By Vipal Monga 

Small-business formation is surging in the U.S., and e-commerce company Shopify Inc. has been reaping the gains of that business boom.

More Americans are opening online stores and selling goods and services to make money as the effects of the pandemic have wiped out jobs and disrupted in-person activities like dining and shopping. The shift has brought a wave of new business to Shopify, which sells subscription services that enable people to put up websites, accept online payments, and ship and track orders to customers.

But Shopify's business model carries risks. Analysts expect the surge in e-commerce that drove much of the company's growth to taper as the pandemic ebbs. "There could be a material deceleration in sales growth," said Tom Forte, an analyst with DA Davidson.

Another risk: Many of the startups that use Shopify's services are more likely to fail than grow meaningfully, said Robert Fairlie, an economics professor at the University of California, Santa Cruz. "How can you get capital, and how do you scale up in this kind of environment and this kind of uncertainty?" he said.

Most of Shopify's more than one million customers are first-time entrepreneurs, said Harley Finkelstein, president of the Ottawa-based company, which will report fourth-quarter results on Wednesday. "Imagine a future where everyone is an entrepreneur. We're moving in that direction," he said.

Eric Girouard launched in September a workwear company, Brunt, selling boots to construction workers on a Shopify site after he saw how quickly his wife, Sarah Girouard, started offering winter hats online. She was making $25,000 to $40,000 a year from a side business she ran entirely by herself, he said.

"It was a basic website, but it was working and she was getting paid," said Mr. Girouard, who had initially expected to spend upward of $100,000 designing a virtual storefront for Brunt. He created his Shopify site for less than $25,000, including the cost of hiring two contract workers. "It made me realize the world had changed," he said.

New business applications hit their highest level on record last year, rising 24% from 2019, according to the Economic Innovation Group, a bipartisan research organization, which used data from the U.S. Census Bureau. The most active sector was retail trade, which recorded a 54% increase in new business formation. The bulk of those were merchants that sell goods online or directly to clients, according to the EIG.

That activity helped to boost Shopify's profit 72% for the first nine months of 2020, compared with the year before. The growth also made the company's stock one of the market's best performers. Its share price has more than tripled since January 2020, to a market capitalization of roughly $177 billion, about the same as oil and gas giant Chevron Corp.

The jump in entrepreneurship during the pandemic is largely a result of hard economic times, said John Haltiwanger, an economics professor at the University of Maryland. Unemployment surged at the start of the pandemic and joblessness remains high. Many Americans are trying whatever they can to generate income.

A rise in new business formations could also aid broader economic recovery, said Mr. Haltiwanger. Although most startup businesses fail or never grow beyond one or two founders, some that survive contribute a lot to economic growth in later years, he said.

"Their contribution to job creation, productivity and innovation is very important," Mr. Haltiwanger said.

Still, small businesses are vulnerable during downturns, and they have suffered during this one. Some 30% fewer small businesses were open at the end of the 2020 than at the start of that year, according to data-tracking and software firm Womply. For Shopify, a number of the new businesses using its services may not last long -- a risk to the tech company's growth.

Mr. Finkelstein, Shopify's president, played down that risk. Since its founding in 2006, Shopify has expanded its offerings to include financing for businesses, and fulfillment and inventory services for merchants, along with a payment-processing service. Those fees made up the bulk of the company's revenue during the first nine months of 2020, a trend that is likely to continue in the fourth-quarter report, analysts say.

Those offerings bolster the company's revenue streams and could also support fledgling businesses, Mr. Finkelstein said.

Investors will be watching to see how monthly recurring revenue grows in the fourth quarter, said Ken Wong, an analyst with Guggenheim Securities. The measure, which tracks subscription fees that customers pay Shopify to design and host websites, increased 47% in the third quarter compared with a year ago.

Write to Vipal Monga at vipal.monga@wsj.com

 

(END) Dow Jones Newswires

February 16, 2021 09:14 ET (14:14 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.