Why old people make better entrepreneurs than young ones.

Commentary about business and finance.
Dec. 17 2010 6:30 PM

Grown-Up Startups

Why old people make better entrepreneurs than young ones.

Facebook founder and CEO Mark Zuckerberg. Click image to expand.
Mark Zuckerberg might be an exception to the rule

A few months back Peter Thiel —PayPal founder, hedge-fund manager, early Facebook investor, Silicon Valley bigwig—announced an initiative to get kids to drop out of college for the good of the country. Arguing that America desperately needs new entrepreneurs, he unveiled the Thiel Fellowship, granting $100,000 to 20 entrepreneurs under 20 years old. "This fellowship will encourage the most brilliant and promising young people not to wait on their ideas," he said. Thiel's is hardly the first initiative aimed at encouraging entrepreneurship among the young. Just this year, for instance, Babson's school of business started a "Venture Accelerator" to help MBA students starting their own businesses at graduation. Something called the Young Entrepreneur Council —check out that Web site address— made waves by encouraging the young to ditch their résumés and head to their garages. Even the State Department launched an entrepreneurship program.

The idea behind all of the programs is similar: The United States relies on young businesses—not small businesses, as previously thought—to create new jobs. Therefore, for the good of the economy, the United States should encourage smart, savvy kids to work for themselves rather than to join established businesses. But new research complicates the picture. Older entrepreneurs are starting more and more new companies and might outpace younger entrepreneurs within the next few years. And that isn't necessarily a bad thing: Older entrepreneurs tend to be more successful.

Indeed, contrary to conventional wisdom, entrepreneurship is increasingly a project and priority of older workers—even in the youth-obsessed technology sector. The Global Entrepreneurship Monitor, a nonprofit academic consortium that studies global entrepreneurship, found that in 2009, entrepreneurs in their late 20s and early 30s did create the most new businesses, as usual. But the under-35 cohort made up just 19.1 percent of "total entrepreneurial activity," meaning planning, setting up, or managing a new business. Plus, the report notes that in a "radical shift," entrepreneurship has declined for the young and increased for the over-45 cohort during the recession. If trends continue, older workers will be the more entrepreneurial set in just a few years.

Other studies have confirmed these findings about the gray overtaking the green. For instance, the Kauffman Foundation, a nonprofit devoted to studying and ginning up innovation, looked at business starts in the technology sector. It found that between 1995 and 2005, when venture capitalists were plentiful in Silicon Valley, the 20-to-34 age bracket produced fewer companies than older age brackets did. The average age of a tech startup founder was not 19 or 27 but a respectable 39. And there were twice as many entrepreneurs older than 50 than younger than 25.

There are a number of structural factors that make it easier—and possibly better—for older workers to start companies. First and foremost, older entrepreneurs are more likely to have long, solid credit histories—vital for getting the credit cards and loans vital to new businesses. Older folks are also far more likely to have assets—like retirement savings or housing wealth—they can tap to fund their own startups. Furthermore, and less tangibly, older workers are more likely to have the management experience necessary to set up a company and keep it running.

For those reasons, older entrepreneurs, most if not all studies find, make better entrepreneurs—better at actualizing their business plans, finding adequate funding, keeping their young companies going, and creating new jobs. Young people might start more companies. But check in a few years later, and it is the older entrepreneurs' companies that are still around. Age and its attending wisdom—or at least its attending credit score—go along with entrepreneurial success.

And, the Thiel Fellowships notwithstanding, educational achievement seems to make a difference as well. One study found that tech startups were twice as big, in terms of employees and sales, when started by better-educated, older workers. "Startups established by tech founders with terminal Ivy-League degrees had higher average sales and employment—$6.7 million and 55 workers, respectively. The success of these two groups markedly contrasted with startups established by tech founders with high school terminal degrees, which had less than half the average revenues and number of employees—$2.2 million and 18 workers."

All of which leads to the question: Should we be encouraging older entrepreneurs rather than younger ones? It may be a false choice. At the end of the day, the United States needs more entrepreneurs, period. But the research does show that maybe, instead of focusing so much on the kids, some wealthy philanthropist can fund a fancy entrepreneurship initiative or two exclusively for AARP members.

Watch: Brad Feld and Paul Kedrosky on entrepreneurs

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