Despite the prevailing economic uncertainty, new business formation continues to grow rapidly. According to a recent report from the Bank of America Institute, “new business formation is often viewed as a barometer of economic dynamism.” I saw this firsthand in the 1990s, when the “entrepreneurial revolution” began, forged by entrepreneurs offering new products and services, creating jobs, hiring local citizens, and spreading the wealth. The productivity growth that created the economic recovery in the 90s was built from the bottom up.
New Business Formation Reaches New Heights
The B of A report says today’s recent acceleration in business applications shows many Americans taking the risks and pursuing new business opportunities.
Growth in business applications was up nearly 15% year-over-year (YoY), as of last June, on a three-month moving average, according to government data.
Gen Z Brings a New Wave of Entrepreneurs
Currently, Gen X is the largest group of business founders, according to Bank of America payments data, which shows nearly four Gen X founders for every Gen Z founder. And for every one Gen Z-led new business, nearly three are owned by millennials and baby boomers.
But the data shows that Gen Z is contributing disproportionately to recent growth. In June, Gen Z surpassed all other generations in application growth — more than double that of millennials and Gen X — suggesting a new generation of entrepreneurs is emerging, especially since the pandemic.
B of A suggests that for younger workers navigating a tough labor market, starting a business may be seen as an alternative path to income growth and career advancement.
Starting Up in the AI Era
The data also suggests that some of today’s new businesses may be starting with leaner operating models. B of A says BLS data shows “a stark divergence between the overall number of business applications and those that signal plans to pay wages (hire workers).”
That difference is widest in the information sector. B of A says, “If AI or other digital tools can help founders automate administrative tasks, bookkeeping or content creation, the upfront need for employees could be lower than in past startup cycles.”
Is AI Making It Easier to Start a Business?
Small employer businesses have seen some AI impact on their business, according to data from the Cleveland Fed’s Small Business Credit Survey. Many reported increased productivity after adopting AI. But B of A says that although AI could be enabling new business formation and small businesses continue investing in AI, “the productivity payoff depends on whether these smaller, potentially younger companies can convert nascent operations into revenue growth, hiring, and durable efficiency gains.”
That’s a question that can’t yet be answered. The B of A report concludes that, for now, the “evidence suggests AI may be making it easier to form a business rather than a proven driver of broad-based small business productivity gains.”
My guess is that will change as we go forward.
Rieva Lesonsky is the founder of Small Business Currents, a content company focusing on small businesses and entrepreneurship. You can find her on Twitter @Rieva, Bluesky @Rieva.bsky.social, and LinkedIn. Or email her at Rieva@SmallBusinessCurrents.com.
Photo courtesy Josué Sánchez for Unsplash+
