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March 09, 2011

Entrepreneurs: Old and Young

Entrepreneur and venture capitalist Luke Johnson reports that the landscape for entrepreneurs has changed a lot since he first started creating businesses back in the 1980s ["Rules of the game have been rewritten," Financial Times, 8 February 2011]. He writes:

"Start-ups are far more likely to be undertaken by graduates than they used to be. ... Female entrepreneurs are much more common than in the past, with almost one in three UK start-ups in 2009 founded by a woman. ... Generally, the entrepreneurial universe is more diverse than ever. Ethnic minorities were always over-represented (relative to the general population) among the self-employed, because of culture and prejudice. But my observations are that the backgrounds of business founders in 2011 are more heterogeneous than ever. ... Most of these developments are positive – economically and socially. There are more entrepreneurs, more diverse entrepreneurs, better educated entrepreneurs, more digital and more collaborative entrepreneurs. I approve of each of these advances."

As optimistic as he is, Johnson does worry that web-based start-ups hire too few people to help create the jobs that are needed to keep global economy's running at good speed. He writes:

"Many of these businesses need few staff – their whole philosophy is to use computers to automate everything they can. And frequently they subcontract abroad those elements that require much labour input. Emerging tech and service companies do not generate well-paid, high-skill employment on the same scale as industrial concerns once did. We shall need a heck of a lot of Generation Y entrepreneurs to cure the crisis of worklessness in the west."

Before relying solely on Generation Y for help creating jobs, Stefan Theil suggests that we shouldn't give up on Baby Boomers and Generation Xers ["The Golden Age of Innovation," Newsweek, 20 August 2010]. He writes, "Despite stereotypes of entrepreneurs as fresh-faced youngsters, new research has found that older workers are more likely to innovate than their under-35 counterparts." He continues:

"We've been taught that with middle age come calcified habits, outdated skills, and an aversion to risk. Sounds bad, right? Hey, it gets even worse when you consider that, by 2030, the average age will rise from 37 to 39 in the United States, from 40 to 45 in the European Union, and from 45 to 49 in Japan. The implication is that such figures, plus the post–baby boomer decline in birthrates, could leave swaths of the world with a deficit in creative potential. The question then becomes whether these places can continue to compete, grow, and create wealth with an aging pool of prospective entrepreneurs and workers. According to several new studies, the surprising answer is yes."

Theil reports that the average founder of a high-tech startup is "a mature 40-year-old engineer or business type with a spouse and kids who simply got tired of working for others." At least that is the conclusion of a study conducted by Duke University scholar Vivek Wadhwa that looked at "549 successful technology ventures." If you, like Johnson, are looking for people to create jobs, then you should know that "older entrepreneurs have higher success rates when they start companies." Thiel explains that older entrepreneurs "have accumulated expertise in their technological fields, have deep knowledge of their customers’ needs, and have years of developing a network of supporters (often including financial backers). 'Older entrepreneurs are just able to build companies that are more advanced in their technology and more sophisticated in the way they deal with customers,' Wadhwa says." Theil continues:

"According to data from the Kauffman Foundation, the highest rate of entrepreneurship in America has shifted to the 55–64 age group, with people over 55 almost twice as likely to found successful companies than those between 20 and 34. And while the entrepreneurship rate has gone up since 1996 in most other age brackets as well, it has actually declined among Americans under 35. That’s good news for one very simple reason: baby boomers are now in their prime, startup-founding years, which will unleash what Kauffman researcher Dane Stangler expects to be an entrepreneurship boom. Since new companies create the vast majority of jobs, the positive impact on a post-recession economy could be great."

Even if older workers aren't starting their own companies, they are generating good ideas for their employers. Theil reports that one German company "had a researcher examine its system for continuous improvement, expecting the findings to back up its policy of pushing workers into early retirement. The numbers, however, showed that older workers not only had great ideas for making procedures and processes more efficient, but their innovations also produced significantly higher returns for the company than those of workers in younger age groups." You shouldn't be surprised to learn that the company "is now phasing out its early retirement program." Theil concludes, "Demographic and economic pressures will soon force workers, businesses, and entire economies to rethink certain stereotypes; in a post-recession world, assuming that someone can be phased out due to age will be a luxury no one can afford."

The fact that older entrepreneurs and employees still have a role to play doesn't change the fact that the future belongs to the young. Fortunately, there are good things happening with younger generations as well. Deirdre Coyle Jr. and Anne Habiby, cofounders of AllWorld Network, a company that researches and ranks fast-growth companies in emerging markets, claim that there are young "entrepreneurs running sophisticated companies with the potential to create millions of jobs in the developing world." ["A New Global Growth Engine," Bloomberg BusinessWeek, 17 November 2010]. Without greater visibility and more reliable backing, however, Coyle and Habiby worry that many of these companies will falter before they have a chance to succeed. They write:

"Young, dynamic entrepreneurs ... are showing up all over the emerging world, building companies that could create new industries—and millions of jobs. But fast-growing developing-world companies ... often stall out because few outsiders know they exist. And their markets offer little in the way of entrepreneurial infrastructure such as venture capital firms eager to invest, small business banking services, and targeted government programs such as loan guarantees."

The potential growth of these companies is phenomenal. In a survey of 300 fast-growing emerging market companies conducted by Coyle and Habiby, they found:

"Those companies grew at an average of 40 percent annually over the last three years, and most of them powered through 2009 even as the global economy remained in a funk. In industries ranging from technology to transportation, fashion to finance, media to medicine, they collectively employ over 50,000 people. And they're not just in hot markets such as India and South Africa, but also in Pakistan, Afghanistan, and other troubled countries. While these companies are prospering, to reach the next level they need greater visibility to attract capital, talent, and opportunities. Our research indicates there are at least 2,500 other companies with similar potential to drive economic progress in the next five years."

Efforts to create new jobs in the developed world should get a boost from the success of startups in the developing world. Why? Because the workers these companies hire are going to become the consumers that keep the global economy growing over the coming decades. Emily Maltby reports that an increasing number of small businesses are looking overseas for growth opportunities ["First Stop: London. Next Stop: The World." Wall Street Journal, 3 February 2011]. The focus of her article was an airline flight filled with 250 entrepreneurs that travelled from New York to London. The entrepreneurs had seven hours to "network, share business ideas and discuss the best ways to expand abroad" during the flight to London. Once they arrived, they had a chance to attend meetings and continue discussions about how best to expand abroad. The Obama administration has hopped aboard the entrepreneurial bandwagon. In late January, it "announced a string of initiatives—collectively called 'Startup America'—designed to spur innovation and growth at private U.S. firms." ["Kickstarting Entrepreneurship With 'Startup America'," by Colleen DeBaise, Wall Street Journal, 1 February 2011]. Since entrepreneurism is taking front and center stage, Rosalind Resnick claims that this is a great time to start a new business ["10 Reasons to Start a Business This Year," Wall Street Journal, 19 January 2011]. Here are her ten reasons:

"1. You'll never get laid off again. ... 'Jobs used to be for life, and leaving a company to start your own could put your entire career in jeopardy,' says David Ronick, co-founder of UpStartBootcamp.com, a New York company that provides coaching, classes and information to first-time entrepreneurs. 'Now the average job lasts about four years—if you can get one.' On the flip side, most start-ups don't succeed and, while you won't get fired from your own business, you might end up shutting it down and losing the money you invested.

"2. You can stop asking your boss for a raise and give yourself one. When you run your own business, there's no limit to how much money you can make if your company takes off. Because you're taking all the risk, you're entitled to all the upside. ... While getting a business off the ground is never easy, every dollar that you put in and every hour that you work is an investment that returns profit back to you. ...

"3. You can write off that new laptop, BlackBerry, iPad or printer. One of the fringe benefits of running your own business is the opportunity to write off or depreciate legitimate business expenses. Recent changes in the tax laws make these deductions even sweeter. Under expanded bonus depreciation rules, qualified investments in fixed assets purchased between Sept. 9, 2010, and Dec. 31, 2011, can be fully written off for federal tax purposes, according to Michael J. Goldberg of New York's Ganer, Grossbach & Ganer LP. ... A new business also can use the Section 179 deduction to write off the price of certain equipment or software, up to $500,000 in 2011. The disadvantage is that the current year Section 179 deduction cannot exceed the net income of the business. Start-up costs of up to $10,000 are deductible once the business begins, Mr. Goldberg adds.

"4. You can unplug and work anywhere there's WiFi reception. Forget the daily grind of commuting to the office. Today's mobile start-ups have unplugged from their digital tether. ...

"5. There's never been a cheaper time to start a business. Ten years ago, a typical Internet start-up needed $1 million to launch a product and millions more to prove its business model and scale it to profitability or an IPO. Today's start-ups run lean and mean thanks to the plunging cost of technology and a surplus of real estate and talent. ... And thanks to the power of social networking, it's no longer necessary to hire an expensive PR firm to generate press. You can target niche publishers and bloggers instead.

"6. There's a huge talent pool just waiting to be tapped. While businesses have started staffing up again, there are still plenty of executives, bookkeepers, sales reps and other skilled professionals looking for work. Not only can you scoop up top talent at bargain prices (either as employees or independent contractors), but you may also be able to find someone who's prepared to roll up his or her sleeves and share the risk. ...

"7. Consumers and businesses have started spending again. With the economy slowly beginning to rebound, both retail shoppers and corporate purchasing departments are opening their wallets once again. But customers are demanding more bang for the buck, keeping companies' prices low and margins thin while the cost of commodities and other materials continues to rise. ... If you can't deliver a unique selling proposition, keep your day job until you can.

"8. Capital has started flowing again for small businesses. Banks have started lending again—but only to borrowers who check all their boxes. And while getting a small business bank loan may no longer be as tough as landing a date with George Clooney on Oscar night, it's still not as easy as getting tickets to a comedy starring Vince Vaughn. Some alternatives: Crowdfunding, ... peer-to-peer lending, credit unions, microlending, merchant cash advances, factoring accounts receivable, purchase order financing and good old-fashioned credit cards.

"9. Sellers will lend you the money to buy their businesses. With the market for small, privately held businesses still soft and bank financing hard to come by, businesses that are looking to sell are willing to 'hold notes' to bridge the gap between the purchase price of the company and the cash and loans that the buyer can bring to the table. ...

"10. You can finally set your inner entrepreneur free. Probably the best reason to start a business this year has nothing to do with start-up costs, financing or taxes. It's so that you can stop making excuses and spread your entrepreneurial wings and fly."

Are you ready to become an entrepreneur (check out my post entitled Want to Be an Entrepreneur? Take A Test to See If You Have the Right Stuff)? If you are, don't let your age get in your way. The research cited above should convince you that age doesn't matter.

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