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February 28, 2022

CT has seen a surge in new business starts since the pandemic began. Will it translate to meaningful growth?

HBJ PHOTO | STEVE LASCHEVER David Lehman
By Zachary Vasile

The phones are ringing more frequently at the Connecticut Small Business Development Center (SBDC).

The East Hartford-based organization, which offers advisory services and other resources to small and recently-formed ventures, has seen a sizable uptick in outreach and inquiries since around April 2020, when the first wave of the COVID-19 pandemic was nearing its crest.

“There’s been some peaks and drops, but across the board our numbers are much higher,” said SBDC Director Joe Ercolano.

SBDC officials said they’re seeing interest and activity from nearly every sector, from restaurants and cottage food operators to landscapers, dentists and doctor’s offices.

Joe Ercolano

The flood of information-seekers has been so substantial that SBDC has increased its number of advisors assigned to “pre-venture” clients from one to four over the last two years, according to Associate Director Matt Pugliese.

About 70% to 80% of inquiries are from people looking to start new businesses, Pugliese said, a sign that whatever forces were pushing residents to strike out on their own in early 2020 are still at play today.

The Small Business Development Center’s experience largely squares with available data that reflects an apparent boom in entrepreneurship unlike anything Connecticut has seen in at least a decade.

A recent CTData Collaborative analysis of business registration data from the Secretary of the State’s office found a 20% increase in new business starts in 2021 through the month of November. Excluding December, 47,584 new enterprises were launched last year, up from 39,570 in all of 2020, and 36,323 in 2019.

Industries that saw some of the biggest gains included construction, real estate rental and leasing, professional, scientific and technical services and retail trade.

Business registrations between 2010 and 2020 had increased by an average of only 5% annually, CTData Collaborative calculated, giving even more weight to the theory that pandemic-related disruptions opened opportunities — or created the need — for workers to launch new ventures.

While the exact reason for the number of new businesses has been hotly debated — both in Connecticut and nationally — Pugliese said it’s probably due to a combination of social and economic factors.

Matt Pugliese

“People decided, either in losing their job or just deciding to make a change, that it was the time to leap into something new,” he said.

David Lehman, commissioner of the state Department of Economic and Community Development, offered a similar interpretation.

“More people were and are reevaluating,” Lehman said. “There was a level of dissatisfaction, for some people, with their existing jobs, and the pandemic made them give their jobs a second look.”

Entrepreneurs may also feel emboldened by opportunities afforded by technology and an economic landscape that was changing rapidly even before COVID-19, Lehman added.

“The amount of innovation has changed the traditional way of doing things,” he said, pointing to tools such as video conferencing, which have made remote work possible for millions of Americans. “You don’t necessarily have to go into an office. A lot of the old obstacles to starting a business on your own are falling away.”

Ercolano also highlighted the importance of remote work in helping would-be company owners keep their early costs down.

“Working remotely has helped people understand, ‘Hey, I don’t need to commit to a brick-and-mortar space right away and deal with the rent,’ ” he said. “The thinking is, ‘I can work out of my house, my basement, my garage.’ ”

“That’s a trend that’s been steady in Connecticut and the Northeast in general,” Ercolano added. “People don’t want to dive into fixed costs that make their proposal more expensive.”

Growth opportunity?

While evidence of a new wave of business owners is fairly concrete, it remains to be seen just how big of an impact it will have on the broader economy. The question is all the more critical for Connecticut, which has struggled to produce meaningful economic growth for years, and by many metrics is still attempting to undo the damage caused by the Great Recession more than a decade ago.

Economist Don Klepper-Smith said that while the country’s real GDP grew 17.5% between 2010 and 2020, Connecticut’s real GDP fell 3.5% over the same period. Connecticut is running up against a number of factors, including slow population growth and a reputation for a “borderline antagonistic” relationship with businesses of all sizes, Klepper-Smith said, and would still have to add just short of 100,000 jobs to reach its previous employment peak in early 2008.

Don Klepper-Smith

“The Connecticut economy is in the midst of a modest economic rebound, coming back inch by inch as opposed to yard by yard,” he said. “Despite all the rhetoric, the state is years away from full job recovery.”

Officials are hesitant to make any predictions about the ability of newly-launched businesses to undo some of that damage, and there are reasons to be cautious.

Ercolano said the majority of businesses started over the last two years will likely remain limited in scope, probably one- or two-person operations.

And while Connecticut has seen a surge in new business starts, overall job growth remains behind the national average. According to the Department of Labor, Connecticut has recovered just 75% of the 292,400 jobs lost to pandemic lockdowns and restrictions in March and April 2020, well behind the U.S. recovery rate.

Overall, there are 74,300 fewer people working in the state today than in February 2020.

“They’re not necessarily looking to hire people right away, and they may never get to that point,” Ercolano said of recently-formed businesses. “Or they’ll use 1099 contractors if they have to. They can have more control over their initial labor expenses.”

Small businesses are also more susceptible to downturns than bigger companies that can absorb a few bad quarters or years. And sometimes ideas and business plans, for a variety of reasons, just don’t take off.

“There’s a lot of churn in small business,” Ercolano said. “For every one that comes there’s one that goes.”

Indeed, from January through May 2021, the number of businesses that dissolved in the state (32,529) outpaced the number of new business starts (22,408), according to data tracked by CTData Collaborative. Full year business stops data was not available.

In some cases new business starts may not even represent the formation of an actual company. For example, real estate investors will often create new limited liability companies when purchasing a property for legal protection purposes.

High propensity businesses

But the data also includes promising signs suggesting that small businesses could serve as an engine for meaningful growth.

Lehman pointed specifically to an increase in “high propensity” business applications, or applications that are more likely to turn into a business with a payroll.

High propensity applications typically come from a corporate entity, or indicate a company is hiring, purchasing a business, or plans to pay out wages.

The state averaged between 800 and 850 high propensity filings over six-month intervals from 2010 to 2020, but that number has shot up since the pandemic began, and reached over 1,100 in the second half of 2021.

“Prospectively I do think this is very positive,” Lehman said. “Business starts were level for years, they spiked and it doesn’t seem like that’s abating.”

Ercolano too is encouraged.

While acknowledging that a relatively small number of businesses formed in any given year will go on to have a significant impact on the state’s overall economy, Ercolano said the proliferation of many startup enterprises can help collectively revitalize struggling cities and towns.

“The impact they have on their communities is more important,” he said. “They’re filling vacant storefronts, bringing some vitality back. The effect is immeasurable. It gives people confidence to be active in those areas, and it generates more wealth in those communities.”

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