Should We Worry About Older Entrepreneurs

Press release from the issuing company

Tuesday, May 18th, 2010

In an earlier column , I explained that older people start businesses at a much higher rate than younger ones. As I wrote there, “the incorporated self-employment rate is 4 times higher among those aged 65 to 69 than among those aged 25 to 34—and a whopping 25 times higher than among those aged 20 to 24.”

This pattern worries some observers, who believe it reflects a lack of job opportunities for older Americans. For instance, writing in the True Slant, Anne Field argues that many older entrepreneurs today are being driven to start businesses because they have lost their jobs and cannot get new ones.

It is doubtless true that in today’s economic environment, some entrepreneurs of all ages have chosen to start businesses because they were laid off and couldn’t find new jobs. However, the data don’t indicate that the high level of entrepreneurial activity among those over 55 can be attributed primarily to recent high levels of job loss. As Dane Stangler explained in a report he wrote for the Ewing Marion Kauffman Foundation, “In every single year from 1996 to 2007, Americans between the ages of 55 and 64 had a higher rate of entrepreneurial activity than those aged 20-34.” That is, boom or bust – and we have seen several of each since the mid-1990s – older Americans are more likely to run their own businesses than younger ones.

Field also worries that entrepreneurship might not be right for older Americans because these folks have spent too much time in the corporate world.

She needn’t worry. The data actually suggest the opposite. Entrepreneurship might be right for older Americans because they have spent a lot of time in the corporate world.

As I have written elsewhere, there is little evidence that businesses founded by entrepreneurs over the age of 55 perform any worse than those founded by younger entrepreneurs. On the contrary, several studies show founders with more work experience have businesses with higher sales and profitability and greater odds of survival. Specifically, more years of management experience the founders of new businesses have, the better their start-ups perform. Finally, more years working in the industry in which the new business was founded – something older entrepreneurs are likely to have more of – is associated with better new company performance.

In many ways, this pattern shouldn’t be surprising. The skills that successful entrepreneurs need – selling, hiring and managing people, decision making, and managing financials among others – are skills that all companies demand and that people often learn over the course of their careers.

Writing in American Express Open, Anita Campbell worries that the greater tendency of those over 55 to start businesses is a problem because older entrepreneurs risk losing their retirement savings at an age when they might not be able to start over.

This is a valid concern. Starting a business is risky. Many entrepreneurs fail and most of the rewards are reaped by only a small portion of those who start companies.

But the risks entrepreneurs face are present for business founders of all ages. If anything, the risks for older entrepreneurs are smaller than those for younger entrepreneurs because the older ones are better at running their own businesses.

Thus, any concern we might have about older entrepreneurs starting businesses shouldn’t be related to their skill at entrepreneurship. Rather it should be similar to our worries about older Americans’ investments in growth company stocks instead of government bonds. As people age and their time horizon shortens, they need to make more conservative investments. Unfortunately, starting a company isn’t a conservative investment.

The data suggest that there is a “best age” for starting a business. Because people get better at running businesses as they age, but the adverse effects of failure also rise, there must be a sweet spot when starting a business best balances the benefits of experience and the risk of being unable to recoup lost retirement savings.

I turn the question back to those worried about older entrepreneurs taking on too much risk by starting businesses and ask: what’s the “best age” for starting a company?

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About the Author:Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.