Start-ups: between skills shortages and COVID blues

• Number of business start-ups down 9% to 550,000
• Weak economic momentum and strong labour market are a disincentive
• Share of female entrepreneurs has fallen slightly below the long-term average

The number of business start-ups in Germany dropped by a notable 57,000 (-9%) to 550,000 in 2022, according to the new KfW Entrepreneurship Monitor published by KfW Research. Total entrepreneurial activity thus decreased to 108 start-ups per 10,000 people aged 18 to 64 years, which is near the historic low of 104 recorded in the first pandemic year 2020. In 2021 it rebounded again briefly to 119. Drivers of the decline in 2022 were reduced economic momentum compared with the previous year and the strong labour market, which is characterised by skills shortages and offers potential entrepreneurs attractive income alternatives. The rate of start-up planners rose slightly to 4.5% in 2022 (4.1% in 2021), suggesting steady entrepreneurial activity in the course of the year 2023, even if the macroeconomic environment remains challenging.

Positive trends in the motives for self-employment emerged in 2022.The number of entrepreneurs who regarded self-employment as the best income alternative for them nearly doubled to 95,000 (+86%). One of the reasons these ‘dream start-ups’ increased so strongly despite the good labour market situation might be that during the pandemic many people developed a greater interest in trying out new career options. The share of businesses founded by salaried employees increased yet again in 2022 and, at 73%, is higher than ever before. The move from unemployment to entrepreneurship is becoming increasingly rare (6%).

The number of female start-ups fell again after rising in the two previous years (-20%) and stood at 205,000 in 2022. The number of male start-ups hardly changed, slipping by 1% to 345,000. Thus, women made up a share of 37% of all new entrepreneurs in 2022, which was slightly below the long-term average. The research shows that increases in the shares of female entrepreneurs so far have been nothing more than short-term fluctuations around the long-term average. Increasing the share of female entrepreneurs sustainably, on the other hand, is a challenge that requires patience and must begin early. Measures include breaking down gender cliches and teaching entrepreneurial skills early.

The COVID-19 crisis, which laid bare the disadvantages of traditional business models and processes, continues to have an impact. Although the shares of digital and Internet-based start-ups fell slightly from the previous year, they remained disproportionately high at 29% and 35% in 2022 (31% and 41% in 2021). Innovative and growth-oriented start-ups remain lacklustre. At 10% and 22%, they were just below the long-term average.

Other key findings of the KfW Entrepreneurship Monitor:

• The structural problem of SMEs grappling with succession worries, which is that takeovers make up only a fraction of business start-ups, continues. Most businesses were started from the ground up, in other words, they did not previously exist as a legal or organisational entity. In 2022, their share reached a new all-time high of 86% (2021: 85%).
• The share of employers among start-ups increased in 2022 by 13% to 34% on the previous year. Given the very strong labour market situation and the disadvantages which start-ups have in recruiting staff compared with established businesses, that is an unexpected development. A closer look at the data also reveals that in a long-term comparison, start-ups indeed are currently reporting recruitment difficulties more often – and many are turning to their families for support. Part of the increase in the share of employers is likely attributable to family members working in the business.
• A large portion of entrepreneurial activity in 2022 was self-funded by business founders. Two thirds (65%) exclusively used their own capital. External capital was raised by 18% of business founders.
• The survival rate of start-ups can be roughly determined on the basis of the KfW Entrepreneur¬ship Monitor, which has found that around 30% of entrepreneurs close their business again within three years of operation. After five years, just under 60% remain in business. The reasons for aborting are diverse. By far the largest proportion of business founders (32%) discontinue their venture in the first five years for personal reasons –for example because of family pressures, stress, illness or dissatisfaction with income achieved – and not because of immediate financial need. Within five years, 24% of businesses close for lack of profitability.

Dr Fritzi Köhler-Geib, Chief Economist of KfW, summed up the key findings of the KfW Entrepreneurship Monitor as follows: “Faced with the challenges of skills shortages and COVID blues, start-up activity in Germany is on the decline. Labour market developments have traditionally had a strong influence on entrepreneurial activity here. That is because there is a strong focus in Germany on salaried employment. It seems the COVID blues made people more eager to try out new career options and, hence, to start a business. Whether this will continue remains to be seen. In any case, the focus on salaried employment begins early, for example in the occupational guidance given to students. We urgently need a rethink here, despite – or perhaps indeed because of – the shortage of skilled workers”.

Further information

The new KfW Entrepreneurship Monitor can be downloaded from

www.kfw.de/gruendungsmonitor