New Data: why entrepreneurialism exploded after the Crash

As a general rule the number of businesses in the UK has grown by around 120,000 each year since 2000. That is until we got to 2011 when the increase almost doubled to approximately 225,000 following two years of below average growth*. The recent publication of the annual Business Population Estimates by the ONS shows that in 2012 we returned roughly to trend with an increase of 102,000.

Why should 2011 have been such a bumper year for the number of start-ups? Was it something the Government did? Maybe the introduction of more support for new businesses.

Or could it be that the surge in unemployment after the 2009 recession forced people into business once they realised a new job was not forthcoming?

What I think the data actually shows is that people’s propensity to be entrepreneurial is largely (although not entirely) driven by the big shifts that occur in the wider economy. The evidence for this is that we saw a very similar trend in business population growth in the early years of the century. 2003 enjoyed an almost identical leap in business population with a sudden surge of 248,000. As with the more recent growth, this earlier surge followed a couple of years of below average increases. It is relevant, I would argue, that the earlier surge followed the confidence sapping dotcom bust of 2000 just as the later surge followed the 2008 Crash.

What this may be telling us is that after an economic crisis, the UK’s potential entrepreneurs are like a coiled spring. Plans to start up are put on hold as confidence and trading conditions worsen but at the first sign of light, entrepreneurs just as suddenly revive those plans and put them into action except that by then a lot more entrepreneurs are waiting to move than exist under normal conditions.

Bouncy Business

What is remarkable about the surge in 2011 is how quickly we got back to entrepreneurial ways. Clearly the 2008 Crash was far more serious than the 2000 crisis especially as it was followed by two periods of recession. And yet  the surge happened over the same time frame as the earlier crisis and with close to equal vigour.

In short, it seems the entrepreneurial spirit has proved more resilient, bouncing back just as quickly from a deeper economic crisis. Indeed the bounce may have been helped by the more profound nature of the 2008 crisis as more businesses went to the wall creating greater opportunities for new companies once conditions began to return to normality.

It should also put to rest, in my view, any notion that the recent rise in entrepreneurial activity is being largely driven by desperation as the unemployed or low paid seek any way of making a living. It is notable, for example, that after the surge of 2003, growth in the business population continued unabated. There is no indication that those new entrepreneurs returned to ‘proper jobs’ once the crisis passed. This time could be different, of course, but we shall have to wait until the next year or two of data to know for sure.

The RSA launches its new research project on the rise of micro-business called The Power of Small on 13th November. The project is kindly supported by Etsy.

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*Due to a methodological change, the ONS can only estimate the business population growth for 2011 as being somewhere between 200,000 and 253,000 rather than being a single figure. I’ve roughly split the difference to recognise this.