When you think of Silicon Valley, you’re probably more likely to think of young entrepreneurs risking it all on ideas that can change the world.
That image of a Silicon Valley driven by young, ambitious individuals is, of course, only partly true. There’s plenty of gray hair in Silicon Valley, particularly on Sand Hill Road and in the hallways of some of the Valley’s most profitable companies, like Oracle, Cisco and HP.
But when it comes to startups, there does seem to be a growing penchant for investing in companies started by younger and younger entrepreneurs.
Today, Reuters’ Sarah McBride published a piece exploring this phenomenon. “While little data on [it] exists,” she writes, “venture capitalists say they are funding more chief executives under age 21 than ever before.” Anecdotally, Netscape founder-turned-VC Marc Andreessen was quoted as saying, “At a certain point, they can’t get much younger or we’re going to be invested in preschool.”
Andreessen and other venture capitalists say the entrepreneurs they fund at 18 or 19 typically have been prepping for years — learning computer code, taking on ambitious freelance projects and educating themselves on the Internet.
Some are self-consciously molding themselves in the image of Facebook founder Mark Zuckerberg, 27, who created computer games as a child and was taking a graduate-level computer course by his early teens.
Call it the curse of Mark Zuckerberg.
On the surface, it would appear that investors are trying to find the next Facebook CEO — a wunderkind who will create the next big thing despite his or her limited experience. Which seems to make sense. After all, young entrepreneurs not yet old enough to legally drink have grown up with the internet and mobile devices. So who better to develop the next disruptive technology?
But is that all there is to it? Are entrepreneurs simply betting that tech-savvy teens and twenty-somethings can use that tech savvy to overcome their lack of domain expertise and business experience?
Thanks in large part to the technology boom of the past several years and the relative difficulty of putting money to work in a low interest rate environment, Silicon Valley angels, super angels and VCs are flush with cash. The costs of starting a consumer internet company have never been lower, so unless you’re going to buy up shares of companies like Twitter and Facebook on secondary markets (which some investment funds have been doing), putting capital to work today practically requires that investors place a lot of bets on very young companies. This is particularly true if you have a small fund (think seven or eight figures) or you’re not a top-tier VC with access to desirable deal flow in more mature companies.
This creates some challenges for investors.
For one, selling capital for equity in high-growth industries in five, six and sometimes even seven-figure chunks is typically a difficult task. After all, who would want to sell a piece of his or her company for $20,000, or even $250,000? Answer: entrepreneurs who don’t have cash of their own and/or the wisdom to understand the game they’re playing. After all, if you’ve been working as a senior engineer in Silicon Valley for the past decade, pulling in a six-figure salary year after year, chances are you don’t need to raise $50,000 for your new startup, making you a tougher target for angels and VCs. The same is true if you’ve started a company before.
Which brings us to the primary advantage of selling capital to youngsters: most of them don’t know what they don’t know about startup financing. From valuation to liquidity preferences to option pools, it’s a lot easier to get a bright-eyed 19 year-old entrepreneur to agree to your ‘standard’ terms for a $100,000 investment than it is to get a 39 year-old who has been around the block to agree to a similar investment. Throw in mentoring, events, coworking space and access to Silicon Valley insiders who can provide your Series A (wink-wink) and even the more discerning young entrepreneurs can convince themselves that it’s worth it. After all, they’re going to change the world and even a relatively small piece of equity will one day be worth a lot.
The reality is a bit more stark. Investment doesn’t guarantee success, and in many cases it can actually impede it as investors focus on matters like “scale” and headcount growth as opposed to the development of a sustainable business, providing ample opportunity for the interests of founders and their investors to diverge as the founders realize that they don’t want or need a “home run” to build a great company. The dilutive effects of multiple rounds of financing can leave founders with relatively little even when their companies succeed. And, of course, it must be noted that most companies don’t succeed, and even those that do don’t typically succeed at Facebook-like levels.
All of this said, right now, thanks in large part to the acquihire, there is most certainly opportunity for investors to translate pint-sized bets into profitable returns. And to be sure, one of those pint-sized bets could be in a company started by the next Mark Zuckerberg. A nice benefit to be sure.
But make no mistake about it: the increase in financings of startups led by inexperienced founders has far more to do with the economics of startup investing than it does with the potential for young entrepreneurs to build great businesses. Pretending otherwise is pure folly.