ENTREPRENEURSHIP AND THE YOUNG FOUNDER MYTH

While many observers and many investors believe that young entrepreneurs are the most likely people to create successful new firms, a research report on Age and High-Growth Entrepreneurship published in the American Economic Review, strongly rejects common hypotheses that emphasise youth as a key trait of successful entrepreneurs...

By integrating data from the United States Census and Internal Revenue Service on firms, workers and owners, the researchers were able to compile a list of 2.7m company founders who hired at least one employee between 2007 and 2014. The researchers were chiefly interested in high growth new ventures and further distilled that down to the fastest-growing 0.1 percent – in other words, the one company out of every 1,000 that saw its sales or number of employees increase the most in its first five years.

Surprisingly, the research concluded that successful entrepreneurs tend to be middle-aged, not young. And for the 1-in-1,000 fastest growing new tech ventures, the mean age at founding was 45 years.

In this article, the team at Déjà Partners outlines its key takeaways from the report on why age may actually play a bigger role in entrepreneurial success but in the opposite direction to what many people think.

While there are many successful entrepreneurs in the software and IT sectors, some of the most extreme cases of success have come from young founders. One notable example is Mark Zuckerberg, who founded Facebook at just 22 years old. With a user base of over 2 billion people, Facebook is one of the largest tech companies in the world, and Zuckerberg is now one of the richest men on the planet.

Another young founder who has achieved massive success is Bill Gates, who co-founded Microsoft at just 20 years old. Today, Microsoft is one of the most valuable companies in the world, and Gates is one of the richest men on the planet.

These examples show that it is possible for young people to achieve incredible success in the software and IT sectors. However, it’s important to remember that these stories are the exception, not the rule. For every Mark Zuckerberg or Bill Gates, there are thousands of aspiring entrepreneurs who don’t achieve the same level of success. The truth is that starting  a successful tech company is incredibly difficult, no matter how old you are.

It is often said that youth is an advantage when it comes to entrepreneurship. After all, young people are typically more idealistic and have more energy to devote to their businesses. They are also more likely to take risks, which can be essential for startup success. However, middle-aged individuals often have distinct advantages over their younger counterparts.

For one thing, they tend to have more financial stability and access to capital. They also usually have a better network of contacts and a greater understanding of the business world. In addition, middle-aged entrepreneurs are often more patient and level-headed than their younger counterparts. They’re less likely to take unnecessary risks and more likely to make sound decisions based on experience.

Another key finding from the researchers (Benjamin Jones  of Northwestern University, Javier Miranda of U.S .Census Bureau, and Pierre Azoulay and J. Daniel Kim of MIT) is that there is a mistaken belief that outsiders are the most disruptive to an industry, when in fact, research indicates that prior experience in the specific industry predicts much greater rates of entrepreneurial success.

Based on long careers in both the tech industry and venture capital firms, the team at Déjà Partners believes that entrepreneurs with industry experience have a better understanding of their target markets, the competitive landscape, and the regulatory environment. They also have established relationships with suppliers and other key players in the industry. As a result, they are in a much better position to identify opportunities for innovation and to successfully launch new businesses. While it is true that outsiders can sometimes bring fresh perspectives and new ideas to an industry, it is clear that insiders are more likely to be successful entrepreneurs.

Given that the report focused on the top 0.1 percent of firms and the rare outcome of successful acquisition or IPO, the researchers also wondered if even more extreme upper-tail outliers are solely attributed to very young founders (e.g. Steve Jobs, Bill Gates and Mark Zuckerburg)?

An important counter to this is to note the extraordinary successes of older founders. For example, David Duffield was 64 when he co-founded Workday, Tony Ryan was 49 when he co-founded Ryanair, and Robert Noyce was 41 when he co-founded Intel.

A subtler but perhaps more important observation on extreme upper-tail outliers of very young founders is embodied by Mark Zuckerburg who famously said in 2007 that “Young people are just smarter”. This statement seems rather doubtful and if this were to be true then you would expect that “better” young entrepreneurs would be “worse” when they age.

Elon Musk’s Tesla and SpaceX seem no less visionary than his earlier ventures, Paypal and Zip2. Steve Jobs and Apple appeared to find their blockbuster innovation with the iPhone, introduced when Jobs was 52. Jeff Bezos went way beyond his initial vision as an online book seller to find immense success in many offerings and industries. And see how Facebook has grown to an incredible level with an older Mark Zuckerberg in combination with a seasoned tech executive, Sheryl Sandberg!

What these examples suggest is that many of these prominent founders may not have peaked when they were very young or to put it another way, extremely talented people may also be extremely talented when young.

Given the importance of venture capital to the tech ecosystem, the researchers also noted that investors tended to be bet on relatively young companies despite younger founders having “substantially lower batting averages”. It is important to note that younger founders may also be more in need of early-stage funding which potentially skews the funding allocation of venture capital firms at the expense of allocating capital to the firms with the highest growth potential.

The team at Déjà Partners concurs with the suggestion that venture capital firms are seeking high returns, which is not identical to high growth. And it may be that younger founders tend to sell their equity at lower valuations, and thus investors favouring such founders are making optimal return decisions.

In conclusion, the research report on Age and High-Growth Entrepreneurship published in the American Economic Review, found that age indeed predicts success, and sharply, but in the opposite way that many propose.

However, while the research findings confirm that the highest success rates in entrepreneurship typically come from founders in middle age and beyond, the team at Déjà Partners believe that there is no one formula for success when it comes to entrepreneurship. It is important to remember that being an entrepreneur is about iteration and learning from your mistakes, and about ensuring your team embodies the skills required at any one time. No matter what your age, if you are passionate about your idea, willing to work hard and capable of on-boarding new team members, you have a chance at success. So, don’t be discouraged if you are in your 20’s or 30’s contemplating your first startup, or in your 40’s or 50’s considering going out on your own; the most important thing is to get started and see where the journey takes you.

As an entrepreneur, you will face a unique set of challenges. Whether you are just starting out or have been in business for many years, Déjà Partners can help you by providing mentorship, guidance and support over the long-term. Our goal is to help our portfolio companies grow and succeed. We are here to help them navigate the challenges of funding and scaling a business and to provide them with the support they need to create value and achieve their goals.

Thank you for reading and we hope you found it helpful.

Contact us today to learn more about how we can help.

Sources:

Age and High-Growth Entrepreneurship – American Economic Review

The 20-year-old Entrepreneur is a Lie – MIT Sloan

How Old are Successful Tech Entrepreneurs – Kellog School

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