Citadel Securities reported in a July research note, citing U.S. Census Bureau data, that new business applications in the U.S. will reach 5.6 million in 2025, a 24% increase since ChatGPT’s launch.
In Q1 2023, one quarter after the release of ChatGPT, the median number of employees for seed-stage startups decreased from 5 to 4. Citadel noted that the decline coincides with rising interest rates and slowing demand for jobs, which could also help explain the change.
Citadel’s rough estimates suggest that new business formation is now offsetting the decline in the labor intensity of individual startups. “These benefits could be most powerful for small businesses and entrepreneurs, the bedrock of the U.S. economy,” Citadel analyst Frank Fleit said in an analysis.
Research from Citadel Securities shows that AI is reducing the minimum efficient size of businesses, the level of profit at which it becomes economical to hire experts. Founders who once required separate employees for accounting, marketing, customer service, and compliance can use AI to pool these capabilities across much smaller teams. The threshold for business success is lowering. This makes it possible to start up a company economically where the overhead was not previously justified.
One founder builds a $401 million company in one year
Matthew Gallagher launched Medvi, a GLP-1 telemedicine startup, in September 2024 from his home in Los Angeles with no employees and $20,000. In its first full year, Medvi had sales of $401 million, served 250,000 customers and had a net profit margin of 16.2%, PYMNTS reported in April, citing The New York Times. The company is targeting sales of $1.8 billion in 2026. By comparison, Hims & Hers reported sales of $2.4 billion last year with 2,442 employees and a net profit margin of 5.5%. Mr Gallagher has brought on his younger brother Mr Elliott as his sole employee, and the two-person operation has nearly tripled that margin.
The tools were not unique. ChatGPT, Claude, and Grok handled the code and copy. Midjourney and Runway created the ad. Eleven Lab was responsible for voice-based customer communication. A custom AI agent connected to his system. While retaining ownership of the customer relationship, Gallagher outsourced regulated components such as certified physicians, prescription processing, and pharmacy fulfillment to specialized partners CareValidate and OpenLoop Health. This division of labor has allowed him to focus on growth while his partners absorb the compliance burden that typically consumes early-stage telehealth capital, PYMNTS reported.
Digitally proficient small businesses are being separated from others
In its May 2026 Small Business Week report, PYMNTS Intelligence found that small businesses with annual revenue of more than $1 million reported an average revenue growth of 13.7%, while businesses with revenue of less than $150,000 reported only 0.6% growth. The report also found that larger, more digitally proficient SMBs are more likely to sell across multiple channels, accept a wider range of digital payment methods, and express greater confidence in their future growth, highlighting the widening performance gap between digitally advanced companies and their smaller peers.
Citadel’s analysis points to structural effects that are not yet visible in employment statistics. AI-exposed occupations are seeing a reallocation of labor across industries, but the most important signal from the S&P 500 earnings call isn’t substitution. In April, Citadel Securities analyzed earnings call language and found that for nearly every job role analyzed, more companies are positioning AI as a complement to hiring than are positioning it as a replacement. A company that once needed five employees to justify its initial overhead now needs four employees. Its headcount will not be reduced. Business is postponed until it reaches a scale where human judgment becomes binding.
