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STARTUP

The Dangerous Myth of the Twenty-Something Founder

One seemingly harmless stereotype could lead the startup economy off a cliff.

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BY Arnobio Morelix - 09 May 2018

PHOTO CREDIT: Getty Images

Who will be the next Mark Zuckerberg or Bill Gates?

It's a question that tempts investors. Intuiting the answer now could lead in a few years to billions of dollars--or even millions, which is still OK.

But the question is also misleading. It assumes that the next big business will come from a brilliant and restless entrepreneurial genius who is also young. That's just not the prevailing reality of entrepreneurship. There may be a few late Millennial or Generation Z candidates out there, but members of the Baby Boomers and Generation X are still more likely to become entrepreneurs than their generational successors.

A recent working paper from the National Bureau of Economic Research finds that the average age for entrepreneurs at the time of founding is around 42 years old--and even older for high-growth founders. According to research Startup Genome has published in its Global Startup Ecosystem Report, the typical tech founder is in his or her late 30s to early 40s.

It's the same pattern for Inc. 5000 companies. When the Kauffman Foundation surveyed 479 Inc. entrepreneurs in 2015, roughly two-thirds of them were aged 35-54. Meanwhile, only 8.6 percent of founders were age 34 or younger. The remaining 20 percent were even more senior entrepreneurs.

This is no surprise. People in their 30s, 40s, and 50s tend to have more business experience, better knowledge of market opportunities, and more practice running a team or company effectively.

However, Americans in their 20s and early 30s aren't even keeping up with previous generations at the same stages of life. Despite Mark Zuckerberg's unofficial role as Millennial icon, his cohorts and their just-out-of-college successors, Generation Z, are less entrepreneurial than the Boomers and Generation Xers were in the first 15 years after graduation. In 1996, adults ages 20-34 made up about 35 percent of all new entrepreneurs, as data from the Kauffman Index of Startup Activity shows. Today, their share of new entrepreneurs has gone down to 25 percent.

Conversely, Baby Boomers (ages 50-64) have seen the biggest increase in the rate of entrepreneurship over the past two decades. This group made up 15 percent of entrepreneurs in 1996 and is at 25 percent today.

Source: Kauffman Index of Startup Activity

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Why are Millennials less entrepreneurial? The verdict is still out, but there are at least three potential hypotheses.

The first is that the skyrocketing costs of higher education and student debts have left Millennials gun shy of assuming the financial risk necessary to start a company. According to U.S. News and World Report, between 1997 and 2017, the average college tuition increased 157 percent to well over $41,000 per year for private universities and 237 percent to well over $10,000 per year for public, in-state-tuition. Meanwhile, inflation during that period increased by only 53 percent. Post-graduate salaries have not been running apace with the average student loan, which almost tripled from 2005 to 2015 to $35,000, according to The Federal Reserve Bank of Cleveland. That makes for an average monthly repayment of about $351. It's hard to start a new company when you have zero savings.

Second, it's possible young people feel just as entrepreneurial as ever and are channeling that energy into the gig economy, by doing things like starting a dog walking operation on the Fido app or driving for Uber or Lyft. With ad slogans like "Be your own boss," these startups appeal to people's entrepreneurial spirits while promising to absorb most of the risk. It could be hard for these self-directed contingent workers to trade easy income through an app for the wild ride of startup formation.

Third, the decline of entrepreneurship rates among the Millennials may be linked to their emphasis on social impact. Much has been written about Millennials' desire to work more for a shared sense of purpose than for a paycheck. Data from Johns Hopkins and the Bureau of Labor Statistics indicate that the non-profit sector now supplies more than 10 percent of employment in this country. Though we do not know a lot about how this number has changed over time due to limited data, it is possible that the for-profit sector is losing young talent to non-profits, where they feel they can find more meaning and community.

Regardless of the cause, the bottom line is clear; Millennials are not the most likely cohort of entrepreneurs, and their decline in entrepreneurship rates has influenced an overall entrepreneurial decline in America--with the creation of new employer firms in the U.S. per capita dropping by about 50 percent since the late 1970s, as shown by data from the Census Business Dynamics Statistics.

Could the dynamism of the economy be saved with breakthrough medical technologies that enable the Boomers to work until 110 years old? Some startups are certainly working on it, but the Boomers rate of formation will likely taper off by 2025 as they retire. If startup generation continues to stall as Millennials assume more space in the demographic pie chart, we are looking at a problem for the economy that no service economy app can fix.

 

Yasuyuki (Yas) Motoyama co-authored this post. He is an assistant professor of Geography and Business at the University of Kansas. His main research areas are regional systems of entrepreneurship, drivers of high-growth companies, and university-industry relations.

 

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