When opportunity knocks: How economic cycles shape entrepreneurial ventures and their success

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After a decades-long downward trend in business dynamism, a surge in new business applications during the COVID-19 pandemic stirred cautious optimism for future economic growth (Decker, et al. 2016; Decker and Haltiwanger 2022). Over 545,000 new business applications were filed in July 2020, nearly twice the level 12 months earlier.¹ That momentum continued even as pandemic restrictions abated, and business applications have remained elevated through the first quarter of 2024, relative to pre-pandemic trends.

Unpacking these dynamics can help policymakers better understand the relationship between recent entrepreneurial activity and future economic growth. Entrepreneurs founding new businesses during the past few years did so under unique economic and labor market conditions, which may have affected their prospects and outcomes. In strong economies, new businesses may form to take advantage of the opportunity created by robust demand. In downturns, new businesses may form as the labor market weakens and some workers turn to self-employment, perhaps out of necessity. These necessity entrepreneurs may face challenges in growing their businesses. When a larger share of new firms is founded by necessity entrepreneurs, the trajectory of subsequent aggregate economic growth may be muted.

In this report, we focused on one type of necessity entrepreneurs, ones that started a business after involuntary unemployment. We analyzed firms started by both necessity and opportunity entrepreneurs in different economic conditions over 14 years, a period that includes two recessions. Our unique data asset provides the basis for our distinctive contribution in not only identifying necessity entrepreneurs but also studying their financial outcomes. In particular, we found:

Our findings may also have implications for other types of necessity entrepreneurship. To the extent that those who are disadvantaged in traditional labor markets—such as unemployed workers, recent immigrants, or returning citizens—may be more likely to start a business out of necessity, self-employment may not necessarily be an option that leads to financial security and building wealth. Consequently, entrepreneurship may have a limited role in reducing inequality in financial outcomes. 

In an accompanying report, we found that although women were not more likely to be necessity entrepreneurs, the gender revenue gap persists among both necessity and opportunity entrepreneurs.  

Nevertheless, entrepreneurship does play a role in both business dynamism and labor market fluidity. Policies that support self-employment as a viable option for both necessity and opportunity entrepreneurs can contribute to a dynamic economy. Policymakers and decision makers can use this report’s insights to inform expectations about economic growth, tailor small business programs to the objectives and circumstances of their founders, and support entrepreneurship as part of a well-functioning labor market.

Data asset and methodology

We designed our research sample to compare the characteristics and financial performance of firms founded by necessity and opportunity entrepreneurs in different economic conditions. It does so by leveraging granular, longitudinal data from linked business and personal deposit accounts between 2009 and 2023, a period that includes two recessions.

As in much of our small business research, the de-identified firms in our sample all have Chase Business Banking deposit accounts that meet our criteria for being active and small. Given our focus on the initial years after founding, we required evidence of some activity during the first 12 months after the account opened. See the Appendix for details on the required activity. By construction, all firms in our sample survived at least one year. We further restricted the firms in our sample to ones where at least one owner had a personal deposit account in the 12 months before the business account and used transactions in these accounts to classify business owners as either necessity or opportunity entrepreneurs. See Box 1 for details.

Our unique data asset provides a large sample of over 880,000 firms founded by necessity and opportunity entrepreneurs over 14 years, during a period with varying economic conditions. Requiring business owners to have personal accounts in the year² before opening their business accounts restricts the sample and may introduce selection bias if entrepreneurs who use the same bank for personal and business purposes are different from those who do not. However, median revenues and exit rates for this sample are similar to those in prior analytical samples (e.g., Farrell, Wheat, and Mac 2018) that employed fewer requirements, suggesting that this sample has similar properties as our larger, less restrictive samples.

While there are many reasons that might drive an entrepreneur to start a business, two macroeconomic drivers are especially salient—aggregate demand and labor market conditions. When favorable business conditions generate strong demand for their products and services, entrepreneurs may take advantage of the opportunity by starting new businesses (Schweitzer and Shane 2016). When labor markets are weak, workers may turn to self-employment and start new businesses out of necessity (Fairlie 2013). Notably, favorable business conditions and weak labor markets typically occur at opposite ends of the business cycle, causing the net effect of business cycles on aggregate new firm formation to be ambiguous.

Recent history provides two examples of economic downturns: the Great Recession and the COVID-19 pandemic. The share of firms that are new, which had declined since the 1980s, declined further during the Great Recession (Decker, et al. 2016). However, the national rate of new entrepreneurs, reported by the Kauffman Foundation,⁷ increased slightly in 2009-2010 and 2020-2021, coinciding with the downturns. Business applications⁸ decreased slightly during the Great Recession and at the onset of the COVID-19 pandemic only to increase markedly to over 545,000 in July 2020 (compared to about 280,000 in July 2019) and remained over 400,000 per month through the first quarter of 2024.⁹ Applications by likely employer businesses also increased during the pandemic and remained elevated through 2023, suggesting that the recent surge in applications was not only due to necessity entrepreneurs (Fikri and Newman 2024).

Regardless of the overall effect of economic conditions on total business formations, we might expect the share of new firms founded by necessity entrepreneurs—those that start businesses when they are unable to find suitable wage employment—to increase during periods of economic distress, consistent with the hypothesis that weak labor market conditions steer more workers toward self-employment. See Box 1 for a description of how we identified necessity entrepreneurs in our sample.

Figure 1 shows the share of firms in our sample founded by necessity entrepreneurs increased around the Great Recession and the COVID-19 pandemic. The highest share occurred in 2021, when 21 percent of firms founded had owners that received UI in the 12 months prior to the firm’s start. The increased share of necessity entrepreneurs in 2021 reflected the UI received in 2020-2021 and the pandemic recession from February 2020 to April 2020.¹⁰ Although the 2020 recession was short-lived, the determination of the economic trough was not made until July 2021.¹¹ During the pandemic, the unemployment rate and share of the labor force receiving UI peaked during 2020 and remained elevated in 2021, as shown in Figure 2.

The businesses started around the Great Recession also showed a higher share founded by necessity entrepreneurs. While this recession lasted from December 2007 to June 2009, the peak was not determined until December 2008,¹² and the trough was not determined until September 2010.¹³ Although the unemployment rate began to trend downward in April 2010, sharper declines did not begin until January 2012, when the unemployment rate was 8.3 percent, falling to 4.9 percent in January 2016 (Cunningham 2018). This longer tail of elevated unemployment rates is reflected in our sample: 4 to 6 percent firms of started in 2009 through 2014 were founded by necessity entrepreneurs, compared to 2 to 3 percent of those started between 2015 and 2019.

Figure 2 shows the national unemployment rate by race as well as measures of UI incidence between 2008 and 2022. The left panel shows how the unemployment rate declined gradually after the Great Recession. In comparison, the unemployment rate increased sharply in 2020 and subsided nearly as quickly. On the right panel of Figure 2, we calculated the share of the labor force receiving UI based on the U.S. Department of Labor’s estimates for the labor force and UI recipients. This share is lower than the unemployment rate, as not all unemployed persons receive UI. However, the share receiving UI is somewhat elevated after the end of the Great Recession, and a larger share of the labor force received UI in 2020 than in the Great Recession, a pattern that is reflected in our sample. The right panel also shows the UI recipiency rate, estimated as the insured unemployed as a percent of the total unemployed, which also suggests that there were more recipients during the pandemic recession than in the Great Recession.¹⁴

Our sample is also consistent with other estimates using different data sources. Using the Current Population Survey, the Kauffman Foundation found lower shares of opportunity entrepreneurs between 2009 and 2011 (about 74 percent), as well as in 2020 (nearly 70 percent), compared to nearly 87 in 2019.¹⁵ Lower shares of opportunity entrepreneurs imply higher shares of necessity entrepreneurs.

During economic downturns, labor market conditions are often unfavorable. The unemployment rate may rise as job seekers have more difficulty finding openings and layoffs increase the number of unemployed. Some may turn to self-employment as an alternative to wage employment. Consequently, necessity entrepreneurship increases during downturns. The founders’ circumstances as well as the macroeconomic environment may shape not only the types of firms founded but also their financial outcomes.

The sharp increase in business applications as well as uncertain economic conditions starting in 2020 suggest that the types of firms founded during this period may differ from past cohorts. In particular, the number of applications for non-store retailers rose sharply (Decker and Haltiwanger 2022). This increase may reflect the relatively low barriers to entry to start a non-store retailer as well as shifting consumer preferences away from in-person shopping (Wheat, et al. 2021).

Necessity entrepreneurs may face additional challenges in starting a business, which may make it more difficult for them to start firms in industries that require larger amounts of capital. More than 75 percent of small business owners in 2022 used personal savings or funds from friends and family as sources of capital when starting their firms (Misera and Perlmeter 2023). Having experienced recent unemployment, necessity entrepreneurs may have depleted some of their personal savings. During periods of economic distress, both necessity and opportunity entrepreneurs may find it more difficult to raise funds from friends and family.

Here, we focused on four industries with sizable shares of necessity entrepreneurs. Since opportunity entrepreneurs comprised most of the sample, their industry shares can be interpreted as the general trend for new firms over time. The trend among necessity entrepreneurs provides a contrast, and divergences can provide insights about how their firms differ from those founded by opportunity entrepreneurs.

Figure 3 shows the share of both necessity and opportunity entrepreneurs in the restaurant, personal services, retail, and repair and maintenance industries. Notably, the share of necessity entrepreneurs in three of these industries—restaurants, personal services, and repair and maintenance—increased sharply in 2020 at the onset of the COVID pandemic. In each of these cases, the share of necessity entrepreneurs was lower than the share of opportunity entrepreneurs prior to 2020, but higher afterwards.

Two of the hardest hit industries during the pandemic were restaurants and personal services (Farrell, Wheat, and Mac 2020a), and yet the share of necessity entrepreneurs starting firms in these industries increased in 2020, despite the challenges that these industries faced at the time. This could reflect the higher unemployment rates in these industries during the pandemic and preferences among necessity entrepreneurs to start businesses in industries where they had work experience.

The unemployment rate for the restaurant industry was over 35 percent in April 2020 and was not consistently below 10 percent until the second half of 2021.¹⁶ The unemployment rate in personal services was over 47 percent in April 2020, although it decreased to about 10 percent by the end of the year.¹⁷ During this time, the share of opportunity entrepreneurs starting firms in the restaurant industry fell while the share in personal services remained similar to prior years.

Sub-industry analysis reveals additional insights about the differences between firms founded by necessity and opportunity entrepreneurs. Within the personal services industry, the share of necessity entrepreneurs in personal care services (e.g., hair and nail salons) increased materially during the pandemic while the share in other personal services (e.g., dry cleaning and laundry) was relatively flat. Among opportunity entrepreneurs, there was little change in the share in either personal care or other personal services. The increasing share of all personal service firms was driven by increases in personal care services, despite the challenges in that sub-industry during the pandemic (Farrell, Wheat, and Mac 2020b). High unemployment rates in personal services may have led to larger shares of unemployed workers in this field turning to self-employment in similar roles.

A similar dynamic may have been relevant among different types of restaurants, as shown in Figure 5. Among necessity entrepreneurs, the share of new firms as either full-service or limited-service restaurants increased during the pandemic. In contrast, the share of opportunity entrepreneurs opening new restaurants declined in 2020, likely reflecting the challenges of operating restaurants during the pandemic.

During the pandemic, grocery stores experienced strong outcomes relative to other types of retail (Farrell, Wheat, and Mac 2020b). However, grocery stores represented a small share of new firms. Consistent with business applications (Decker and Haltiwanger 2022), an increasing share of new firms founded by either necessity or opportunity entrepreneurs were non-store retailers,¹⁸ as shown in Figure 6, although that share had already been increasing over time. Overall, a larger share of necessity entrepreneurs during the pandemic started retail businesses compared to opportunity entrepreneurs, and that was true in each retail sub-industry.

During periods of economic distress, a larger share of new firms is founded by necessity entrepreneurs, and the types of firms differ from those of opportunity entrepreneurs. Despite the challenges faced by firms in the personal services and restaurant industries during the pandemic, unemployed workers founded increasing shares of businesses in these industries. They may have had relevant work experience in these industries, predisposing them to seek self-employment in the same industries. While these new ventures may benefit from their founders’ past work histories, industry-wide pressures may hamper their survival and growth.

Necessity and opportunity entrepreneurs have often concentrated in different industries, with some more pronounced contrasts during the pandemic, possibly due to the disproportionate effect of the pandemic on some industries, such as restaurants and personal services. Analogously, economic downturns can affect some demographic groups more severely than others, which can have implications on the population of necessity and opportunity entrepreneurs. 

During economic downturns, younger workers often experience higher unemployment rates. During the pandemic, the unemployment rate for men aged 20 to 24 peaked at over 23 percent, compared to a peak of over 12 percent for men aged 55 and older (Falk, et al. 2021). Similarly, the peak unemployment rates around the Great Recession were over 19 percent for those aged 16 to 24 (in April 2010), and over 7 percent (in August 2010) for those aged 55 and older (Cunningham 2018). 

Higher unemployment rates among younger workers need not imply that necessity entrepreneurs are necessarily younger than opportunity entrepreneurs. For example, unemployed younger workers may have lower propensities to start businesses relative to their older counterparts. Figure 7 shows the share of necessity and opportunity entrepreneurs who were under age 35 as well as those aged 55 and over. For new firms between 2009 and 2019, which includes those started in the Great Recession, a slightly smaller share of necessity entrepreneurs was under 35, compared to the share in that age group for opportunity entrepreneurs. During the pandemic, the share of necessity entrepreneurs who were under 35 increased markedly. Among firms founded by opportunity entrepreneurs, the share of founders under age 35 also trended up over the years, but the increase during the pandemic was not as sharp. One potential explanation might be the supplemental unemployment insurance payments available during the pandemic,¹⁹ which could have provided younger workers with seed money with which to start their businesses.

Our sample distribution differs from the implications of other studies using different data sources. For example, using the Current Population Survey, Fairlie (2022) found the rate of new entrepreneurs to be the lowest among those aged 20 to 34.²⁰ The Kauffman Foundation (2022) showed about 25 percent of new entrepreneurs in the 20-34 age group during 2009-2021, with 26 percent in 2021. The study showed a similar share for entrepreneurs aged 55-64, comprising nearly 23 percent in 2021.

While our sample shares are similar for the period 2009 to 2015, our upward trend in the share of younger entrepreneurs suggests some underlying differences. These differences may be related to basing our sample on the Chase retail banking footprint, which is more concentrated in urban areas, as well as requiring Chase personal deposit accounts in the year prior to establishing a business banking account. Nevertheless, the increasing share of necessity entrepreneurs under age 35 during the pandemic is worth noting.

In our sample, we also found a declining share of necessity entrepreneurs who were White during the pandemic. Before the pandemic, more than 60 percent of necessity entrepreneurs were White; this share declined to about 50 percent during the pandemic. The shares of businesses founded by Asian and Hispanic necessity entrepreneurs increased during the pandemic, while the share founded by Black necessity entrepreneurs declined. That may appear inconsistent with the high unemployment rates experienced by Black workers, shown in Figure 2.

However, other studies have documented lower unemployment insurance recipiency among Black workers despite higher unemployment rates (Nichols and Simms 2012). Since our sample is based on observed receipt of unemployment insurance, our sample may be reflecting this underrepresentation of Black workers with unemployment insurance. Differing propensities to start a business may be another confounding factor.

As with our industry analysis in Finding 1, comparing shares of necessity entrepreneurs with corresponding opportunity entrepreneurs provides additional insights of historical trends. For example, in most years, over 60 percent of necessity entrepreneurs were White compared to less than 60 percent of opportunity entrepreneurs who were White, although these shares converged during the pandemic. Similarly, larger shares of necessity entrepreneurs were Black, compared to the shares of opportunity entrepreneurs who were Black.

The reverse was observed for Asian and Hispanic business owners. About 15 percent of opportunity entrepreneurs were Asian, compared to 10 percent necessity entrepreneurs prior to the pandemic. This pattern ended in 2020, when the share of Asian necessity entrepreneurs increased. The share of opportunity entrepreneurs who were Hispanic was also consistently higher than their corresponding share of necessity entrepreneurs.

The demographic composition of necessity and opportunity entrepreneurs over time has been a function of unemployment rates as well as propensity and resources to start a business. The sharp increase in unemployment during the pandemic, coupled with higher UI recipiency rates as well as supplemental UI payments, may have affected the constitution of necessity entrepreneurs in recent years. Since the pandemic, a larger share of necessity entrepreneurs has been under age 35 and non-White.

Starting a new business can be challenging in the best of times. Not surprisingly, businesses founded during periods of economic distress have lower initial revenues. Figure 9 shows the median first-year revenues for firms started between 2009 and 2022. The left panel shows the median for all firms founded in each year, inflation-adjusted to 2022 dollars. Firms founded during and after the Great Recession and during the pandemic had lower revenues.

The right panel of Figure 9 shows the median first-year revenues for necessity and opportunity firms founded in each year. The median among necessity firms is consistently lower than the median among opportunity firms started in the same year. However, that difference was smaller for firms founded around the Great Recession and the pandemic. Although median revenues among necessity firms showed some variance related to the business cycle, the first-year revenues across the cohorts were relatively more stable than across opportunity firms. This suggests that the types of firms opportunity entrepreneurs start may be more sensitive to market conditions than the ones necessity entrepreneurs open.

Necessity firms start smaller, and their revenues do not catch up to their counterparts founded by opportunity entrepreneurs over time. Figure 10 shows the median revenues of four cohorts of firms founded by opportunity entrepreneurs (on the left panel) and necessity entrepreneurs (on the right panel). The 2010 cohort represents firms founded around the Great Recession, with necessity entrepreneurs likely receiving UI in 2009-2010, during a time of high unemployment. Firms started by both necessity and opportunity firms in 2010 have shown little real growth in revenues during the first five years.

The 2018 cohort of firms were founded during a time of relatively favorable economic conditions, and the 2020-2021 cohorts consist of businesses started during the pandemic. These necessity firms followed similar revenue trajectories: the second-year revenues for the three cohorts were each in the $80,000-90,000 range. However, none of the median necessity firms caught up to their opportunity counterparts in the subsequent years. 

Some of the differences between median revenues of firms founded by necessity and opportunity entrepreneurs may be due to different industry compositions, as discussed in Finding 1. We used a regression model of first-year revenues to control for observable firm and owner demographics. In addition to an indicator variable for UI receipt, the model also included controls for state, industry, and start year. The owner demographic variables included owner race, gender, age group, and personal deposit account balances prior to firm’s opening. Details are shown in the Appendix.

Using the coefficients from this model, we estimated the first-year revenues for necessity and opportunity firms assuming that the other observable variables were identical. Figure 11 displays the predicted first-year revenues for firms founded by necessity and opportunity entrepreneurs, holding other variables constant. The difference between necessity and opportunity firms appears smaller than the difference between their medians shown in Figure 10, suggesting that part of the reason firms started by necessity entrepreneurs are smaller than their opportunity counterparts was due to the types of firms they founded. However, observable firm characteristics did not fully account for the revenue gap between the two types of founders.

Not all new businesses survive, and that is part of the churn that constitutes business dynamism in the economy, contributing to innovation. Exit rates are typically higher when firms are young (Fairlie, et al. 2023). In addition, firms founded by necessity entrepreneurs are more likely to exit in early years, relative to ones founded by opportunity entrepreneurs, although the difference narrowed in the third year. Observable variation in firm characteristics, such as industry, can account for some of this difference. However, Black necessity entrepreneurs were materially more likely to exit relative to Black opportunity entrepreneurs even after controlling for firm characteristics.

Figure 12 shows the exit rates in the second and third years for firms founded by necessity and opportunity entrepreneurs. By construction, all firms in our sample survived the first year. For a given cohort (e.g., firms founded in 2018), the share of firms exiting in the second year was generally higher than the share exiting in the third year, conditional on surviving the second year. 

Second year exit rates trended slightly downward over time: less than 15 percent of opportunity firms started in 2017 exited in their second year of operations, compared to over 15 percent of those started in 2009. Firms founded in 2018-2019 had noticeably lower second-year exit rates, but confounding circumstances make this difficult to interpret. Their second year of operations was 2020-2021, during the first two years of the pandemic. During this time, an unprecedented amount of small business support (e.g., the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL)) may have kept firms afloat. Moreover, even nonoperating firms may have deferred closing their bank accounts during the public health emergency.²¹ The exit rates for subsequent cohorts—firms founded in 2020-2021—were similar to those of pre-2018 cohorts, which may indicate a return to the historical trend.

For each cohort of firms starting in the same year, those founded by necessity entrepreneurs generally exited at higher rates than their counterparts founded by opportunity entrepreneurs. This difference narrowed in the third year, suggesting some convergence among the firms that survive the initial years.

It may not be surprising that firms founded by necessity entrepreneurs exited at higher rates. First, they had lower cash balances, which suggests fewer financial resources upon which to draw. Figure 13 shows the median balances²² of each group of firms one year after the firm was founded. For every cohort, there was a material difference in cash balances between necessity and opportunity firms. For example, among necessity firms started in 2021, cash balances were about $4,000, compared to about $6,000 among opportunity firms.

This difference may have been exacerbated by the economic conditions of the time. The necessity firms founded in 2021 were founded by entrepreneurs who were unemployed in the previous year. Although they received unemployment insurance, which may have included supplemental unemployment insurance payments, their personal circumstances were likely worse off than those of opportunity entrepreneurs. In prior research, we noted that entrepreneurs with higher personal cash balances before starting their businesses also founded firms with higher balances (Wheat, Mac, and Tremper 2022), and cash buffers were positively correlated to firm survival (Farrell, Wheat, and Mac 2020c).

Second, even if necessity firms had access to the same resources, we might still expect them to have higher exit rates than opportunity firms. Necessity entrepreneurs were previously engaged in wage employment before involuntary unemployment, and they may prefer to return to wage employment when labor market conditions improve.

Necessity entrepreneurs start different kinds of firms from their opportunity counterparts. Their revenues and cash balances are lower, and the mix of industries varies over time. Such firm characteristics are correlated with firm exit. To control for observable differences between firms founded by necessity and opportunity entrepreneurs, we estimated a regression model of firm exits in their second year.

In addition to firm and owner characteristics, we included macroeconomic variables that summarized the labor market conditions after each firm’s first year. The unemployment rate, quits rate, and job openings rate are indicators of the alternatives entrepreneurs could pursue in wage employment.

Figure 14 shows the predicted second year exit rates for necessity and opportunity entrepreneurs of different owner demographics, holding firm characteristics and macroeconomic variables constant. Necessity firms exited at higher rates than opportunity firms, but for most demographic groups, the difference was narrower than those shown in Figure 12. This suggests that much of the difference in exit rates was due to firm characteristics. However, the consistently higher exit rates for necessity entrepreneurs also suggests that they may prefer wage employment and choose to exit self-employment when possible. The difference in predicted exit rates is largest among Black business owners, which could imply that Black necessity entrepreneurs have stronger preferences for wage employment or reflect another unobservable factor.

Among opportunity firms, the differences in exit rates based on owner demographics was relatively small once firm characteristics was controlled for. This is consistent with past research (Farrell, Wheat, and Mac 2020c).

Firms founded by necessity entrepreneurs are more likely to exit within the first few years, compared to those founded by opportunity entrepreneurs. Some of those differences are due to the types of firms necessity entrepreneurs start, which typically have lower revenues and cash balances. However, differences in estimated exit rates persist even after controlling for firm characteristics and labor market conditions, suggesting that necessity entrepreneurs may prefer wage employment over self-employment. 

Small businesses are a heterogeneous population, and efforts to segment this population can provide insights into not only the needs and challenges of each segment but also their growth trajectories (Farrell, Wheat, and Mac 2018). In this report, we focused on the circumstances under which entrepreneurs start their businesses, which may include their personal experiences with unemployment as well as general economic downturns. We offer the following implications of our findings: 

• The motivations of entrepreneurs and economic conditions in which they start their firms may affect their subsequent contributions to aggregate economic growth. Firms started by necessity entrepreneurs may have limited resources, possibly affecting growth intentions as well as actual growth. New businesses founded during economic downturns may also face challenges in growing. Business formations are something to celebrate, as they embody the dynamism of our economy. However, when a sizable share of new businesses is founded by necessity entrepreneurs or in a weak economy, as in the pandemic, the contribution to aggregate economic growth may be muted.
• Firms started by other types of necessity entrepreneurs—such as recent immigrants or returning citizens—may face similar challenges as those founded after involuntary unemployment. In this report, we defined necessity entrepreneurs as those who received UI in the year before opening their business. While this definition was tractable and could be consistently applied across a large dataset, it excluded other types of necessity entrepreneurs. Insights from this report may nevertheless apply to other types of necessity entrepreneurs, especially those who are disadvantaged in traditional labor markets.
• Necessity entrepreneurship may not reduce inequality in financial outcomes. Entrepreneurship is sometimes promoted as a potential mechanism for addressing inequality: those disadvantaged in traditional labor markets can become entrepreneurs, earning income and building wealth for themselves and their families, thereby reducing inequality in financial outcomes. However, racial and gender gaps in business outcomes and capital access are well-documented. If Black, Hispanic and Latino, or women business owners are also more likely to be necessity entrepreneurs, then their businesses may not achieve the growth needed to materially reduce inequality or build wealth.
• Policies that support entrepreneurship as a viable alternative to wage employment can benefit both business dynamism and labor market fluidity. In economic downturns, some unemployed workers turn to self-employment. For some, it is a temporary solution until labor market conditions improve, but for others, it may be the beginning of a new career. People make choices based on not only their preferences but also the available alternatives. For potential entrepreneurs, the availability of affordable health insurance as well as unemployment insurance in the event their ventures fail are important considerations in entering and leaving self-employment. A well-functioning labor market should include viable options for entrepreneurship.   

Appendix

Sample construction

Our sample included over 880,000 firms that opened Business Banking deposit accounts between 2009 and 2022. Our inclusion criteria are designed to ensure that the new business accounts likely represent active small businesses without excluding businesses that might be seasonal or have irregular cash flows. To be included in our sample, firms must have at least 10 transactions and $500 in outflows in at least three months of the first 12 months. They have at most two deposit accounts at a given time and operate in one of the 12 industries that are characteristic of the small business sector: construction, health care services, metals and machinery manufacturing, real estate, repair and maintenance, restaurants, retail, personal services, other professional services, wholesalers, high-tech manufacturing, and high-tech services.

Firms in our sample also have at least one owner who was the primary account holder of a personal Chase deposit account during the 12 months prior to the opening of the business account. This requirement allowed us to search for evidence of UI and identify likely necessity entrepreneurs. See Box 1 for details. We did not apply any activity requirements for the personal accounts.

For firms with more than one owner with available demographic information, we used the demographics of the oldest owner. Self-identified and modeled demographic data was obtained in 2021 from a third party for the JPMorganChase Institute to conduct economic research examining financial outcomes by race, ethnicity, and gender. The demographic data was matched to internal banking records using encrypted quasi-identifiers. This de-identified file that contains banking records and demographics is only available to the JPMorganChase Institute.

Regression models

Business outcomes are influenced by many factors, some of which may be related to industry or economic conditions and others that result from actions of the owners. We used multivariate regression models to estimate relationships between explanatory variables and two outcome variables, first-year revenues and the probability of exit in the second year. The models were estimated using ordinary least squares (OLS), and the coefficients were used to predict revenues or exit probabilities for hypothetical firms. This allowed us to compare the predicted outcomes of necessity and opportunity entrepreneurs while keeping the other variables constant. 

Table A1 shows the results from several specifications of regression models estimating first-year revenues. The dependent variable was transformed using the inverse hyperbolic sine function. The main explanatory variable of interest is an indicator for receipt of UI in the year prior to firm start. Across all models, the coefficient for this variable was negative and statistically significant, implying that necessity entrepreneurs start firms with lower revenues, all else equal. In Model #3, which includes the full set of control variables, the coefficient on UI receipt is –0.239, implying that firms founded by necessity entrepreneurs earned revenues that were 21 percent lower than those founded by opportunity entrepreneurs.²³

Also included in our model is an indicator for receipt of any Economic Impact Payments (EIP) prior to the starting the business. Our results suggest that EIP had a negative effect on revenues, which may be surprising, as having additional funds could have helped entrepreneurs launch larger businesses. However, we would urge caution in interpreting this coefficient because EIP was only available during the pandemic. During that time, those who did not receive EIP had incomes too high to qualify.

Another variable that is intended to control for available personal resources is the personal account balance of the owner 6 months prior to firm start. As expected, there was a positive correlation between personal balances and first-year revenues, consistent with past research (Wheat, Mac, and Tremper 2022). The remaining explanatory variables include controls for state, industry, owner demographics (race, gender, age group), as well as interactions with UI receipt.

Table A2 shows the estimates from several linear probability models of firm exit in year 2. By construction, all firms in our sample survived their first year. Necessity entrepreneurs—those that received UI in the year prior to starting their businesses—were about 1 percentage point more likely to exit in their second year, depending on the model specification. Firms with higher revenues and cash balances were less likely to exit, and firms with higher expenses were more likely to do so.

Macroeconomic variables included the quits, job openings, and unemployment rates in the economy measured at each firm’s one year mark. The coefficient on the job opening rate is positive and the most statistically significant of the three, consistent with more entrepreneurs exiting when jobs are more available. An increase of 1 percentage point (or 0.01) in the job opening rate was associated with about a 1 percentage point increase in the probability of exit. New business owners, especially if they were necessity entrepreneurs, may prefer to return to wage employment when labor market conditions are favorable.