Wasington, D.C. -- (ReleaseWire) -- 01/16/2015 --On January 2nd, 2015, the Wall Street Journal printed an article entitled 'Endangered Species: Young Entrepreneurs.' I wanted to bring on two people that have insight into this area so we can discuss both the benefits of becoming a young entrepreneur in the United States today, and the reasons for the current decline and how to get things back on track. My first guest is Dane Stangler. Dane is the Vice President of Research and Policy at the Ewing Marion Kauffman Foundation, which promotes entrepreneurship here in the United States. He has researched and written about the 20 to 34 year old cohort in America having a far lower percentage rate of entrepreneurship than older groups, especially in the last few years when that rate has continued to fall. I've also invited Dan Pierson. Pierson is a recent college graduate and a full-time employee at a consumer electronics company. Despite a history of entrepreneurialism, during which he grew a business when he was young and later sold it, Dan decided to take a job with a big corporation. Dan and Dane, welcome to Financial Myth Busting.
DAN PIERSON: Thank you.
DANE STANGLER: Thank you.
BENNETT: Dan, you started a business at the early age of 13. How did you sense that opportunity and how did it go after everything was up and running?
PIERSON: Sure. So I sensed the opportunity as actually a matter of need where I was looking to establish some independence and work for myself and make some money. And an opportunity came up, where, actually at that age, I was starting a landscaping company and there was a need for services in the area around me, initially. After I started that, as I grew and expanded, I quickly realized that being smaller as a company, I had a capability of offering more competitive pricing and telling a more compelling story than a lot of the larger companies competing in the area. So, throughout my childhood and into college, I was able to grow and expand that business throughout several towns and then ultimately, sold it off because I wanted to pursue something that was more technically based.
BENNETT: You say you wanted to pursue something more technically-based. Why didn't you go back into setting up a private company, as opposed to gravitating towards a larger one? The independence, and even the wealth factor is greater when you start your own company.
PIERSON: Sure. There's a couple of things that drove me to that. First, over the past 15 or 20 years, the internet has become more prevalent. It's made the world a smaller place and it's allowed companies to compete globally which is a great thing for established companies, but for companies that are starting now, it means you're going up against a lot of organizations that have established such strong economies of scale and that really puts pressure on the idea whether it be a product or service that you come up with to be one that has a pretty significant, competitive advantage so that you can overcome some of that premium pricing that you may have to charge initially. That's one aspect.
The other aspect is, when you're running your own company, there's a thousand and one things that you have to be concerned about that go well beyond that initial product or service concept that you're trying to bring to market: payroll, service management, facilities, benefits, many things like that, and if you don't have an initial framework for understanding how all those pieces work together in an organization and how to implement them, when you go and start that company, you'll end up spending most of your days in fighting fires that keep away from promoting the product or service that you're trying to make profitable. And, in college, I did a minor in entrepreneurship and I read through a lot of case studies, looked at a lot of different companies that have started out and that seems to be a common trend, that it was a lot when they start out early on. There's a lot that they didn't understand and there's a lot of value that to be had from learning some of those skills first before jumping out and starting your own business.
BENNETT: Dane, in one of your research pieces you write, "No matter how badly you want to be an entrepreneur, no matter how low the cost to starting certain kinds of companies, if you come out of school with $60,000 in debt, entrepreneurship may not be as attractive as an option." Do you remember writing that and what inspired it?
STANGLER: I do remember writing it and what inspired it is not just stories we had heard and talking to people, but also different data points going in different directions. One, as you mentioned, lower rates of entrepreneurial activity among young people, and then on the other hand, data going in the other direction which is raising student debt burden. And I mean just starting up company takes money and you can imagine that, whereas before, if you do have entrepreneurial intention to start a company after college, after grad school, it's hard to start a company if you're starting from a negative financial hole and so, you can imagine that for young people today, this is quite a significant financial burden if you're looking at entrepreneurship as an option.
BENNETT: Why is entrepreneurship among young adults at the lowest rate in 24 years? You would think that with all the stories of the 20-something Silicon Valley billionaires, everyone would want to be an entrepreneur. It inspires me, and I'm in my 50s.
STANGLER: Sure. I think there's a couple of reasons and you're absolutely right, and there's multiple data points pointing you in this direction: the numbers in the Wall Street journal stories, the numbers in the Federal Reserve, numbers that the Kauffman Foundation uses from the Census Bureau. And you have seen this broad declining trend. And I think there's both good and bad reasons for it. Some bad reasons would be what you just mentioned which is rising student's debt burden so it's not as financially easy for young people to start a company and even if you're few years out of college and you've already started a family, the recession took a major toll on everyone, but hit particularly hard on young households. And so, in past years where, for example home equity served as a source of seed capital for a lot of our entrepreneurs, that option just isn't there today for young households because they had such a hit. There's also some not bad reasons that we've seen in this trend. One of them is that, a lot of more young people are going to school. This was part of the recession, the job market wasn't great, so a lot of people came back to school or enrolled in school, which they wouldn't have otherwise, so that has also taken away from some of the business creation activity. Well, that's not a bad thing. You'll start to see that payoff later on. So, I think there are a lot of things going on underneath these numbers.
BENNETT: Dan, do you think college was worth it?
PIERSON: Absolutely, absolutely. I agree with some of the points that were made that student debt can become a prohibitive factor if you're making $500 or $600 a month in student loan payments, it can impact the decision-making process. But ultimately, I view myself vastly better equipped to compete in a global economy because of the skills I gained in the school.
BENNETT: Dane, what are the benefits that society receives from a culture of entrepreneurship, in particular here in the United States? I'm very familiar with China and the economy in China, and their young entrepreneurs, are just coming out of the woodwork, and they're being supported by their families. That's being ascribed to having come out of a communist regime that controlled everything and a desire to control their own lives.
What are the benefits that entrepreneurs receive themselves, as well the benefits to our society?
STANGLER: There's tangible and intangible cultural benefits. On a tangible side, things we can count that have a definite definable economic value. The biggest thing would be job creation, and in the United States, over the past 30 years or really any period of time, new and young companies, especially new and young companies that grow, have been a principle source of net job creation in this country. That's not just true for the United States, it's actually true for most countries around the world, especially advanced economies. Also, innovation. Entrepreneurs are a principal source of new innovation for any economy.
On the intangible side, on the cultural benefit, especially today, we hear a lot about entrepreneurs as disrupters or hear about creative destructions. We have these terms, these disruption and destruction that are the negative terms about entrepreneurs. So, the role that entrepreneur and young and growing companies really play is about renewal. They help renew an economy, they help keep it from stagnating. I think that's exactly what you're seeing, as you describe, in China. And then for young people especially—and I'd be interested to hear Dan's perspective on this—you've seen in the past few decades in the U.S., young companies serve a very important labor market role for young people. They're more likely to hire and to employ young people, and so they've especially been a source of a career stepping stone for young people to kind of keep moving up the career ladder.
BENNETT: Dan, do you ever plan to start your own company again? Is what Dane saying true, that you're moved to this electronics company, this major electronics company, just as a stepping stone?
PIERSON: Yes. I anticipate fully that, at some point during my career, I will start and pursue my own venture or buy into a venture and continue to help develop and grow that. And I also agree that in a lot of cases, you're right, young companies that are looking to grow at a significant pace, often lure younger employees over there and I think there's many companies and industries that have demonstrated that over and over again.
BENNETT: Dane, in your talks with young possible entrepreneurs, do you think that there is a cultural element at play? The media portrays millennials as self-absorbed, weak, and not willing to take on risk. Do you think this generation is simply just too risk-adverse?
STANGLER: It's hard to say. It's hard to make some generalizations like that. I think a severe recession like we had in 2008 and 2009, is definitely going to have short and long-term effects on everyone, but especially cohorts of young people who are just getting their careers going. There's been a lot of economic research on, if you graduate from a college in the recession or get your first job in the recession, the long-term impact that has. And it does have a negative long-term impact. You can imagine that the recession either puts a permanent dent in people's economic ambitions or has just made it harder to start off with.
But I also think it's hard to compare across generalizations. I mean think if you had polled 50-year-olds in 1970 and said, "What do you think about young people today?"-- they probably wouldn't have had hugely positive things to say that this is the great future of the country.
So, I think there's always this generational thing and, in the past, we've seen this, what we called, the peak age for entrepreneurship, is the late 30s to early 40s because, as Dan mentioned, you gain experience in different kinds of jobs. So, it's entirely fast growing. I think it is—would be the case that you see young people, kind of the millennial generation will turn out to be highly entrepreneurial, it's just going to take a little bit of time for that to play out.
BENNETT: What about the cost and regulations, Dane, involved in starting a business. Is it just simply too onerous right now, is government too big?
STANGLER: I don't know if it's case that it's simply high regulatory barriers. I think what you're actually seeing is, even though as Dan mentioned the cost to you as an individual starting a company has gone down, whether you're buying server space or you're building a website, the cost is going down. But the barriers people are facing is actually regulation being used by incumbent firms that try to keep out new entrants. And so, this is the case where regulation is being a barrier but it's being used on behalf of existing firms to protect themselves rather than regulation being used as a tool to promote competition. You see lots of barriers spring up around the economy from occupational licensing restrictions especially at the low end of the scale and job distribution to things like non-competitive agreements preventing high-skilled employees from going on and starting companies.
BENNETT: We do seem to be in a world where there are a lot of penalties put on small businesses, and there's story after story about how difficult on companies when, for example, they get fined. The health department of New York City actually collected $45 million in fines just in 2012 and in 2013 alone. And each one of these entrepreneurs, each of one the owners of these cafés and restaurants have to pay lawyers, contractors and other things, people to fix the violations and to fight those fines. That seems aggressive and like a lot of money.
STANGLER: It is certainly true that the cost of compliance for any set of regulations whether it's fines that you describe or other types of regulations are higher for small and young companies simply because they're smaller, and that's always been true and if it varies with enforcement then you're going to see that change. That's certainly true that there's a higher burden for small and young companies.
BENNETT: There's a story of a man who started his laundromat business and then got hit with a $5,000 fine for not registering with the Department of Consumer Affairs, even though he wasn't informed of that requirement when going through the process. It seems that young entrepreneurs have no chance of avoiding all of these rules and regulations. It almost is making it impossible for them.
STANGLER: Well, I think what you're highlighting as well, is not simply at this level, but also the complexity and difficulty of complying with everything. I mean I've heard the exact same stories as you that even when you're just starting off, I have to go to this office to do this, and to that office to do that, and this office to do something else, why can't all of this one be in one place.
BENNETT: What can we do to get back on track? What are most important policy changes that can be made to start reversing the trend of young Americans? Right now, it seems like they're avoiding starting their own businesses. I wanted to start with you Dane.
STANGLER: I will highlight two or three things. One, as you mentioned before, I think there is a lot of work to be done on the complexity facing small young companies, both in terms of tax and regulations. It's often not—the level of something like a tax that you are dealing with, but it's more often the complexity of just how much they have to navigate and the cost that causes to them, as you described. I think I'd also roll back a lot of barriers that are crossed up with the federal, state and local to new entries, across a wide variety of sectors of the economy. And I would, on a positive side, allow further experimentation to things like equity crowdfunding which was passed—which was allowed through the jobs act two years ago. The SEC has been working on regulations for two years, but they—it's been delayed and delayed, and I understand that there is a lot of concerns over kinds of bad things that could happen if we allow for equity crowdfunding, but I think we have to allow that experiment to take place and see how it works out in the market as other countries have done, rather than kind of strangling that part to begin with.
BENNETT: I also think, culturally, that we need to change our mindset. We hear the words fines and violations all the time now and we think they're assessed to the bad actors. But, as you pointed out, navigating our government is so complex, with so many rules, that even those with the best intentions can be held guilty, and they should not be.
STANGLER: That's right. And maybe that's an exposure issue, too. Dan is a good example of someone who started from a young age and there is a huge proliferation of, for example, entrepreneurship education on college campuses, but there doesn't seem to be equal proliferation of opportunities after school. So if we can start to build the bridge in some programs like one institute has done where you have almost apprentices with young companies that can expose more people to it, we might start to see that cultural shift.
BENNETT: Dane, what do you think about programs like the one started by Peter Thiel which pays promising high school grads to skip college and instead launch a startup?
STANGLER: I'm a huge admirer of Peter Thiel, but as Dan said, there is still huge value, or huge economic reasons for going to college. So while I think it's good to have programs like Thiel's fellow program, like the institute, that's opened up different alternatives and options, I don't think we should be persuading more and more people from going to college. I think the alternatives are important.
BENNETT: Dan, is there anything that could have been different from a public policy perspective that might have made it easier for you to start your own business after college?
PIERSON: From a public policy perspective, I don't know of anything off the top my head that if it was different it would have changed my mind. I think the decision I have made was primarily driven by the skills that I felt that I need to gain in order to be successful when I do start my own business. The only suggestion that I guess I'd make is that, as I said earlier, there are a lot of aspects that go on with running a company, that go beyond the product or service you're trying to grow to be profitable, and the more mentorship and advising organizations that are out there that help young entrepreneurs navigate those difficulties, so that they can focus their time on what's going to really make the company possible the more likely they are going to succeed. I think there has been a large increase in number of incubators that have shown up, at least in the north east, and I think as those continue to grow and become more popular, and as students and young professionals begin to learn more about what they offer, I think that will help drive companies to be more successful.
BENNETT: The article, 'Endangered Species: Young Entrepreneurs' is in the Wall Street Journal from January 2nd, 2015. It's currently still publicly accessible online.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org