The Geography of the Startup Surge during the Pandemic

The COVID-19 pandemic dramatically changed the way we live and work, creating turmoil in labor and other economic markets. But it also created new opportunities. Entrepreneurs responded with a surge in business entry, partly reversing a long-run decline in the firm startup rate.

The first figure shows this long-run trend. The firm startup rate, defined as the share of firms that were started within the past year, has fallen since the late 1970s. It declined from above 12% to a low of 7% at the trough of the Great Recession (2007-09). Firm exit rates also declined. Because young firms are more likely to exit, a lower startup rate reduces the share of young firms in the economy and, in turn, lowers the overall exit rate. This process of firm entry and exit is a key measure of business dynamism and an important driver of productivity growth.

This trend was partly reversed after the onset of the COVID-19 pandemic. The firm startup rate had been rising slowly since the trough in 2010, but by 2019 it was still only 7.9%, well below its 2006 rate of 9.6%. That changed during the pandemic. The startup rate increased by 0.9 percentage points between 2019 and 2022 and remained elevated in 2023. Although it is still well below the high levels seen in the 1980s, the 2022 and 2023 startup rates of 8.7% and 8.4%, respectively, approached the rates seen in the early 2000s.

This blog post examines the geography of the pandemic-era startup surge.

Where Did the Startup Rate Increase?

The next figure shows which cities saw the largest increases in the startup rate.The displayed cities are metropolitan statistical areas (MSAs) and key micropolitan areas. The map plots the change in the startup rate between 2018 and 2023, with darker green indicating larger increases and the lightest green indicating decreases.

The increase in startup rates is geographically broad rather than confined to the traditional coastal tech hubs. Many metro areas in the southern U.S. show increases, with especially visible gains across parts of Florida, Georgia, Tennessee, Texas and Arizona. The West is more mixed, with some sizable increases but also several notable declines. Declines appear less common overall and are concentrated in a smaller set of metros, including parts of Colorado and the interior West, and a few Midwest metros such as St. Louis.

Are the Gains Concentrated in Large Cities?

Past research has shown that before the pandemic, the firm startup rate declined more in small cities than in large cities. However, the pandemic changed where many people live and work, with some of the largest and most expensive cities experiencing out-migration (PDF). This raises a natural question: Was the pandemic-era startup surge still concentrated in large cities?

The third figure below answers this question by plotting the firm startup rate against city population at three points in time: 1980; 2018, just before the pandemic; and 2023, three years after the pandemic’s onset.

In 1980, there was little relationship between the firm startup rate and city size (evident by the slope of the orange line). But as the aggregate startup rate declined, it declined more in smaller cities. By 2018, a positive relationship had emerged (green line), and large cities had systematically higher startup rates. The slope was 0.7, meaning that cities with a 1-log-point larger population had startup rates that were 0.7 percentage points higher.

This relationship did not change much after COVID-19. In 2023, there was still a positive relationship between the firm startup rate and city size (blue line). However, the pandemic-era surge did not make this relationship steeper. Instead, consistent with the finding that the increase in startup rates was geographically broad-based, the line shifted up while the slope remained largely unchanged.

Taken together, the third figure suggests that the pandemic-era startup surge was not primarily a large-city phenomenon. Large cities still have higher startup rates than small cities, continuing the prepandemic pattern. But the increase after the pandemic began appears to have raised startup rates across the city-size distribution rather than further concentrating entry in the largest metros.

Conclusion

Overall, the pandemic-era startup surge represents a meaningful break from the long-run decline in firm entry. The increase did not return startup rates to their highs of the 1980s, but it did bring them closer to the levels seen in the early 2000s. Geographically, the surge was broad-based. It was not confined to the traditional coastal hubs or concentrated in only the largest cities. Large cities continue to have higher startup rates than smaller cities, but the pandemic-era increase appears to have lifted startup rates across much of the city-size distribution.

Note

1. The displayed cities are metropolitan statistical areas (MSAs) and key micropolitan areas.