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Start-ups Enter the Irrational Exuberance Phase

Congress is beginning to view entrepreneurship by 20-somethings as a low-cost fix for all that ails the economy. A little realism, please?
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“There are four things* an investor is looking for in your presentation,” Ben McKean is saying as he clicks through his PowerPoint. McKean is mid-20s and looks younger, a former Wall Streeter turned entrepreneur and co-founder of a restaurant deals site called Savored.com. At the moment, he is holding stage in the basement of a Greenwich Village restaurant called Le Poisson Rouge, lecturing an audience of would-be Zuckerbergs on how to raise money for their start-ups.

 It’s a scene repeated every weeknight around the country. Everyone under 30, it seems, wants to be an entrepreneur. In the Poisson Rouge, for example, the hopefuls include a suburban Boston stockbroker hoping to launch a site connecting small investors to shares in startups; a programmer with a new tool for analyzing Web traffic; and a former Conde Nast magazine guy who wants to bring his European deals guide to New York. “Yes, there’s a lot of competition here,” he says, in what sounds ilke a triumph of hope over competitive analysis, “but you can’t be a global brand and not be in New York.”

Of course, resilient, die-hard optimism is the essential trait of any entrepreneur. Without it, you'd never dare tackle the odds against starting a company.

The question is whether, in the hopes of creating more jobs and more innovation (start-ups are how we'll beat those Chinese!), we aren't building that optimism to the point of failure. Yes, we need to get recent college grads into the labor force. The unemployment rate among recent college gradates is the highest on record. A New York Times survey found that, stunningly, only 56% of the class of 2010 had held at least one job by the spring of 2011. But we shouldn't confuse free-floating optimism with a jobs policy.

“When I ask my MBA class whether they hope to found a company or work in a start-up, about 80% raise their hands,” says Ralph Maurer, a professor of strategy and entrepreneurship at Tulane University. At Wharton, the number of graduates going to work for start-ups doubled in the past year. To ambitious college grads, entrereneurship is fast becoming the promised land that investment banking was 15 years ago. We know how that ended.

What's wrong with fostering a little more entrepreneurship among young professionals? Well, for starters, while new companies are unquestionably the economy’s job creation powerhouse, even they aren’t creating enough jobs right now to sop up the 1.5 million newly minted baccalaureates who enter the job market every year—not to mention the roughly 4.3 million of all grads who turn 21 in a given year. Robert Litan, economist with the entrepreneurship research group Kauffman Foundation, projects that of the companies founded in 2011—there are about 400,000 of them, he guesses—those still around in five years will employ some 2.3 million people. “That’s a lot of jobs,” he says, “but it includes people of all ages,” not just young college grads.

So how about fresh college grads starting companies themselves? Brad Feld thinks it's a good idea for college students to start companies, as long as they still graduate. Peter Thiel asks "Why even bother wtih graduation?" And indeed, the examples of Mark Zuckerberg and other dropout multimillionaires suggest that fortunes are simply waiting for the right millennial to claim them, degree or no degree.

The problem is, 20-somethings don’t make particularly good entrepreneurs, Mark Zuckerberg notwithstanding. “Starting a company is a multi-disciplinary thing,” says Maurer. “It takes time to learn all the skills you need. Most people who start companies fresh out of college do very poorly.” In fact, the typical entrepreneur hits it on his or her third try, not before, and according to Litan, the median age of a successful entrepreneur at the time of launch is 39, not 19. "The only way to learn entrepreneurship is to get out and try it," he says.

For all that, there is more money available for youthful start-ups now than ever.  Venture capitalist Mark Suster explains that the cost of starting a company has fallen by 90% in the past decade, one reason investors—who also have heard of Zuckerberg and Mason—are more willing to fund more companies, with younger founders, ever earlier in their life cycle. Suster has an acronym for the phenomenon: FOMA, or "Fear of Missing Out." (Not to be confused with Suster's other famous acronym, ENIFA, or “Everybody now is a f—ing angel.”)

Suster warns that this won’t end well, either for investors or the start-ups’ founders. When angel-supported companies need to move on to their next round of funding, they’ll find far less money available, and many would-be job creators will find themselves without a job themselves.

Still, it’s not hard to see why politicians have latched on to entrepreneurship: It’s sexy and founders make much more palatable economic heroes than the corporate titans who triggered the financial crisis. But let’s not let expectations run wild. “I don’t think entrepreneurship is a panacea for the economy or unemployment,” says Maurer. “We absolutely need people willing to take those risks and foster innovation. But we need to be frank about the failure rate.”

*In case you're wondering McKean’s four things that investors want is: Your bio (especially with a startup, VCs want to see whether you are worthy of money, as well as your idea); momentum (you must show growth); money (you should have cash in the bank); and market (you need to have a Big Idea).

A version of this post first appeared on The Fiscal Times.

IMAGE: iStock
Last updated: Dec 5, 2011

ERIC SCHURENBERG | Staff Writer | Editor-in-chief, Inc.

Eric Schurenberg is the president and editor-in-chief of Inc. Before joining Inc, Eric was the editor of CBS MoneyWatch.com and BNET.com and managing editor of Money Magazine. As a writer, he is a winner of a Loeb and a National Magazine Award.




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