PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Two Big Positives for Entrepreneurship: New Business Applications and Access to Capital

By at 5 August, 2021, 2:46 pm

by Raymond J. Keating – 

Small businesses have been devastated during this pandemic. But certain signs point to a hopeful recovery in entrepreneurship.

First, new business applications continue to run at levels well above where they were pre-pandemic, according to the latest report from the U.S. Census Bureau. Even with a decline in June, new business applications, that is, applications with the IRS for Employer Identification Numbers, remained at a high level. These applications serve as an indicator of future business formations.

While the 448,533 applications (seasonally adjusted) in June were down from 497,043 in May (the second highest month’s data on record), the June 2021 level stood far above pre-pandemic levels (such as 299,878 in February 2020).

Source: Federal Reserve Bank of St. Louis, FRED

A similar pattern continued to play out with the subset of high-propensity business applications, that is, applications that have a high likelihood of turning into businesses with employees. While the June level of 152,272 was below May’s 167,034 (again, second highest on record), June 2021 ran well ahead of the 113,592 registered in February 2020.

Source: Federal Reserve Bank of St. Louis, FRED

So, the new business applications data offer hope for an entrepreneurial recovery. But entrepreneurs need capital to startup and grow.

Strong Year for Angel and Venture Capital Investment

Therefore, it’s worth taking note of what has occurred in terms of angel and venture capital investment. The data point to 2021 being the strongest year on record.

It was explained in the latest Venture Monitor report, from PitchBook, the National Venture Capital Association (NVCA), and Silicon Valley Bank:

“Deal flow at all stages of the investment lifecycle appears healthy, but large and late-stage investments remain the main drivers behind overall strong deal value trends the industry continues to see. … [T]he increase in early-stage investment is also partly indicative of investors improving their ability to evaluate and make projections for companies raising their first priced rounds. Additionally, improved best practices and better, more easily accessed information have helped startups improve their ability to launch. Lastly, the disruption caused by COVID-19 has led to an influx of top caliber executive talent from all industries joining startups, increasing a talent pool that had been primarily limited to veteran technology professionals. These factors help explain the growth in the relative share of capital invested accounted for by early-stage investment in Q2.”

Also, a host of investors not traditionally working in the startup arena – like hedge funds, mutual funds, and pensions – started participating in the VC market in a big way this year.

Let’s consider what’s occurring regarding investment and deal activity at various stages of entrepreneurial activity, again, according to the Venture Monitor data.

First, total venture capital investment actually increased in 2020, from $142.4 billion in 2019 to $164.3 billion in 2020, which was a record high with a dataset going back to 2006. At the same time, the number of deals declined slightly from 12,449 in 2019 to 12,084 in 2020, which was still the second highest going back to 2006.

The first half of 2021, however, showed a robust increase. Only through the end of June, investment already registered $150 billion, with deals at 7,058. That puts 2021 on track for a major increase in VC investment. In fact, the six-month tally for 2021 was higher than the full-year totals for every year before 2020 (i.e., from 2006 to 2019).

Second, looking at angel and seed investment activity, angel investment declined in 2020, from $2.7 billion in 2019 to $2.6 billion in 2020, with the deal count falling from 2,163 in 2019 to 1,972 in 2020. But through the first half of 2021, angel investment already hit $2.1 billion, and the number of deals hit 1,271.

Meanwhile, seed investment actually grew in 2020, from $7.7 billion in 2019 to $8.3 billion in 2020 (a record high), with deals declining slightly from 3,270 to 3,187. Again, the first six months of 2021 were strong for seed investment, coming in at $4.9 billion, though the number of deals registered 1,502.

Third, after hitting a record high in this dataset in 2019, early-stage venture capital investment fell in 2020 – from $46.2 billion in 2019 to $43.5 billion in 2020 – with the number of deals also falling from 3,908 in 2019 to 3,545 in 2020. However, the first half of 2021 points to this year shattering the old record, with investment registering $34.4 billion by the end of June, along with a deal count of 2,038.

Fourth, the doors are being blown off VC late-stage investment so far this year. In fact, late-stage VC investment jumped dramatically higher in 2020, from $85.8 billion in 2019 to a record of $109.8 billion in 2020, with deals going from 3,108 to 3,380. The record-shattering is continuing into 2021, with late-stage VC investment coming in at $108.6 billion in the first of half of this year, with deals at 2,247.

Policies Need to Support These Positive Trends

These are the numbers we want to see. The business applications numbers point to increased interest in and/or intentions to participate in entrepreneurship, and the VC data show robust, re-energized investment in entrepreneurial ventures. This is all vital to U.S. economic growth now and in the future, and therefore, it is critical that policymakers not undermine these efforts in any way, such as via proposed increases in personal income, corporate income and capital gains taxes, not to mention anti-investment and anti-acquisitions regulatory activity on the antitrust front. Public policy should be focused on removing costs and barriers to both entrepreneurship and private investment in order to help secure a strong economic expansion.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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