Entrepreneurship and Age

Over at A VC, Fred Wilson is continuing a series about the relationship between entrepreneurship and age. A few weeks ago, he made the passing comment that most of the entreprenuers in his portfolio are under 40, and perhaps there’s something to that. Valleywag chimed in with more anecdotal evidence, and Fred clarified:

So I don’t know if youth is an advantage in the tech/startup world, but it certainly isn’t a disadvantage. And I see our job as being able to work with young entrepreneurs in a way that allows them to be their best while helping them where they need it. … So let’s celebrate youthful enthusiasm and the blind ambition that powers many of these companies. Figure out how to harness it and work with it. The results speak for themselves.

Today, Clay Shirky at Many 2 Many begs to differ.

Fred was right before, and he’s wrong now. Young entrepreneurs have an advantage over older ones (and by older I mean over 30), and contra Fred’s second post, age isn’t in fact a mindset. Young people have an advantage that older people don’t have and can’t fake, and it isn’t about vigor or hunger — it’s a mental advantage. The principal asset a young tech entrepreneur has is that they don’t know a lot of things.

In Mr. Shirky’s account, young entrepreneurs have an edge becuase they don’t know that what they’re attempting is impossible, or at least not conventional wisdom.

I don’t agree, for reasons I’ll get to in a later post. First, what can research tell us? Economists have studied entrepreneurship intently, and someone must have investigated the effects of age.

In a quick scan on Google Scholar, I turned up a half-dozen early results dealing with entrepreneurial selection and age, either as a predictor or control variable.

(Note – this is going to get a bit wonky. Feel free to skip ahead.)

Evans and Leighton (1989) used data from the National Longitudinal Survey on Young Men, which included 12 observations for each of almost 4000 white men taken between 1966 and 1981. “The probability of switching into self-employment is roughly independent of age and total labor-market experience.” However, “[t]he rate of self-employment increases at a dimishing rate with age and approaches a plateau at about age 40 which lasts until about age 60.” A variety of other socioeconomic factors, such as net worth and marital status, were found to significantly affect the probability of entering self-employment.

In a 2001 paper (pdf), Blanchflower, Oswald, and Stutzer compared levels of entrepreneurial aspiration with actual levels of self-employment across a number of industrialized nations. They found that the appeal of entrepreneurship decreases with age but the probability of self-employment increases with age:

The paper also estimates separate probit equations for being self-employed and preferring to be self-employed. They reveal interesting differences. In particular, age enters positively in the first equation and negatively in the second.

Blanchflower, Oswald, and Stutzer hypothesize that access to capital is a primary cause of this discrepancy.

A pair of more recent studies provide the most relevant results. In 2002, Jack Lazear proposed a “jack-of-all-trades” model of entrepreneurship, suggesting that individuals with a wide variety of skills are more likely to become entrepreneurs while those who specialize or develop domain expertise are likely to pursue wage work. His data was from a Stanford survey of GSB alumni in the 90s. (This is a really fascinating paper.)

Lazear estimates that if age increased one standard deviation (13.5 years) from the mean, the probability of entrepreneurship would fall about 1.4 to 1.7 percent (if I interpreted the model correctly) or 20 to 25 percent of the overall probability of entrepreneurship. Other factors are more powerful predictors:

Those with more varied experience have much higher probabilities of starting their own business. The number of prior roles is by far the most important variable in explaining the propensity to start a business, even when holding constant previous experience [i.e. age], earnings and past employment tenure. Furthermore, those who study a more general curriculum when in the Stanford MBA program are also more likely to become entrepreneurs. Entrepreneurs are not the individuals who perform particularly well in one specialized area. These results support the “jack-of-all-trades” view of entrepreneurship.

In 2003, J. Wagner confirmed that Lazear’s model holds for data from a survey of the working population in Germany. With respect to age, “the probability of being self-employed is … increasing with age at a decreasing rate…”

Obviously, this search was far from exhaustive, and these papers may have flaws that I haven’t spotted. For example, they generally take “self-employment” as “entreprenuership” (so low income is sometimes a predictor of entrepreneurship), whereas Mr. Wilson and Mr. Shirky probably have in mind a special class of visionary entrepreneurs who can deliver world-beating returns.

With the exception of Lazear, these papers do suggest that across a variety of environments the effect of age on probability of entrepreneurship is roughly neutral to positive. To carry his argument, Mr. Shirky would have to show that there is something about high tech or venture-backed startups that overrides the effects of net worth, broad skill sets, and so forth found by other researchers and gives an advantage to young, naive entrepreneurs over older ones. Perhaps the Stanford data, which probably includes a higher proportion of such entrepreneurs, provides some evidence for this.

(I also searched for “age and venture capital” and found lots of studies that control for firm or fund age, size, and industry, but not many that studied the effects of age on venture-backed entrepreneurs. If anyone knows of such a study, please let us know in the comments. Maybe the National Venture Capital Association should ask a PhD student somewhere to check into this…)

PREVIOUSLY on Zeal and Activity: Entrepreneurship and Family


4 Responses to “Entrepreneurship and Age”

  1. Clay Shirky Says:

    “…whereas Mr. Wilson and Mr. Shirky probably have in mind a special class of visionary entrepreneurs who can deliver world-beating returns.”

    I can’t speak for Fred, but this is certainly what I had in mind. I don’t mean that young people have an advantage in starting any kind of company, I mean specifically that they have advantages in starting revolutionary companies, companies that don’t simply become new competitors in an existing ecosystem, but which change the ecosystem in which competition happens.

  2. Timothy Says:

    Clay – thanks for stopping by. I agree and disagree at once. Agree, because of the evidence assembled by Mr. Wilson, Valleywag, etc. Disagree, becuase I can think of revolutionary businesses that don’t look anything like that list – for example, the shift from selling jet engines to leasing and servicing them, led by GE under Jack Welch.

    Perhaps the edge that you see in younger entrepreneurs is local to technology – something to do with knowledge specific to rapidly changing technology or rapidly changing applications?


  3. wes2 Says:

    Being a 47 year old entrepreneur and running a media company focused on midlife issues, this is a topic that I simply had to weigh in on.


    In short, I feel that ageism in the Valley is real. However, it isn’t necessarily a bad thing or even unfair. If, for the reasons in your detailed post above or Clay’s post, younger entrepreneurs are a better investment then in fact this “ageism” is simply a short-handed way of increasing the efficiency of allocating investment capital.

  4. Entrepreneurship and Risk Tolerance « Zeal and Activity Says:

    […] and Risk Tolerance A few weeks ago, I wrote that there’s not a lot of empirical research supporting views that the young have an innate […]

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