What starting a business looks like

Introduction

The US is at peak startup. The rate of business formation doubled in 2020 (from about 200,000 to 400,000 per month) and has stayed there every year since. This study aimed to understand what it’s really like to start a business.

Key findings

• 72% of US startup owners started their business while working a day job (52% were full time employees). Most quit their day job within 6 months.
• 85% say their business earns equal to or more than they projected, with 64% saying they’re better off since starting their business.
• A quarter started up for less than $1,000. Almost half (44%) got started for less than $5,000.
• While most work harder than they did before starting a business, 78% say they’re more fulfilled by their work.

Survey results

Learn what startups said about their journey.

1. The start of something new: looking at reasons for starting a business, the planning process, and finance.
2. Show me the money: checking income levels, pricing strategies, and startup costs.
3. How owners run their business: exploring how businesses get customers, what they spend money on, and how they track finances.
4. Is it worth it?: where we ask if the business has delivered financially, and how it’s affected their lifestyle.

1. The start of something new

A third of respondents always dreamt of starting a business, while another third found their business grew out of a hobby (something they did for fun) or side gig (something like freelancing, which they did to supplement income).

Business owners have different motivations that helped them take the leap to self employment.

• The top reason Gen Z business owners started a business was by making a side gig a business.
• Baby Boomers were the most likely to start a business because they lost their job (18%).
• Male business owners were 11% more likely than female business owners to start a business due to a longtime dream/intention.
• Female business owners were more likely than males to start a business due to making a side gig an official business.

Get ready to work two jobs…for a while

About 72% of startup owners worked a job while launching their business. 52% were employed full time, but almost two-thirds of that group had quit that day job within 6 months.

Making the leap from full time employee to full time business owner can be tricky, which is why so many business owners report balancing both for a period of time. Though most business owners were fully employed when starting out, they didn’t balance both for very long.

• 24% of business owners balanced a full time job for 4-6 months, while 16% did so for 7-12 months (17% did so for 2-3 months).
• 17% of online business owners report that they are still balancing both a full time job and owning a business to this day.

How owners found the money to start a business

Most businesses were started for a modest cost (see Low startup costs keep owners out of the red). That money came from a variety of sources, with many owners using a mix of options.

Many business owners face the hurdle of securing financing to start their business, especially in tight economic times. While some business owners used assistance to start their business, most used their own personal savings.

• Millennials were the generation most likely to use investors, credit cards, or business or personal loans to start their business.
• In-person only businesses used friends/family for business financing more than any other business model.
• Male business owners were 15% more likely than females to use business loans and 11% more likely to use personal loans.
• Using a credit card to start a business decreased in popularity amongst businesses open for less than a year, especially compared to those open for 1-10 years.

Is planning popular?

More than half of business owners took the time to write a plan, with Millennials leading the way. Those with a plan were more likely to report financial success.

A written business plan gives business owners a blueprint for executing their business idea. Our findings show some business owners had a plan while others opted out.

• Over 3 in 4 millennials business owners in the United States had a written business plan when they started their business.
• On the other hand, 69% of baby boomers did not have a plan when they started out.
• Business owners with a plan were more likely to say their business earned more than expected.

2. Show me the money

Owners are generally happy with the financial performance of their businesses. Modest startup costs are generally reaping expected (or better-than-expected) income.

How does income look?

Only 15% of business owners are disappointed by their level of income since starting a business. A third are hitting their projections while half are doing better than they imagined.

Many factors can contribute to meeting or exceeding financial expectations and, overall, most business owners were pleasantly surprised with their business’s earnings.

• Hybrid business models are most likely to report earning more than expected, while online businesses are most likely to report earning less than expected.
• Businesses using an accountant, bookkeeper or accounting software to keep track of their finances were most likely to report earning more than expected.
• Businesses using nothing to track their finances were most likely to report earning less than expected.

How business owners price their products and services

Prices have a big impact on income, so we asked how business owners decide what to charge. They were mostly intentional, although a quarter admitted to some guesswork. Interestingly, those who consulted target customers about pricing reported better business outcomes.

Regardless of age, years in business, and business model, most business owners priced their products by analyzing competitors’ pricing.

• Although only 30% of business owners tested pricing with customers, this group were more likely to say they earned more than expected.
• Those who took an educated guess were most likely to report earning less than expected.

Low startup costs keep owners out of the red

A quarter of US respondents started their businesses for $1,000 or less, while almost half started up for $5,000 or less. As a result of these modest investments, 69% of businesses were able to break even within a year.

Startup costs can vary depending on business model and industry. While most business owners spent $1,000 or less to start their business, some put in much more money to get up and running.

• Every generation of business owners in the United States was most likely to spend $501-$1,000 to open their business, except for Gen X who was most likely to spend $2,000-$5,000.
• Two-thirds of online only businesses report startup costs being $5,000 or less.
• Over a quarter of millennials spent $20,000-$50,000 on startup costs.

3. How owners run their businesses

Business owners:

• find new customers through word of mouth and digital channels
• spend most on rent and marketing
• use a variety of methods for tracking finances.

Finding customers

Almost two-thirds of businesses get new customers through their old customers. Word of mouth is the biggest source of new business but social media is gaining, fueled by high usage among younger business owners.

Methods businesses use to find customers continue to evolve, and business owners attempt to keep up in order to remain profitable.

• Though word of mouth was the top method total, social media was the top way businesses find customers amongst Gen Z and millennials.
• Women were more likely to use social media while men were more likely to use digital advertising.
• Business owners most likely to use digital advertising were the most likely to have earned more than expected.

Biggest operating expenses

As you might expect, rent was the biggest expense for physical businesses while marketing was the main cost for online businesses.

Owners face an array of expenses once they start their business. Keeping these expenses in order is key to a business’s success.

• Over 1 in 4 online business owners say marketing is their biggest expense.
• Gen Z business owners were the only generation to report marketing as their biggest expense.
• Millennials were the generation most likely to claim business software as their largest expense.

Tracking finances

Businesses use a combo of spreadsheets, accounting software and professional advisors to track their finances. Although 8% don’t actively use anything.

How a business owner chooses to track their finances can also reveal how they deal with other aspects of business.

• The longer someone was in business, the more likely they were to shift to accounting software.
• Millennials are the generation most likely to use accounting software, while baby boomers are least likely.
• Business owners who don’t use anything to track their finances were the only group to report one of their biggest business obstacles being a lack of money/budget.

4. Is it worth it?

Respondents generally felt better off financially and emotionally since starting a business, although they still face plenty of obstacles and work harder than they used to.

Small business proving a solid financial decision

Some 64% of small business owners earn more by working for themselves than by working for someone else. Another 15% earn just as much as they used to. 19% earn less.

Younger generations were more likely to report an increase in income since starting a business. This may be because they’re less likely to have ascended to higher–paying professional roles.

Most business owners report earning more now than before they started out, but there are a few caveats.

• Over 1 in 4 baby boomers make less than before they started a business.
• Men are more likely than women to report earning more now than before they started a business.
• 2 in 3 business owners using an accountant, bookkeeper or accounting software report earning more now than before they started a business.
• A quarter of business owners using nothing to track their finances report earning less now than before they started a business.

Workload stays high (or goes higher)

Business ownership only rarely lightens the workload. Three-quarters of owners work at least as much as before starting a business – with most working harder.

While most business owners are working more now than before, there are a few exceptions.

• Millennials are the most likely to report working more, while baby boomers are the most likely to report working less.
• Men are more likely than women to report working more, while women are more likely to report working the same or less.

The work is more fulfilling

Despite the extra effort required, a vast majority of business owners feel better about their work. Just 7% say they’re less fulfilled since starting a business.

Owning a business can be extremely fulfilling and rewarding, especially to business owners who have been at it for a while.

• Gen X are the most likely to feel more fulfilled, while baby boomers are the most likely to feel less fulfilled.
• Men are more likely to report feeling more fulfilled by their business, compared to women who are more likely to feel the same or less fulfilled.
• Those open less than a year are most likely to be the same or less fulfilled but once over the one year hump, the feeling of fulfillment increased.

Inside the head of small business owners

Inflation continues to chew up mindshare among business owners. Among day-to-day problems, competitors loom large, while many owners wish they had a bigger operating budget.

• Inflation aside, Gen Z, Gen X, and baby boomers reported competition as the next biggest obstacle while millennials said it’s lack of knowledge about marketing/advertising.
• 28% of those in business less than 1 year reported lack of support from family/friends. That concern decreased drastically amongst businesses open for 1 year or longer.

Conclusion

Starting a business revolves around small steps and managed risks. Newbies tend to make modest investments in their new business and launch while holding down a day job. Of course some will get trapped in that cycle of double-jobbing but a majority have found that their business – while hard work – met or surpassed their earning expectations.

Limitations of the study

This study reports on the experiences of 1,000 business owners. Most respondents were from the Millennial (1986–1999), Gen X (1971–1985) and Baby Boomer (1952–1984) generations. There were comparatively fewer respondents from Gen Z (born post-2000), as they are only now emerging into business ownership. We have nevertheless shown Gen Z-specific results in some sections because they will have a growing presence in the startup scene. However, Gen Z results should be viewed as coming from a small sample size.