Abstract: The onset of COVID-19 not only threatens the health and safety of communities but also the operation and survival of firms and industries that provide essential products and services. This crisis has hit small businesses (firms with fewer than 500 employees) and entrepreneurs particularly hard. Goldman Sachs conducted a survey in March 2020 of small business owners and report that roughly 50 percent are unable to operate beyond three months under the current U.S. federal and state restrictions. In this paper, we examine pandemic-induced shocks to the U.S. entrepreneurial ecosystem. We focus specifically on two sets of outcomes: 1) the impacts of the pandemic and varying policy responses on small high-tech ventures owned by members of minority groups; and 2) changes in the landscape of ventures that support the Federal government’s attempts to bolster the economy during the crisis.
We rely on the System for Awards Management, which provides monthly updates for a central repository of official registration records of corporate entities that seek to transact with the U.S. government. This enables us to construct a database for the population of startups founded on or after Oct. 1, 2014 (~180,000 firms). These federal records provide useful firm-level detail on a range of factors including founding year, ownership status, NAICS, location, certifications (HubZone, 8a, and SDB), and intention to support FEMA during catastrophic events. We also track federal transaction activity from USASpending.gov, which reports procurement contract data for over 80 million transactions from 2014-2021. This massive database allows us to estimate the firm’s productivity and contributions to public services.
In the months following the onset of the pandemic, we find a dramatic increase in startup activity for firms owned by members of under-represented groups, with minority-owned firms accounting for the greatest increase. In addition, we observe an increase in service-related startups, which contrasts to firms in the R&D and manufacturing sectors, which report more stable activity. Our key outcome, federal procurement transactions, spikes following the pandemic from 14.4 million contracts in 2019 to 23.1 million in 2020, an unprecedented single year increase. However, we find that, while the pandemic has brought increases in new startups from minority groups, these groups have not captured proportional shares of the massive influx of new procurement contracts. Firms owned by under-represented minorities constitute nearly half of all new startups since the pandemic began. Yet these firms receive only twenty percent of procurement contracts issued during the pandemic. Similar disparities hold for firms owned by women and veterans.
We present a counterfactual analysis utilizing coarsened exact matching techniques to examine the impact of the pandemic on productivity for these sub-groups of small ventures. We draw inferences surrounding the health of entrepreneurial ecosystems and the ability of those ecosystems to support government-led pandemic relief efforts. This paper represents the primary outcome of a recent NSF RAPID grant to study the impact of the pandemic on small, high-tech ventures.
Keywords: Young firms, COVID 19, government-firm relationships, minority-owned businesses, women-owned firms