2020 was an unusual year to say the least, with people in the UK and the rest of the world finding their lives turned upside down by coronavirus almost overnight.
Unexpectedly amongst this was an explosion in new business registrations. Nearly half a million new businesses launched last year – a record 84,758 extra businesses compared with 2019.
Why the surge in new businesses during a pandemic?
Was this sudden spike the result of unemployment forcing people to find other ways to make ends meet? Or perhaps people unexpectedly finding the time to grow businesses while on furlough?
Starting a successful business is notoriously difficult, even in normal times. As many as 60% of new businesses fail within the first three years. But, within these new micro companies are the SMEs of tomorrow, and a potentially bright future for our economy.
The startups creating the jobs of tomorrow
ONS data shows that the UK’s small and medium-sized businesses created three times more jobs in the years from 2013 to 2017.
Firms employing more than 250 staff added around 650,000 net jobs.
Those employing fewer than 250 added 1.7 million (a 14% increase).
It further underscores just how central SMEs are to the health of the UK economy. But what made these entrepreneurs decide to take the plunge amongst so much uncertainty? What do they really know about owning and managing a business? To ensure they receive the support necessary for survival, we need to establish who is behind these new ventures.
In order to learn more about their reasons for stepping out on their own in such an unsettled year, we surveyed more than 1,200 entrepreneurs. Here’s what we found.
Surveying 1,200 entrepreneurs: Key findings at a glance
46% of 2020’s entrepreneurs had always wanted to be self employed
21% wanted to start a side hustle vs 15% in 2019
16% were made redundant, compared with 12% the year before
7% were put on furlough
71% want to continually grow their business’s revenue
46% want it to become their sole source of income
Instagram has grown in popularity by 7% year on year as a launch tool
30% of 2020’s entrepreneurs risked their life savings
39% of businesses were started with less than £500, compared with 33% in 2019
8% of 2020’s entrepreneurs manage their finances with a paper-based system
Taking the plunge
2020 was a devastating year in many ways, not least for employment, with a series of lockdowns taking their toll on the economy. UK unemployment rose to a record high of 5.1% in December, following a staggering 370,000 redundancies in the period from August to October alone.
726,000 fewer people on company payrolls in January 2021 compared to February 2020
Figures from HMRC for January 2021 show there were 726,000 fewer people on company payrolls, in comparison to February 2020. With even large, well-established businesses finding themselves in serious difficulties, it’s easy to assume that the vast majority of last year’s 84,758 additional new business registrations were by those left with little other choice.
Why businesses are launching in a pandemic
Our research paints an altogether more complicated and interesting picture of the reasons so many people decided to take their first steps as entrepreneurs in the midst of a global pandemic.
As one might expect, a fairly significant proportion were striking out on their own as a direct result of COVID’s impact on employment. Of those surveyed:
16% cite redundancy as one of the reasons for starting their business last year.
In contrast, only 12% of those starting a business in 2019 gave redundancy as one of their primary motivations.
7% started their business because they had been put on furlough.
With 14% needing additional income.
This shows that the rising level of unemployment and financial hardship faced by many last year did indeed play a role in the birth of many new businesses.
46% of 2020’s entrepreneurs started their business because they want to be self-employed.
However, almost half (46%) of 2020’s entrepreneurs said that they started their business because they had always wanted to be self-employed – by far the most widely cited reason.
“This statistic is hugely encouraging, showing that even businesses launching out of necessity have people behind them with a genuine desire to be their own boss. Hopefully this invaluable enthusiasm will see many of these fledgling businesses thrive, regardless of the circumstances behind their beginnings.”
Lee MurphyManaging Director of The Accountancy Partnership
21% of 2020’s businesses started life this way compared with 15% in 2019, a significant 40% increase. With many people finding themselves with more time on their hands than usual as a result of lockdown, these figures might suggest a drive to use this time to monetise a skill or hobby.
There was also a rise in the number of people wanting to turn their side hustle into a full time job; from 11% to 13%.
It seems that some small businesses were not adversely affected by the pandemic, and perhaps even benefitted, creating an opportunity for the people behind the business to make them their main source of income.
What does the future hold for UK businesses?
Although the UK is not currently in a recession, we are far from out of the woods financially. The country’s post-COVID recovery will be complex and multi-faceted, but SMEs will certainly play a pivotal role. SMEs are the backbone of the British economy, which:
Generate three out of every five jobs.
Account for half of the nation’s private sector turnover.
Foster healthy competition.
Can respond and adapt more quickly to changes in the economy.
All traits that are vital in today’s rapidly shifting business landscape. When our SMEs are thriving, the country thrives.
With SMEs accounting for around 99.9% of the business population, if you don’t work for one, it’s certain that your family or your friends will. The launch of so many businesses in 2020 therefore spells good news for our economic recovery efforts.
But to do so, these new businesses must do more than survive; they must thrive. Only then can they grow enough to contribute to public finances and create new job opportunities.
Although it’s clear that many of 2020’s entrepreneurs had long harboured dreams of starting their own business, we have also established that in a lot of cases it was the financial implications of the pandemic that pushed them to take the first step.
Dreams can often be very different from reality, so what are the long-term intentions of these new business owners now? Are they hoping to return to the world of salaried work as soon as they can? Or do they now see themselves growing their own business empire?
Ambition for the future
Positively, our research suggests that people have big ambitions for their businesses. While many businesses were started last year as side hustles, or may still be in their very early stages:
Nearly half (46%) of those surveyed said that they want their business to become their sole source of income.
71% hope to continually grow their business’s revenue, implying that the vast majority are in it for the long haul.
A quarter (25%) would like to recruit one or more employees.
20% want to use the income from their current business to open another.
Impressively, 5% would like to turn their business into a franchise.
It’s fantastic to see that so many of these new business owners are keen to grow their new ventures, either into a full-time career for themselves, or even to provide career opportunities for other people.
“This entrepreneurial spirit is exactly what the UK needs at this difficult time, so we need to ensure we’re doing as much as we can to support these SMEs to secure both their future and that of the country.”
Lee MurphyManaging Director of The Accountancy Partnership
Technology as a facilitator
In recent years, blanket access to the internet and the rise of smartphones have led to a boom in eCommerce and a proliferation of social platforms. They undoubtedly make it easier for people to fulfil their dreams of becoming their own boss.
But is the latest cohort of entrepreneurs taking advantage of these new and exciting channels? Have the most popular platforms changed following the advent of COVID? If so, why?
Our survey reflects these findings, with a clear growth in the usage of eCommerce platforms and social media sites by new business owners.
The most popular platforms for starting a business
By far the most popular platforms for starting a business in 2020 were Facebook and Instagram.
Nearly a third (31%) of 2020’s new ventures began on Facebook, compared to 34% in 2019.
Another 31% began on Instagram, compared to 29% in 2019.
It suggests that the usage of Instagram by small business owners is growing, while Facebook’s usage is falling. Although Instagram has significantly fewer users than Facebook, it is the fastest growing social network at around 5% growth per quarter – significantly ahead of Facebook at 3.14%.
While Facebook and Instagram are not only of use for eCommerce businesses, Instagram in particular has an ever-growing number of shopping features, making it increasingly ideal for retail businesses looking to target a younger demographic in particular.
Online marketplaces and shopping platforms
Usage of Amazon and eBay remained static, at 8% and 7% respectively both years. Significantly more business owners launched their businesses via Shopify and Etsy.
Businesses started on Shopify were up 83%.
New businesses started on Etsy grew by a massive 300%.
The growth of digital marketing amongst new businesses
When it comes to running and marketing their businesses, it seems that 2020’s entrepreneurs are more digitally-minded than their 2019 counterparts. Of those surveyed:
44% use Facebook compared with 34% of 2019’s new business owners.
40% use Instagram, compared with the previous year’s 29%.
This is possibly linked to the fact that the lockdowns last year meant that digital businesses were more likely to succeed, whereas 2019 would have seen a greater variety of enterprises launched with no social distancing measures to contend with.
Most popular startup sectors in 2020
Number of businesses
Takeaway food shops/mobile food stands
Hairdressing and beauty treatment
Business and software development
Top UK cities for new business registrations
Deciding to launch a business at any time takes nerve, so doing so in the midst of a pandemic is certainly not for the risk-averse.
But just how much of a risk did 2020’s entrepreneurs actually take in deciding to start their business last year? and did they have more at stake than those who came before them? Our research found:
Almost a third (30%) of 2020’s new business owners risked their life savings, compared with 26% of 2019’s.
19% risked their professional reputation.
13% risked their personal reputation – perhaps going against the advice and wishes of close family and friends.
On the other hand, 35% of those who started a business in 2019 quit their job to do so, compared with 28% of those who did so in 2020. This disparity might be as a result of more people already being out of work or furloughed when launching their new venture, as well as the rise in side hustle culture.
With so much on the line, both financially and emotionally, were the lockdown-preneurs ready for the task? Or were some forced to start their businesses before they were really ready, and therefore unaware of the full extent of the risk?
The majority of 2020’s entrepreneurs rated their business knowledge as a 5/10 – the same as 2019’s.
Only 5% rated their knowledge between 9-10, compared with 9% the year before.
Meanwhile, 17% rated their knowledge from 0-2, compared with 14% the previous year.
It seems that most people were well-informed, but with a definite decrease in the number of people who were thoroughly prepared, and a rise in those who had done little to no research.
This preparedness was reflected in the responses from entrepreneurs when asked whether their biggest challenges in running their businesses were the same as they had anticipated beforehand.
The majority, at 76%, said that their opinion on their biggest challenges hadn’t changed.
A fairly significant proportion, 24%, had been somewhat surprised, though these might also signify those needing to rush into business with minimal prior preparation.
Managing their money
While 2019 and 2020’s entrepreneurs were fairly similarly prepared in terms of their business knowledge, can the same be said for their financial situations? Are the lockdown-preneurs as financially savvy as their predecessors or is there a significant difference in their attitudes to money?
Although our findings shows a greater number of entrepreneurs risking their life savings to start a business in 2020, we can also see that many businesses launched with a minimal initial investment.
In 2020, 39% of businesses were started with less than £500, compared with 33% in 2019. This increase might be due to the rise in side hustles, as well as people starting their businesses more spontaneously.
2020’s startups were also in a more precarious financial position than the previous year. 40% of businesses started in 2020 have no financial cushion whatsoever, compared with only a quarter of 2019’s. Perhaps this is to be expected if they have had less time to build one.
Similarly, 16% of businesses started in 2020 have the equivalent of at least six months’ wages in the bank, compared with 26% of 2019’s.
Whether last year’s business owners replicate the relative financial security of their predecessors depends on numerous factors. Some – such as the circumstances surrounding the pandemic – are beyond their control, but others thankfully are not.
This includes the methods they choose to manage their money, and how professional they are in their approach. Reassuringly, it seems many of 2020’s entrepreneurs are already taking their finances seriously, though with varying levels of reliability.
63% are storing financial documents and expense receipts digitally.
67% making use of accounting or bookkeeping software to manage their business expenses.
Currently, 8% of 2020’s entrepreneurs manage their finances with a paper-based system.
22% are reliant on a spreadsheet.
One in 10 store essential documents in a drawer or shoe box.
“This more laidback approach is not necessarily a big problem for very small businesses. However, we know that the vast majority of last year’s business owners have plans to grow their enterprise. Getting organised from the get go makes it much easier for entrepreneurs to have a good grasp of their financials, saving a lot of headaches in the future.”
Lee MurphyManaging Director of The Accountancy Partnership
What do new entrepreneurs worry about most?
2019 and 2020’s new business owners might be at different stages financially, but it’s interesting to note that they share many of the same concerns.
Cash flow is the most common issue, with 58% of 2020’s entrepreneurs and 62% of 2019’s citing this as one of their biggest money worries.
Paying the correct tax or VAT came out a close second, with 53% of 2020 business owners concerned about this, along with 49% of 2019’s.
COVID’s impact on fledgling businesses
While 2020’s new businesses were started with at least some knowledge of the pandemic and its implications, and perhaps even in response to it, 2019’s entrepreneurs were caught entirely unawares.
Have these business owners been more affected by COVID-19 than those who made an informed decision? Would they still have started their businesses when they did, knowing what they know now?
24% of 2019’s startups cite the availability of grants and business funding as one of their biggest financial concerns, compared with 13% of 2020’s. This is perhaps unsurprising, given that 2019’s businesses had no expectation of such a change in demand, or the effects of lockdown and social distancing measures.
10% of those surveyed said that they have not qualified for any government help throughout the pandemic, a problem that has been well publicised but not sufficiently addressed.
9% said that they have actually benefitted from the pandemic.
8% said that they have found it too hard to generate revenue, or too stressful.
Despite the hardships, more than half (53%) said that although running their new business through the pandemic has been hard, it has still been worth it.
It is clear that some of last year’s new businesses were launched by people who were left with little other choice. But fulfilling a dream of self-employment was still by far the biggest motivator – even if the pandemic gave them the final nudge. This is brilliant news, suggesting many of those new businesses were born out of passion – one of the key factors for success.
However, the research also shows that business knowledge amongst fledgling entrepreneurs could be better. It’s essential that experts are on hand to offer advice that these business owners might need, either to turn their side-hustle into a full-time job, grow their business, or even turn it into a franchise.