array of data indicate that Americans are rediscovering their go-getting spirit. The most striking evidence comes from applications to form businesses, a proxy for startup activity. These soared in mid-2020, when America was still in the grip of covid-19.

But now, well after the pandemic has faded, the surge continues. Last year applications to form businesses reached 5.5m, a record. Although they have slowed a touch, the monthly average is still about 80% higher than in the decade before covid, compared with just a 20% rise in Europe. By definition, every startup job counts as new, whereas mature companies have more churn. 

Perhaps even more important than the numbers is the kind of ventures that are being created. In 2020 and 2021 many new businesses catered to the working-from-home revolution. These included online retailers, small trucking firms and landscapers. Since mid-2022, however, the baton has been passed to technology companies, particularly sharp increase last year in business applications involving artificial intelligence (ai). For researchers, this carries echoes of the 1990s, when computers and the internet took off. 

What has fuelled the boom? The pandemic got things going, as millions lost their jobs and more shifted to remote work. The strength of the economy has also helped. When the job market is tight, it is easier for a potential startup-founder to take risks, knowing that they can fall back on paid work if need be. The advent of new technologies, especially ai, also feeds into things. Entrepreneurs are creating ai-powered tools to interact with customers, prepare taxes, sift through court records and more.  

The big unknown is if the startup boom will translate into productivity gains. In theory, the arrival of new companies should breathe vitality into the economy. Entrepreneurs tend to make use of new technologies and create novel business models, in the process keeping incumbents on their toes and propelling growth. There is not much yet in the economic numbers to indicate that this is happening. Labour productivity shot up last year, but that merely made up for a decline in 2022.

Maybe new startups will provide less of a boost to growth than their predecessors, since many reflect changes in where and how people work rather than a true increase in efficiency. A more promising possibility is that America is experiencing a repeat of the Solow paradox. In 1987 Robert Solow, an economist who won the Nobel prize that year, quipped you could “see the computer age everywhere but in the productivity statistics”. These days, you can see startups everywhere—even in Greenville—but not in the productivity data. Eventually, though, the Solow paradox was resolved. By the mid-1990s it was clear productivity had increased. Give the latest startups a few years to make their mark.

3 key takeaways from the article

1. An array of data indicate that Americans are rediscovering their go-getting spirit in the form of creation of new ventures.
2. Perhaps even more important than the numbers is the kind of ventures that are being created. Since mid-2022 its the technology companies particularly sharp increase last year in business applications involving artificial intelligence (AI).
3. What has fuelled the boom? The pandemic got things going, as millions lost their jobs and more shifted to remote work. The strength of the economy has also helped. When the job market is tight, it is easier for a potential startup-founder to take risks, knowing that they can fall back on paid work if need be. The advent of new technologies, especially ai, also feeds into things. Entrepreneurs are creating AI-powered tools to interact with customers, prepare taxes, sift through court records and more.

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Topics:  Entrepreneurship, Startups, Technology, Innovation, Productivity, USA, Europe, Venture Capital