Coming of age: Watching young entrepreneurs become successful

Abstract

The primary goal of this paper is to show that a young entrepreneur, or one who first opens a firm in his or her mid-20s to early 30s, can learn and invest over time to run new, more successful firms with higher productivity and sales. It has been shown by other researchers that most entrepreneurs who are successful started firms in their mid-40s, but what about those founders who are under the age of 35 and are running 42% of all new firms? How successful do they become, and what factors are consistent with their success? Using newly available data from Denmark on firm sales from 2001 to 2016, this paper shows that young founders who become serial entrepreneurs see their sales revenues nearly double between their first and second firms. Commensurate with this sales increase are two underlying factors: (1) young founders become more inclined to register new firms as limited liability corporations (LLCs), which protects them from personal losses if the firm fails; and (2), young founders who are the most successful are portfolio founders, or those who keep their first firms open when they found their second firm. Furthermore, for small firms, the productivity of the firm is often also the productivity of the founder, so just as the personal productivity of wage earners rises with age over their lifecycles, so too does the personal productivity and implied income of young entrepreneurs.

Introduction

Both policymakers and the general public are very interested in what makes for successful entrepreneurship. The general public hears and reads a great deal about entrepreneurship, following well-known figures like Elon Musk, Steve Jobs, Oprah Winfrey, and Sir Richard Branson as though they are inspirational and intellectual leaders. Policymakers follow entrepreneurs because, going beyond the general public, they wish to craft policy tools that foster entrepreneurial growth. And finally, it is important to note that entrepreneurs themselves, or those hoping to become entrepreneurs, are very interested in learning about what makes a great entrepreneur.

There is, not surprisingly, a voluminous literature on entrepreneurship, aimed at identifying the traits of successful entrepreneurs. Thus, one must ask, what will this paper add to that literature? The literature has focused largely on the personal traits of entrepreneurs and less so on the successes of their businesses.¹ That is, researchers have looked at who becomes an entrepreneur and his/her motivations for doing so, not so much at what accounts for their success. This latter omission was driven to a considerable degree by a lack of data in the past. By and large, good data on entrepreneurial success has only become available fairly recently.²

Our goal is to determine what factors are important in making a young person a successful entrepreneur. A founder is said to be successful when his or her firms have high sales, growing sales, or are highly productive. We use Danish data, which has been used previously to study other facets of entrepreneurship, but we focus on the sales of young firms over many years. We match to these sales data the personal traits of founders and their families. We will be following firms from all industries, not just high-tech firms, for 2001-2016. We also go back to 1990 to define who is a serial entrepreneur.

Our specific goals are to follow young entrepreneurs as they age, to compare the more successful entrepreneurs to their less successful counterparts, and to draw limited conclusions as to why some are much more successful. In anticipation of one key conclusion, one indicator of success is whether the young person becomes a serial entrepreneur, because serial entrepreneurs have higher sales than novice entrepreneurs, who are those who run only one firm. Our results are then interpreted, addressing whether serial entrepreneurs appear to be a select group of people, or whether the decision to open a second firm is endogenous to the first firm's success. In following young serial entrepreneurs, a second indicator of success is whether he or she evolves from running a first firm as a sole proprietorship (SP) to running a second firm that is an incorporated LLC firm. The LLC protects the founder from incurring personal debts and thus encourages risk-taking. And with family background data, we test whether a family history of entrepreneurship leads to running LLC firms.

Our data is observational data – entrepreneurship is rarely studied in an experimental setting since it cannot be randomly imposed.³ Therefore, we will make clear the econometric challenges that we face and the limitations of our conclusions. One methodology we use is person fixed effects to follow the success of serial firms, holding fixed the innate unobserved quality of the founder. We also have a rich set of firm and personal characteristics, to interpret our results. Finally, we introduce firm fixed effects to follow the growth of firms as founders age. For novices who run only one firm, the growth of that firm is their way of succeeding.

Given the focus on young entrepreneurs, we look to the literature on age and entrepreneurship, which is also quite large. Azoulay, et al. (2020) most recently show that most successful entrepreneurs found their companies when they are in their mid-40s. The hypothesis that successful entrepreneurs start later in life has been addressed in the past, but Azoulay, et al. (2020) have better data, using U.S. LBD data containing 2.7 million observations on founders for 2007-2014. Others who have looked at age effects have also pointed out that very young people found firms less often than those closer to age 40.⁴ Even when the focus of a research paper is not on age, the age implications surface. For example, Chen (2016) has good data on serial entrepreneurship and shows a very clear quadratic pattern in the effects of age on success.

Though it has been shown elsewhere that the average age of founders is in their 40s, we show that the founder who starts young can achieve the same, or even greater, success because the young founder invests in himself and in his firms. This paper watches these young entrepreneurs grow and improve over time, even though the average successful entrepreneur is middle-aged.⁵

Since we aim to follow the evolution of young entrepreneurs as they age and as their firms grow, we want to permit small-firm entrepreneurs to enter our data, and therefore we require a broad definition of an entrepreneurial firm. We define an entrepreneur as a person who runs a firm that has a minimal level of revenue liable to the Value Added Tax (VAT). We include SPs but exclude “hobby firms” that don't have revenue or employees.

Another reason we use the broadest possible definition of entrepreneurship is that governments making policy decisions to support entrepreneurship, like in U.S. and Europe, care about the founders of small firms. For example, entrepreneurs who run small firms in the U.S. may sell their products through Etsy, which is a website that offers a huge range of products made by people who craft each product individually. Also, these small-firm entrepreneurs may be raising money for themselves through Kickstarter, which is a website that allows people to request and aggregate very small amounts of money from a lot of people.

From a traditional economics literature perspective, we are essentially estimating age-earnings profiles by following the implied earnings of young entrepreneurs as they age. Our measure of success is the revenue and productivity of their firms, not personal wage income, but the growing productivity of firms translates into growing incomes for their founders. Whether wage or entrepreneurial income, income is growing in a concave profile with age: wage-earners move to higher paying firms with age and entrepreneurs open second firms or grow their first firms. Also, the large and long-standing literature on traditional age-earnings profiles, based on wage income, has made clear the issues of selectivity and endogeneity that hamper clear conclusions, and those issues are relevant here. At the end of this paper, we will return to the traditional age-earnings literature to briefly draw analogies between what we have learned and what others learned.

The outline of the paper is as follows. Section 2 presents the theoretical and empirical frameworks for the regressions to be estimated. Section 3 describes the data and presents descriptive statistics. Section 4 displays data distributions of sales for different subgroups that we study later. Section 5 estimates the basic sales and productivity regressions, with Section 6 introducing tests for growing sales with age. Section 7 examines the gains to incorporation, and also the growing incorporation rates with age. Section 8 adds information on family background, to see how families might shape the success of the young. Section 9 shows that success in sales for all subgroups of firms depends on having a small number of firms with enormously high sales, an outcome that policymakers want when they encourage founders to start firms. The conclusion then follows.