Millennials: Not bankrupt, but not quite in business

Millennials: Not bankrupt, but not quite in business

We recently wrote of Millennials that “it’s easy to see why entrepreneurs are so interested in them.” Given that the costs of starting a company are now lower than ever, it occurred to me to explore the inverse: Why aren’t more Millennials becoming entrepreneurs?

After all, young people are far less likely to run their own company than they were two decades ago. In 1996, 34 percent of first-time entrepreneurs were 20 to 34 year olds. By 2014, their number dwindled to less than 25 percent. The Wall Street Journal has gone so far as to call young entrepreneurs an “endangered species.”

This question led me straight to the survey data Foundation Capital gathered last year — research we designed to dovetail with data from the Fed’s Survey of Consumer Finances. (My partner Charles Moldow presented the preliminary findings at Money 2020.)

The basic context is well known: Compared to prior generations, Millennials have lower incomes and higher debt — including six times as much student debt. So I was surprised to learn that total bankruptcies among 18 to 34 year olds have held remarkably steady since 1998. Young people now account for only 15 percent of total bankruptcies, down from 30 percent in 1998 (though if student loans could be discharged in bankruptcy, those numbers would soar). The Great Recession ended up hitting Baby Boomers hardest.

How is this generation achieving financial stability? It turns out that the typical Millennial prefers to hold a steady job rather than take the risk of being a founder or a freelancer.

While it’s tempting to conclude that the Millennials have little appetite for risk, the truth is that soaring tuition costs and uncertain job prospects upon graduation mean that any student who takes out a loan undertakes a great deal of risk. That risk increases every year as each successive graduating class becomes “the most indebted class ever.”

Typical graduates need roughly 10 years of steady repayments to regain their financial freedom. The famous quote by Benjamin Franklin — “An investment in knowledge pays the best interest” — now has a wicked meaning because the interest is largely paid to Sallie Mae. Plus, the cost of student debt is much more than the interest paid on the loan. There’s the opportunity cost of not starting a company — at least, not right away.

The truth is, more education does not necessarily lead to more entrepreneurship. Since 1989, the number of households headed by young people who go on to run a business has declined by 40 percent.

High school graduates and GED recipients have been taking up some of the slack, but businesses owned by college graduates are six times more valuable than those of high school grads ($50,000 vs. $8,000).

So why not take out both a student and a business loan? In theory, it’s possible to go further into debt to launch a new venture. In practice, it takes time for freelancers to build steady income streams or entrepreneurs to reliably realize profits. It’s also harder for young people to access credit and typically more expensive for them given their short credit histories. Rather than take a chance of defaulting on record high loans, Millennials are choosing a less-than-entrepreneurial path to financial stability: graduate, get a job, and keep it.

That has unfortunate implications for the U.S. economy, which has always been fueled by individuals who take the risks necessary to create something from nothing. But it also has implications for entrepreneurs (of all ages) who plan to tailor their financial products and services to this generation.

Our findings revealed that Millennials are hyper-aware of their cash position and rely on mobile apps to constantly monitor it. Many millennials will highly value mobile-first products that create more real-time visibility in their financial lives. This is an opportunity for fintech companies that can that help manage spending in real time or turn the exhausting experience of stretching a paycheck into a savings challenge that millions of recent grads would actually want to undertake.

As time goes on and Millennials continue to pay off their loans, they could regain their appetite for risk and remake themselves as a generation of entrepreneurs. Or not. Maybe by then, they’ll start buying houses and having kids — both of which they are postponing today — and they’ll value having a steady job even more than they do now.

Interestingly enough, business owners across all age groups are twice as likely to be married than single. As the charts below show, businesses owned by young married couples are twice as valuable, and when you consider all age groups, married entrepreneurs’ businesses are five times as valuable.

Stability in life, as well as finances, seems to enable the typical entrepreneur to take smarter risks. I can certainly relate. I’m a student-debt saddled Millennial, but in the years before I became a VC, I still managed to launch a couple of small businesses. Maybe I missed out on a 5x return by not marrying earlier!

Whether married or indebted, it’s clear that Millennials are taking their time to start businesses. America is unique in that failure can be a badge of honor and that successful founders are modern age heroes. It’s a romanticized view of entrepreneurship, but it illustrates the risks and the rewards that too few of the 80 million plus Millennials are experiencing right now.

Imagine if we returned to the 10 percent small business ownership rates of 1989: This generation would create 2.4 million new businesses. Even if we can’t achieve an outcome that strong, creating extra breathing room in the financial lives of these aspiring Millennial entrepreneurs makes great economic sense. Millennials are a huge market, and I’m excited about a range of product ideas — including income smoothing, flexible student loan repayment, and ‘entrepreneurship’ income insurance.

Given the dismal number of young entrepreneurs, and the potential for an outsize economic return from their ideas, providing graduates more flexibility to build businesses is a risk worth taking.

Originally published at on February 6, 2016.