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Key points
- The same opportunity means something entirely different to different people, and at different stages of life.
- One of the earliest life-cycle models of investment decisions was developed in the 1950s.
- Taking calculated risks can help young entrepreneurs acquire skills that are useful throughout their career.
We often celebrate young founders and admire the daring entrepreneurs who launch businesses before going to college. But maybe our perception is backwards: Could it be that it’s actually easier to start a company before starting a family and taking up other responsibilities?
For a single data point, starting my first company at the age of 18 felt surprisingly easy. Sure, I was struggling because of my lack of experience, and nobody took me quite seriously at the negotiating table either. But it wasn’t a hard decision to start the company—it’s not like anyone else would have hired me to do anything remotely interesting anyway.
And at 18, the psychological burden to be great is minimal: When the general expectation is for you to fail, the only way to go is up.
When a friend of mine got poor grades in college, he would say “I wasn’t even trying.” We all know a guy like him: Before an exam or on the night of an important deadline, he would make sure he was either at a party, out on a date, or otherwise unavailable for his studies. He always had a good excuse when he failed a test, but by his logic, he didn’t actually fail, because his true abilities remained untested.
Starting a business in your 30s is a whole different enterprise than starting one as a teenager. Of course, it’s still easy to find excuses when things are not going your way—and with age, you’ll get even better at finding excuses, too. But after 15 to 20 years of work history, it’s a lot harder to pull off the “I wasn’t even trying” card.
Risky businesses
The different life choices that lead to entrepreneurship make for very different entrepreneurs. Some people become founders when they see a business opportunity and want to find a way to take advantage of it. Others start their venture because they literally have no other choice to earn a living; the alternative for many 18-year-olds is to work at a fast-food chain.
Entrepreneurs are often said to be less risk-averse than the general population, but the studies that set out to test this assumption have come back with mixed results. One reason why it’s hard to reconcile results is that “founders” isn’t a homogeneous group; it includes tech billionaires who build global businesses, local mom-and-pop shops, and everything in between.
All of the people within these groups have different levels of determination, skill, and risk tolerance, and they all manage stress differently. Some may be shy, some overconfident, and all have their behavioral biases and preconceptions. Likewise, some young entrepreneurs thrive under pressure and uncertainty, while others find it overwhelming.
The fruits of the decision tree
Indeed, the same opportunity means something entirely different to different people, and at different stages of life.
Entrepreneurs who are motivated by a high level of creativity are found to be more risk-tolerant than other entrepreneurs. They may care more about the creative process itself rather than obtaining rewards in monetary terms. They also tend to be more willing to accept losses as a result of their investment decisions, which is why they—relative to other entrepreneurs—also have a higher willingness to take risks.
One of the earliest life-cycle models of investment decisions was developed in the 1950s by Franco Modigliani and Richard Brumberg. They introduced the concept of the “life-cycle hypothesis,” which suggests that individuals aim to maintain a stable standard of living throughout their lives, adjusting their savings and consumption accordingly.
Early on in their career, young adults typically have fewer financial responsibilities and a longer time horizon for investing. So when looking at a career as if it were an investment portfolio, it makes sense to take risks earlier, when there is more time to recover from potential losses. Older individuals, on the other hand, have to prioritize safer investments to protect their wealth.
By this logic, starting a business early on in your career is less risky, because even a mismanaged startup and a bad adventure can do most things for you that a first job would do. And it will look at least as good as any internship on a C.V. And it certainly beats “no work experience.”
Capping the downside
Smart people don’t want to take on unnecessary risk, and they try to take steps to limit or mitigate the potential losses and downside risks associated with a business venture. For example, entrepreneurs can follow lean start-up principles and spend time up front to test and validate business ideas with minimal resources, before committing significant time and capital.
And one of the main questions to ask before starting a business is: If it all goes to zero, what will I have to show for all the effort? For first-time entrepreneurs, it’s crucial to build their company in a way that helps them gain invaluable experience and forge partnerships and alliances. Even if the company is ultimately unsuccessful, the relationships, trust, and education can survive and help set up the next venture for success.
Early adulthood is a great time to invest in education and learning. Taking calculated risks as young entrepreneurs can help people acquire skills, which can pay dividends till kingdom come. But the only certainty is that things will be uncertain. Or as Professor Peter Lewin put it in his paper Entrepreneurial Paradoxes: Implications of Radical Subjectivism, “Entrepreneurial opportunities are complicated by uncertainty but would not exist without uncertainty."
