Sunday, January 4, 2015

Why Are Young Americans Not Starting Companies?

I came across the fascinating chart below this morning in a Wall Street Journal article. It shows the share of households headed by someone under 30 that have a stake or own a privately held business has reached only 3.6% in the United States, a 24 year low. I think the statistic is actually worse than it initially sounds because if you have a stake in a company it could have been given to you by a parent who started a company previously.



Why are young people not starting companies? First some thoughts from the WSJ and then some thoughts from me.

"Young entrepreneurs face formidable financial hurdles. The average net worth of households under 30 has fallen 48% since 2007 to $44,354. More than half of 18-to-29-year-olds reported one or more financial problems in the past year, a 2014 Pew Research Center survey found. Their poorer financial condition hurts young graduates’ ability to tap their own savings, draw equity from a home or obtain bank loans to cover their startup or ongoing business costs. 

The decline in business ownership among young graduates also reflects a relatively low appetite for risk. Young people have less confidence, said Donna Kelley, a professor at Babson College. In an annual survey she oversees, more than 41% of 25-to-34-year-old Americans who saw an opportunity to start a business said fear of failure would keep them from doing so, up from 23.9% in 2001."

My thoughts:

I started my first business when I was 29 so I'm part of this data set. I shut down the business about 8 months later and began the process of opening my second business, which is still running today. I can try and provide some reasons from personal experience (which are not normally discussed) as to why someone may or may not want to start or continue running their own business.

1. It is extremely difficult. You have to be ready to dedicate your entire life to the company, especially in the early stages. That goes beyond having the personal will to do so. It also means if you have a significant other they have to provide you with both the support and understanding surrounding the process. Employees turn off their working minds at 5:00 and go home to spend time focusing on their families or leisure. Entrepreneurs often work late into the night and weekends. It can be draining both for them personally and their families. If something goes wrong, there is not always someone higher up the food chain that can handle it. You are at the top.

2. It is psychologically exhausting. This goes beyond the fear of failure which is the number one reason for not initially starting a company (discussed above). When you are an employee at a company and you do a great job (if you have a good boss) they will let you know on a regular basis how well you are doing and how much they appreciate your great work. Once you reach a certain income to sustain a comfortable life, hearing that you are doing a good job and having personal satisfaction in the work you are doing is more important than receiving additional income. Beyond the fact that I have seen this first hand in the business world, endless tests have proven this to be this to be true.

For more on this subject I would highly recommend watching this brief video: Revisiting Drive: The Surprising Truth About What Motivates Us. Daniel Pink's book Drive has helped me gain a better understanding of how to motivate employees than probably everything else I have read on the subject in my life combined.

Why am I discussing all this? When you own your own business no one ever tells you that you are doing a good job. No one ever tells you that they appreciate all your hard work. That may sound silly, but I assure you it is probably the most important and least discussed part of success and failure in starting a business.

I am probably less intelligent and have a weaker set of business skills than many of people around me, but I get up very early every single morning (including weekends) excited to start working. No one ever has to tell me thank you for working relentlessly long hours like a psychopath, which I think has helped me tremendously thus far in my entrepreneurial business life.

3. Catastrophic things can happen financially. When you own a business you open yourself to an entirely new world of audits, lawsuits, unemployment charges, worker's comp, etc. While employees are the most heavily taxed, they are also the most protected by the government. You find yourself on the opposite side of the fence as a business owner. An employee can hurt themselves or come at you with a lawsuit for almost anything . Assets can be protected to an extent within a corporation, but major unexpected expenses can appear overnight. It is all on you.

What are the benefits taking the plunge into this life?

1. There are enormous tax advantages for being a business owner (and/or an owner of commercial real estate). The government wants people to start companies and hire people. They designed the tax system to incentivize people to do so. People who say taxes are killing business in the United States are probably not small business or commercial real estate owners. It is a major reason why I dedicate my life to learning how to build businesses and buy commercial real estate.

2. Creating and running a business is like playing a sport that never turns off.  If you are a competition junkie, then the world of entrepreneurship is like a sanctuary. When I take a major customer from one of my competitors I get the same feeling a drug addict receives after taking a shot of heroine.

3. Freedom. This is the reason most people provide for starting a business. As I just mentioned, I like to get up at the crack of dawn and start working. If I have work I need to get done I don't mind working for 12 straight hours to make sure its done. However, if I'm caught up with everything I like to do something else. I play a full court lunch time basketball game twice a week at the gym. I often take my wife to the movies on a weekday afternoon when the theater is empty. At a job you are told to sit in your chair until 5:00 pm if your work is done at 3:00.

While this site focuses almost exclusively on finance and economics, it will become more dedicated to real estate and business when the commercial real estate markets crash in the United States in the coming years (and buying opportunities appear). Things will be a lot more exciting during that period because as everyone is filled with terror and dumping real estate there will be a once in a generation opportunity to purchase high quality assets at inexpensive prices.

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