Young Entrepreneurs

Stephen DeAngelis

August 2, 2010

Prerna Gupta is a young female entrepreneur. Before becoming an entrepreneur, however, she seemed to have it made working as management consultant at a prestigious consulting firm in the San Francisco Bay area [“An Entrepreneur Who Took a Chance on Herself,” by Prerna Gupta, New York Times, 9 July 2010]. Fresh out of graduate school at Stanford University, Gupta writes that she was on track to earn a six-figure income. She had great perks, was surrounded by talented people, and yet she quit her job to start her own firm. What was she thinking? I’ll let her tell you in her own words why she wasn’t happy:

“After six months of living this supposed dream, my day-to-day life was far from satisfying. I was working 14-hour days, and most of my time seemed to be spent nudging boxes around in PowerPoint slides and agonizing over the wording of bullet-pointed items. It felt wrong to be dreading work at such a young age. I wanted to wake up each morning excited about what was ahead. I wanted to create something of my own. I had joined consulting with the goal of starting my own company one day, perhaps after getting my M.B.A. At the time, I believed that management consulting would best prepare me to run my own business, but I soon realized that consulting was mostly just teaching me how to be a better consultant. Venture capital, I thought, would be a more direct path to entrepreneurship. So I quit my job as a consultant after six months and joined a venture capital firm in Silicon Valley. I lasted just six weeks this time. Although I had indeed moved closer to the world of entrepreneurship, I found myself no closer to actually becoming an entrepreneur. To make matters worse, the work I was doing was even more painful than before, and the hours were longer.”

At the venture capital firm, Gupta found herself making cold calls to CEOs of high-growth firms trying to make appointments with them for her company’s partners. As she puts it, she was basically a salesperson and was once again unfulfilled. She continues:

“Sales is an essential aspect of entrepreneurship, which is what initially attracted me to this job. A few weeks of selling something for which I had no passion, however, were enough for me to realize that my venture-capital gig wasn’t the good life I had imagined. Switching jobs had not solved my problems. The truth was that I hated working in a conventional structure. I hated having a boss, working on someone else’s creation and sitting in an office all day. My time was not my own, and I was miserable. I could not bear it for even one day longer. So I quit and decided to become an entrepreneur.”

Gupta’s story is like that of many other entrepreneurs, she and her boyfriend (now husband) “raised money through family and friends and started [their] own technology company, a social networking site that grew to two million users.” That sounds great, but “that company has not been profitable.” For the sake of her family and friends, I hope that situation changes. Nevertheless, Gupta and her husband were undeterred and last year they “started Khush Inc., which makes an iPhone music application called LaDiDa. It’s a kind of reverse karaoke — it creates background music when people sing lyrics into a microphone, and it is one of the top 20 paid music applications in iTunes.” She continues:

“As chief executive of my own start-up, I now spend my days building consumer products from the ground up, creating grass-roots marketing campaigns, pitching my ideas to investors and dreaming about the next big thing. How many people bought my product? Who saw my video? What can I do to reach more people tomorrow? These are the questions I ask myself each day. There is a certain thrill to seeing one’s own creation in the hands and minds of thousands, sometimes even millions, of people around the world. Entrepreneurship is intoxicating.”

I agree with Gupta that entrepreneurship can be intoxicating. I also agree with her next point, entrepreneurship also involves a lot of hard work. She writes:

“Exciting as it may be, however, the entrepreneurial life is far from easy. Stress is a regular part of the day. Money is tight. There are frequent emotional highs and lows, and the desire to succeed can become all-consuming. Underlying all of this is the knowledge that failure is the most likely outcome. Yet, no matter how tough things get, I wake up every morning with renewed hope and excitement for what lies ahead. The fact that I am working on my passion gives meaning to even the most mundane tasks. My future is perhaps more uncertain than it ever has been. I may end up wealthy, or I may earn barely enough to support myself. But the realization that I face a high likelihood of failure is not enough to send me back to the corporate cubicle. Maybe I value my time more than my net worth. Maybe my fear of boredom outweighs my fear of failure. Or, maybe I have an irrational belief that I will succeed against all odds. Whatever it is, I find the risk of entrepreneurship to be not only worthwhile but also necessary for fulfillment. Work is no longer work. It is life, and a good one.”

Ms. Gupta followed her dream while she was young. According to Entrepreneur magazine, she did the right thing. According to an article in that magazine, many aspiring entrepreneurs who wait to launch out on their own find they “never get back to it” [“Risk it When You’re Young,” by Joel Holland, July 2010]. Holland, a young entrepreneur himself, writes:

“Rich Aberman and Bill Clerico faced a tough decision as they approached the end of their senior year at Boston College. Start an innovative online-payment processing business, or start a new job and grad school? In the end, they decided to go the safe route–Aberman set out for law school at New York University and Clerico took a job as an investment banker at Jefferies–and they promised themselves that, one day soon, they’d get back to starting their business. But all too quickly, they saw themselves getting sucked into the workaday world and their entrepreneurial ambitions slipping away.”

Aberman (who is 25) and Clerico (who is 24) hardly seem old enough to have believed that “their entrepreneurial ambitions [could be] slipping away.” They recognized, however, that the longer they waited the harder getting started would become.

“‘It only gets harder to start a company as time goes on,’ says Aberman, 25. ‘As you get used to a salary, you start getting comfortable with a certain lifestyle, which becomes hard to leave for the uncertainly of being an entrepreneur.’ Clerico was worried that if he tried starting a company and failed, he would be six months out of school with no relevant job experience or tangible success. ‘In hindsight, I think that was a dumb fear,’ says Clerico, 24. ‘You can always go get an entry-level job.’ So after just a few months, they changed course: Aberman left law school and Clerico quit his job, and they founded WePay, an online system for groups to manage their funds. They scraped by on income from odd jobs–Aberman taught LSAT courses while Clerico did technology consulting–as they worked to get their business off the ground. ‘We just kind of did what we had to do to make rent every month,’ Aberman says. ‘And it’s completely doable, too. There’s the fear of not having any money, but in actuality, you can usually find a way to scrape up six or seven hundred bucks to make your rent payment.'”

Although Holland doesn’t explicitly state that Aberman and Clerico are bachelors, I have the strong impression that they are. Being unencumbered by a family does make taking risks easier. That doesn’t mean that young entrepreneurs have be single. Ms. Gupta clearly demonstrated that a spouse can be an asset in starting a company. However, no one wants to risk the health and well-being of a child over a business venture. That is why starting out young makes a certain amount of sense. Holland continues with Aberman’s and Clerico’s story:

“The decision paid off, and a little over a year after founding the company, Aberman and Clerico have raised nearly $2 million for WePay from high-profile Internet investors such as Max Levchin, Eric Dunn and Ron Conway. WePay launched its service March 30, allowing individuals and groups all over the world to establish an account and collect money in a variety of ways–from paper checks to credit cards–and then use a debit card to spend the money in the account. They already have several thousand users, ranging from sports teams to fraternities to groups of roommates managing rent and utilities. WePay collects transaction fees ranging from 50 cents for bank account payments to 3.5 percent of credit-card payments for each payment received; outgoing transactions are free.”

Holland doesn’t indicate whether WePay is profitable — most startups need time to get established before they become profitable — but it clearly is a sustainable business model with the potential to become profitable. Holland concludes:

“Aberman and Clerico were able to get their college business idea back on track after a minor detour, but they strongly recommend starting right out of college. ‘You have the degree under your belt, and you haven’t tied yourself into a particular lifestyle or career path,’ Aberman says. ‘If you take a risk, and it fails, the worst that happens is that you have a unique experience that you can use as an impressive factor to get you into graduate school or to rock a job interview.’ Adds Clerico, ‘If you wait until you work for a few years or go to graduate school, you are just piling on reasons not to take the risk, and you reduce the chances that you ever will.'”

Although Gupta, Aberman, and Clerico all quit their jobs to become entrepreneurs, Luke Johnson believes that maintaining a job while starting a company is often a better strategy [“A job may be the best launch for a start-up,” Financial Times, 14 July 2010]. He writes:

“Occasionally, putative entrepreneurs ask me whether they should quit their job to start a business or do it part-time while keeping their current job. I usually suggest the latter strategy, because it worked for me. For six years after university, I was employed by other people – all the while moonlighting on my own projects, such as pubs and software companies, in the evenings, during weekends and holidays. I didn’t take many vacations in my 20s, as I was too busy managing various ventures on the side. The turning point came when a memo was circulated at Kleinwort Benson where I worked, stating that staff were not permitted to hold directorships or shareholdings in external companies. I knew then the time had come to take the plunge and embrace full-blown self-employment, so I jumped ship the following month and became independent.”

Like Ms. Gupta, Johnson indicates that his “sense of freedom was palpable.” But he also states that he “didn’t regret the years juggling employment and entrepreneurship.” He continues:

“It was part of my apprenticeship. The advantages of holding down a job while plotting to become an entrepreneur are plain. You learn at someone else’s expense; you receive an income to pay the overheads while your business develops; and you hedge your bets in case your freelance activities fizzle out. The disadvantages are also clear: if you get caught by your boss misusing resources or getting distracted from the day job, there will be trouble; and a business run in your spare time will never receive the focus and devotion it needs to be truly successful.”

I don’t think that Johnson means to imply that you should try and leverage your employer’s assets to advance your business but do it without getting caught. But, by stating “if you get caught,” his meaning isn’t exactly clear. What I think he is trying to say is that you should be scrupulous about giving your employer a full day’s work for a full day’s pay and that you should keep personal business completely personal. He continues:

“If you are ambitious, the part-time option should only ever be temporary. You should have a ‘boat-burning’ target: the point at which you chuck the job and dive in. The online revolution has made moonlighting easier than ever. Apparently, 2.5m businesses in Britain are based in their owner’s home – many of them will be spare-time occupations. As long as there is no conflict with your principal job, why shouldn’t such an arrangement be successful? A part-time enterprise like this will have to become your hobby and your holidays – and you must steel yourself for 70- or even 100-hour working weeks. It will test your determination: if you don’t have the energy and commitment to put that effort in, don’t expect the journey to get easier if you go full-time.”

Johnson notes that the part-time entrepreneur route is sometimes easier if a spouse gets involved. He explains:

“Frequently, such part-time enterprises are family affairs: the principal wage-earner remains in the day job, with its health, retirement and fringe benefits, while their partner runs the home business. Certain ventures suit moonlighting: e-commerce, direct marketing, franchises, property and suchlike. The rise of virtual businesses has made part-time pursuits much easier to grow, thanks to the expansion of outsourcing.”

Although he earlier stated that “the part-time option should only ever be temporary,” Johnson concedes that there may be circumstances in which the part-time option is all that is desired. He continues:

“Not everyone running a business alongside their main job wants to build an empire – some just enjoy the variety, freedom and extra income. In the west of England, one in 13 police officers in Devon and Cornwall has a second income: some are tattoo artists; one is a horse dentist; and another provides a holistic massage service. The most common sideline involves letting property or running a bed-and-breakfast. All are permitted, as long as they do not interfere with policing. I applaud the authorities for taking such an enlightened view.”

Johnson then touches on a challenge that faces all entrepreneurs — financing. He concludes:

“The biggest single hurdle for many start-ups is the proprietor’s low or non-existent income in the early years. Is the sacrifice of a safe salary for the uncertainty of self-employment worth it for you? Will your family support you – emotionally, if not financially? What often kills an early-stage business is excessive personal drawing of money by the owner, draining the company of vital working capital. A moonlighter can avoid these traumas, but making a go of it requires industry, rather like studying at night school. As ever, all these decisions come down to your personal philosophy. As Goethe said: ‘Most people work the greater part of their time for a mere living.’ Do you want that phrase to apply to you, or do you want to break out and at least try to make a difference? If you moonlight, the downsides are reduced. To me, it is the sensible compromise for many would-be entrepreneurs.”

I think that Johnson would agree that downsides are also reduced when you begin your entrepreneurial path early in life; but, there is evidence that your chances of success increase if you wait a bit. The first thing young entrepreneurs should do is finish college. Although there have a number of college drop-outs who have struck it rich, Scott Shane, the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University, asserts, “Statistically speaking, entrepreneurs are more likely to be successful if they graduate college than if they don’t” [“The College Dropout Turned Billionaire Entrepreneur,” Bloomberg BusinessWeek, 11 June 2010]. Professor Shane also indicates that getting some business experience under your belt gives you a better shot at success once you strike out on your own. He writes:

“College graduates tend to get the better jobs. This makes them more likely to learn entrepreneurial skills, build the right business network, and be exposed to new business opportunities as employees. In fact, numerous studies show that new businesses are more successful if their founders previously held management or supervisory jobs.”

So what does all this mean? Taken together, the articles discussed above tell me that a person needs to carefully consider the timing of launching out as an entrepreneur. Start too early and you lose out on some valuable experience that can help you avoid painful (if not fatal) business mistakes. Wait too long and you may never take the leap. What’s the right length of time? Professor Shane reports “that the average tech company founder doesn’t become an entrepreneur until 16 years after he finishes school.” So if you are still in your 20s or early 30s, I wouldn’t yet worry about your entrepreneurial ambitions slipping away.