Pandemic entrepreneurship, especially in Minnesota

After several decades of declining business formation rates, the COVID-19 pandemic created a surprising surge in entrepreneurial interest in the U.S. and Minnesota. New business applications — a leading indicator of new business starts — rose by 26% in 2020 and 2021 in Minnesota. This surge has only gained momentum throughout the pandemic.

In the Minnesota Chamber Foundation’s recent report, we unpack some of the critical trends shaping entrepreneurship outcomes in Minnesota, including how these outcomes vary across sectors, regions of the state and demographic groups.

It is not just small-scale businesses gaining traction; the rise in new business applications pairs with significant growth in venture capital investment. Minnesota startups raised a record $1.5 billion in 2020 and completed a record 175 venture capital deals in 2021. This financial backing is crucial because research shows that a relatively small subset of all new businesses disproportionately drives innovation, job creation and output.

Minnesota’s newest wave of innovative companies reflects the state’s diverse economy, with venture capital deal flow ranking high in many technology verticals such as agricultural, educational, financial and supply chain technology, as well as advanced manufacturing, 3D printing and wearables. The next generation of health care startups leads the way, ranging from digital health and biotechnology to medical devices and insurance, showing Minnesota’s ability to align its historical industry strengths with emerging technologies and verticals.

Yet, it is not enough to just produce innovative new companies — those companies must also survive and grow past their critical early years to contribute to the state’s economy.

Most new businesses in the U.S. fail to make it past their fifth year. However, the inverse is true in Minnesota, with over half of all businesses clearing this threshold. Remarkably, this held true even during the immense challenges of the pandemic. A nation-leading 56% of Minnesota businesses survived past their fifth year in 2020, helping to create stability in the state’s economy during the pandemic-induced downturn.

All of this has occurred alongside a host of new startup support resources to provide funding, networking, mentoring and technical assistance to new businesses in Minnesota. This strengthening of Minnesota’s startup ecosystem offers an essential infrastructure to support further entrepreneurship gains in the coming years.

Beware what might lie around the corner

But while entrepreneurship is at a turning point, it is not clear what lies around the corner. Notable challenges must be addressed to propel this recent momentum.

Slowing population and labor force growth were key contributors to declining business formation prior to the pandemic. Minnesota’s mediocre population growth, along with persistently tight labor markets and business climate concerns, present potential headwinds for new business growth. Indeed, Minnesota consistently lags behind the U.S. in the number of new employer businesses per capita, ranking 31st across all states in 2019. Sustaining the rise in new businesses beyond the pandemic will require addressing the underlying conditions that make it difficult for startups to invest, find talent and scale.

Early-stage funding also remains a barrier for even the most innovative new startups. This may be particularly true for founders who lack access to the referral networks that can help them get the attention and trust of investors, especially historically disenfranchised groups. Increasing the number of local startup investors and widening access to startup capital will be critical to fueling entrepreneurial growth that is both robust and inclusive.

Finally, while Minnesota’s startup ecosystem is gaining steam, it faces challenges related to sustaining awareness and support amidst the multitude of priorities that vie for our collective attention as a state. Entrepreneurs are often unaware of the resources that exist to support them. Individuals may have the ability and interest to invest in local startups but lack the knowledge of how to do so. Business support organizations may struggle to keep up with rising demand amidst resource constraints. Minnesota will need to broadly promote and strengthen the existing tools to support new companies in the future.

All these issues require strategic action from business leaders, economic developers, chambers of commerce, financial institutions, policymakers and anyone else with a stake in Minnesota’s economic future. With a high survival rate and a track record of statewide innovation, we urge those with the financial resources to make the smart investment of trusting Minnesota’s ingenuity, funding our next generation of entrepreneurial greatness.

Sean O’Neil is director of economic development and research, Minnesota Chamber of Commerce.