Entrepreneurship, Age, and Money – Is It Better To Start Young or Wait Until You Are Older?
My brother in law started his first business out of necessity. A layoff left him unemployed and he decided to design web pages for a few friends and family until he could find something better. Four years later he was running a consultancy, a design firm, and a video company with a handful of employees and a rapidly growing customer base. We talked often about businesses, since I too ran one at the time, but we had very different perspectives because I spent several years in the corporate world first, and he plowed right in at a much younger age.
One day he called me and excitedly yelled into the phone "Gantt charts!" He had grown so busy that he was about to crush under the strain of his workload, but after a bit of research he had discovered the joys of project management tools. He used them to implement a management system that allowed him to increase his workload several times over.
Coming from a corporate background, I was already quite familiar with Gantt charts and other things related to project management. As a result I began to think a lot about the benefits of having some corporate experience before pursuing an entrepreneurial path.
It irks me a bit to read some of these blog posts around the web where people write stuff that basically says entrepreneurship is for everyone, and if you aren't an entrepreneur you are a loser corporate drone. The irony is that successful entrepreneurs who sell their companies usually end up as "corporate drones", working at the acquiring firm for a few years. There is value in what you can learn working for a corporation, and there is value in waiting until you are older to start a company. I did it at 26 and that was probably too young. There was so much I didn't know. But then again there was so much I learned too.
It can be dangerous to learn about entrepreneurship on the web because of all the misinformation. I don't know if anyone believes the hype that you should start a business young, but I am concerned that people will make bad decisions. I'm all for entrepreneurship. It is exciting and educational and can be very rewarding, but it isn't right all the time for everybody. So, I decided to dig into some research and see if age makes a difference in entrepreneurial success. Along the way I uncovered some interesting data about entrepreneurs and money that I also want to address. I am not advocating that you do anything other than think for yourself. None of this is gospel. This is information in aggregate, and may not apply to you. But at least it may help counter some of the more ridiculous things you can find about starting your own business.
Entrepreneurs and Money
The common wisdom is that entrepreneurship is where the money is. I can add some anecdotal evidence that the two wealthiest people I know are entrepreneurs. But beyond that, most of the wealthiest people I know are corporate executives. If you ever become an entrepreneur, there is a good chance that you will end up hanging around other entrepreneurs, and the common joke you will share is the one about entrepreneurs having money.
The truth is that you are likely to make less money over your career as an entrepreneur than you would in the corporate world. Research shows that only the top quartile of entrepreneurs make more wages than their corporate employed counterparts. That means 75% of entrepreneurs would be better off financially with a regular job. You could counter by saying that wages may suffer but you can build wealth through your business, but you would be wrong again. The majority of entrepreneurs have $20,000 or less in business equity, and 30% of them have zero business equity. Surprising? Probably not given how many new businesses fail. One paper on entrepreneurs and optimism starts off this way:
Entrepreneurs make peculiar financial choices. They hold poorly diversified portfolios (Gentry and Hubbard, 2001; Heaton and Lucas, 2000). They bear excessive risk for the returns they earn (Moskowitz and Vissing-Jorgensen, 2002). They accept lower median life-time earnings than similarly skilled wage-earners (Hamilton, 2000).
Now, if you goal is an eight digit net worth then yes, entrepreneurship is just about the only way to get there. The trouble is that the odds are dramatically against your success. If you want to retire early with a couple of million socked away, stay in the corporate world, live cheaply, and be a good investor.
Entrepreneurs and Age
This might come as a surprise, but for knowledge intensive sectors, the average age of entrepreneurs is 37.6 years. Not exactly right out of college, is it? Research actually shows that companies are more likely to survive if the entrepreneur is older, has previous business experience, and is well capitalized. That data aside, here are what I see as the primary advantages of youth and age with respect to starting a business.
Advantages of Youth
- Energy – Starting a business takes a lot of energy, and younger people are more likely to have it.
- Free Time – Starting a business takes a lot of time too, and younger people without kids and other such commitments can devote their evenings and weekends to making the business work more easily than a mid-career entrepreneur with two kids to put through college.
- Recovery – If you crash and burn before 30, you still have time to do recover and not have blown your whole retirement or kids college fund.
- Open Minded – In general, young people aren't as corrupted by bloated corporate habits, are quicker to change, and more eager to learn from their mistakes.
- Learning Curve – If you start a business at 25, you will have vastly more experience by age 30 than most other 30 years olds. Of course, it may be the experience of failure, but you still learned something.
Advantages of Age
- Money – If you know you want to start a business some day, you can put away cash for ten years and fund your business yourself until you reach cash flow positive. It helps to have assets.
- Connections – When you are 25, you don't know a lot of executives at other companies. By the time you are 40, your friends and co-workers will have switched companies, changed jobs, and moved up the corporate ladder. This gives you easier access to decision makers and the people you need to help you get your business off the ground. Many of your old friends and co-workers will be your first customers, and open doors for you in all kinds of places.
- Wisdom – You have much more business experience to pull on. You don't have to learn or invent many of the standard processes that exist at most companies.
- Patience – The longer you wait, the more pitches you will see. If you aren't compelled to swing at anything and everything just to try to get a hit, you can wait for that pitch that is in your sweet spot.
How To Decide When It's Right
For many people, probably most, entrepreneurship isn't something they actively pursue. It just comes to them. They do not sit around wanting to start their own business, they realize an opportunity when it is presented to them, and decide to take the plunge. I think that is key. You have to pick the right opportunity. You have to find the opportunity that fits your skill set, your timing, and the readiness of the market.
The best predictor of entrepreneurship is not age, not income, not wealth, it is ability. Oddly enough, it is a U shaped curve. People very low and very high in ability tend to start companies. The middle usually stays put. From the paper linked to above:
We hypothesize that individuals with very low ability are more likely to take up selfemployment.These individuals may simply lack the discipline to work under someone else's authority, or in teams. They may also compare their low positions in their organizations and their low remunerations with those of higher ability individuals with similar human capital, and feel frustrated at the difference. They would thus be tempted to strike it out on their own. It is an empirical question whether their self-employment income would be higher than their paid employment income.
On the other hand, individuals with very high ability are those with high energy levels, who get things done, who have strong interpersonal skills, and who are creative problem solvers. These individuals may feel that, in spite of their above average remuneration, they can do better on their own. This is because they have to share with their principals a substantial percentage of the value they contribute to their organizations. Finally, individuals of average ability are likely to be compensated in line with their human capital – they are therefore less likely to search for self-employment opportunities.
You know yourself better than anyone. Why do you want to be an entrepreneur? If the answer is because you can't stand working for someone else or you can't deal with the 8-5 life, then you may not be cut out for startup success. You may fall on the lower end of that U shaped curve. But if you think you have untapped potential, if you think you could do more than you do at your current job, if you love the thrill of the game, and if you realize the financial risk you are taking, then make the jump.
Remember that entrepreneurship is personal, and that you have to take the pundits (including me) with a grain of salt. There is no best age to start a business. As your grow older, you simply trade one set of advantages for another. Don't worry about "when." Spend your time waiting for the right "what." You will dramatically improve your chances of success, and that will make the whole entrepreneurial experience a lot better.