Youth entrepreneurship must be celebrated, but be careful
As South Africa celebrates its youth month, the regular calls on young people to start their own businesses will reach its annual peak. Rather than join the chorus, Business Partners strikes a more cautionary note. “It’s good to link the two (youth and entrepreneurship),” says Nazeem Martin, Business Partners CEO. “But we have to be careful.”
Business Partners’ lending patterns clearly reflect this circumspection. Only 8% of the small-business financier’s loan book is lent to entrepreneurs younger than 35 (26% to those aged from 36 to 45, 35% to those between 46 and 55, and no less than 31% to business owners older than 55).
What is going on here? Has South Africa’s leading risk financier gone soft? Has Business Partners become an old fogey itself?
No. In fact, Business Partners’ lending patterns reflect fundamental truths about entrepreneurship throughout the world. The Global Entrepreneurship Monitor, the oldest and biggest comparative study of entrepreneurship globally, clearly shows that throughout the world the youth themselves tend to be cautious about starting businesses. Of course many do, but they are the exceptions rather than the rule. Globally, most entrepreneurs start their businesses in their middle years and older.
Research shows that this is not necessarily an aberration that needs to be fixed. A recent study of 5 000 businesses in the US suggests that the age of the entrepreneur was the strongest factor in determining whether a business survived the 2008 financial crash – the older, the better the survival rate. Age was measured as more important even than skills levels and start-up experience.
Why then this hype around youth and entrepreneurship? To a large extent, the idea is driven by glamorous role models: Microsoft, Google, Twitter, Facebook – all started by entrepreneurs younger than 35. In South Africa we have our own Mark Shuttleworth to look towards, but there is another factor that adds an urgency to the exhortation that young people start businesses. South African youth unemployment stands at 50%.
Out of sheer desperation, everyone from community leaders to teachers is urging South African youngsters to start businesses if they cannot find a job. It is an important way to safeguard against abject poverty, says Martin, but it is by no means the cure-all for South Africa’s developmental problems that so many hold up.
There are sound reasons why not. In essence, the disadvantages of starting a business in your youth tend to outweigh the advantages. In order to start a business successfully and ensure that it survives the very difficult first years, it helps enormously to be well capitalised. Older people tend to have accumulated at least some savings, and at least and asset or two, like a house, against which they can lend.
It also helps to have deep industry knowledge, the kind which you pick up after ten or fifteen years of working in a sector. General knowledge and business skills also mean the difference between survival and business failure. Entrepreneurs have to be able to navigate the labour-relations system, the tax system, the banking system, the legal system, and they have to build their own administration systems, management systems and production systems. It is almost essential to have a few years’ experience even as a low-level manager somewhere.
Older entrepreneurs tend to have more substantial networks that can be tapped for anything from advice to finance and sales. Sure, the young Facebook generation has vast networks, but they are not nearly as well resourced as the network of a middle-aged middle-manager.
These factors are so important, that Martin’s first advice to a fiery young person who wants to start a business is to consider carefully whether they shouldn’t study a bit further, or get some more relevant work experience somewhere.
If they are adamant that the business cannot wait, says Martin, every effort should be made to mitigate the disadvantages of starting up when you are young. Get an older mentor or business partner, says Martin, and approach angel financiers rather than traditional bank lenders. Also, remain very aware of the grim reality of youth entrepreneurship – learn fast or fail.
If anything, the 8% of Business Partners’ loan book extended to South Africa’s youth is an indication of the substantial risk that the organisation is willing to take to support deserving young entrepreneurs. The realities of starting a business may be viciously unforgiving towards young entrepreneurs, but it is worth remembering that there are advantages of being young also: energy, exuberance, a freshness of perspective and freedom without dependents. And if you fail – statistics say you probably will – you have a bit more time to recoup your losses with your next venture.