Business creation is economically important, and unemployment precedes the creation of a&nbsp;<span>substantial share of new firms. Yet, most research has focused on analyzing the effects of&nbsp;</span><span>unemployment insurance policies on re-employment outcomes, ignoring self-employment.&nbsp;</span><span>In this paper, we analyze how the potential duration of unemployment benefits, a fundamental&nbsp;</span><span>design choice of unemployment insurance systems, affects whether new firms are&nbsp;</span><span>founded out of opportunity or necessity and their growth potential. To this end, we construct&nbsp;</span><span>a comprehensive dataset on German firm founders that links administrative social insurance&nbsp;</span><span>information with business survey data. Exploiting reform and age-related exogenous&nbsp;</span><span>variation in the potential duration of unemployment benefits, we find that longer potential&nbsp;</span><span>benefit duration implies longer actual unemployment and, as a consequence, more necessity&nbsp;</span><span>entrepreneurship and worse startup outcomes in terms of sales and employment growth.&nbsp;</span><span>We explain this overall effect of potential benefit duration through a mix of compositional&nbsp;</span><span>and individual-level duration effects. Our findings underline that new firms started out of&nbsp;</span><span>unemployment are a highly heterogeneous group and suggest that the (optimal) design of&nbsp;</span><span>unemployment insurance systems has important externalities on whether innovation- and&nbsp;</span><span>growth-oriented firms are started out of unemployment.</span>