Skip The Hedge Fund: We Need Young People To Take Risks And Build Inspiring Things

Our definition of success has become narrow, boring, and limited. If we want young people to be creative and innovative, we need to reward them for it.

The following is an excerpt from Smart People Should Build Things by Andrew Yang. Copyright 2014 Andrew Yang. Reprinted courtesy of Harper Business, an imprint of HarperCollins Publishers.

A friend told me about a young Princeton graduate she knew named Cole. Cole studied mathematics and went to work for a hedge fund directly out of school. He’s now making well into six figures at the age of 24. That’s his whole story to date.

That’s success and the American way. And yet how excited are you about Cole’s trajectory? Think about it for a second. I’ll admit that I’m not too psyched about it, even though I have friends at hedge funds who are very intelligent, stand-up guys and even philanthropists, and I know that hedge funds are positive in that they provide diversified investment opportunities to large pools of capital.

My lack of enthusiasm comes down to a few things. If Cole successfully analyzes an opportunity for the hedge fund and it invests slightly more effectively, that will be a win for the fund’s managers and its investors. But there will very likely be an equivalent loss on the other side of the investment (whoever sold it to them makes out slightly less well for having undervalued the asset). It’s not clear what the macroeconomic benefit is, unless you either favor the hedge fund’s investors over others or have a very abstract view toward capital markets working efficiently.

Cole is almost certainly very smart. But what has he done to merit his almost immediately elevated stature in life? He’s never hazarded anything. He hasn’t demonstrated any outstanding character or virtue, unless you consider studying math and being really smart intrinsically virtuous. He’s never had to go against the grain or go out on a limb. His rewards seem a little bit exaggerated for his accomplishments.

Finally, Cole’s life is very quickly going to become quite different from that of the vast majority of humanity. His housing, education, and professional circles will take him into rarefied air. He’ll donate to causes and he’ll retain an intellectual interest in policy matters. But his experiences are going to be wildly divergent and probably make it tougher for him to understand others’ customary everyday concerns and struggles over the coming years. Ultimately, Cole’s pursuits don’t reflect a sense of value creation, risk and reward, or the common good.

Not to say that Cole’s not a good dude. I have no idea. I’ve never met him. And if your daughter got engaged to him five years from now you would probably think she was all set (and your grandkids would be good at math).

Our culture of achievement has grown to emphasize visions of success that are, for the most part, fairly predictable. Cole skipped a couple of steps. The basic plan is to go to Goldman Sachs, McKinsey, or the like, then maybe to a top-ranked business school, then back to banking, consulting, private equity, hedge funds, or a name-brand tech company. Or maybe go from law school to top firm to partner or in-house at an investment firm, and live in New York, San Francisco, Boston, or Washington, DC.*

Again, these institutions and roles are necessary, and they’re natural developments in our economy. We need them. But we need people doing other things too. We need people willing to take risks and, yes, to occasionally fail. Like real-world consequences fail. We need people committed over extended periods of time to creating value, no matter how hard that is. We need people who care deeply about the work they’re doing.

Imagine someone who you think could stand to take on some risk—someone well educated who would always have something to fall back on, whose family might have some resources so he would be unlikely to starve. And this person would probably be young and free of major life obligations. Someone sort of like... Cole.

What’s interesting is that many of the people I meet who are young, highly educated, and from good families are among the most risk-averse. They feel like they need to be making progress along a ladder with each passing month or year. Their parents have often set high expectations for them. They measure themselves each period against their peers, who are generally following various well-defined paths.

Yet, as Reid Hoffman, the founder of LinkedIn, and others have pointed out, remarkable careers are unlikely to advance in a straightforward, linear fashion. They are more likely to contain breakout opportunities that lead to unusually rapid gains (and, of course, relative dips and plateaus).

We need smart and hardworking people to build businesses around the country as much as or more than we need them to do anything else. We need more intelligent risk takers and value creators who see their communities reflected in the work they do. We need to restore the culture of achievement to include value creation, risk and reward, and the common good so that more of our top people are in position to create new enterprises and opportunities.

If we succeed in this, our best and brightest will build the engines of future economic growth. If we don’t, our talent will continue to heed purely market-based incentives, our economy will likely continue to underperform, and our culture will become more and more bifurcated.

I just had a son. I’d like him to be very well educated. But I don’t want him to necessarily enter a parallel universe where everyone is smart, well paid, and well dressed while the rest of the country wonders where the jobs went.

This is easy to say, but very hard to achieve. People like Cole have every factor turning them toward their current choices; they’re heavily recruited and offered money, prestige, training, a network, community, and opened doors. Expecting people like Cole to completely ignore these inducements is unrealistic.

What would the ideal be? There’s a renewable energy startup in Providence, Rhode Island, called VCharge that probably could have used Cole too. Its chief science officer, Jessica Millar, has a PhD in math from MIT. VCharge is trying to make our energy grid more efficient using energy storage and transmission algorithms. It’s not a sure thing, but if it succeeds we’ll all be better off for it.

How could you get Cole to head to VCharge instead of to the hedge fund? First, you would hope that immediate income maximization is not the main driver—maybe Cole has a longer time horizon, believes he can make money down the road, and thinks that tinkering with the power grid sounds interesting. Maybe he even has an instinct toward value creation, building things, and having an impact. And second, you could employ resources to recruit him and offer him prestige, training, network, a community, and open doors to head in that direction. You could make it a rational, principled choice as opposed to a vague hope that he decides to do something value creating.

One entrepreneur I met said, "You don’t want to be in the army, you want to be an arms dealer." He meant that you want to build a business that doesn’t rely upon someone winning or losing but that would benefit from supplying both sides (say, a component manufacturer like Qualcomm that sells to all smartphones, as opposed to a smartphone manufacturer that has to duke it out in competition with the others).

The quote sounded smart, but I’ve concluded that if our young people all follow his advice, we’re sunk.

One reason the finance business is always busy is that it functions much like the arms dealer. You don’t need to figure out precisely who’s going to win or lose. You wait until a business gets to a certain point, and then you help them access capital in the form of equity or debt, give them a credit line, and help them get acquired. And if a company goes down, you’re there to assist with reorganizations, divestitures, and bankruptcies.

Yet the real innovation and value are being created by the fighters who are forming little squads and cobbling together businesses. Some fail, some succeed. If they succeed, they wind up building an army that’s providing new software, better services, tastier food, or whatever else the world needs. They also create organizations that form the character of the people in the army who believe in what they’re doing.

Which would you rather have, better arms dealers or better fighters? And which should our young people want to be?

Personally, I always dreamed about going into the woods and fighting the dragon, not selling the guy a sword.

[Image: Maze via The Pattern Library]

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  • Every person working at the coal face needs a supplier of picks and buckets.

    As a professional songwriter and musician, I regularly give thanks to the people who made my instruments, my computers, my studio equipment, my recording software, and to my team of legal, accounting, marketing and management professionals who make their living because I stand at my songwriting mountain chipping out attractive stones to be polished and put on display. These people aren't leeches sucking my financial life blood, even though the percentage they take from the bottom line is very substantial.

    Sitting in his office at "The Hedge Fund", Cole is about as far away from the coal face as you can get. But, I would argue, his role is part of the superstructure of financial services that make it possible for people to begin and sustain their business endeavors. Who am I to question his personal choices of pulling down a six-figure salary instead of educating poor inner-city youth?

  • I think this is easy to say, but what's really best for the young person in question? As a macro trend, sure, I'd love to see young people go do things that change the world and create value. That's totally better for humanity. It's low risk for humanity, and very high potential upside.

    But what about what's better for the young person? Not people, but person? If it were my son/daughter, I'd say pick the hedge fund. It's the significantly less risky option that will make them tons of money -- and afterwards, they can "pursue their passion" or whatever they'd like to do. For them, going and being a "fighter" has the huge risk of failing and ruining their career in an incredibly competitive world.

    That said, I had a friend who did the author's program, Venture for America. He wasn't happy in the program, and found it draining and pointless. And on the converse, I see friends go into i-banking and absolutely love what they're doing.

    Do what's best for YOU.

  • Why would we even want Cole to go to VCharge rather than McKinsey? If I were Cole, I'd actually realize that I'm much more valuable to an energy company if I've spent time learning a lot of things at McKinsey. Part of young graduates' struggles in entering the working world is getting used to work vs school -- and a structured, safe environment like McKinsey is a great place to do so. He won't be any dumber after McKinsey, but he may be more professional, better at thinking about problems, and adjusted to driving his own projects. He'd also have leverage to pick somewhere even cooler than VCharge because McK is a brand name.

    This isn't as easy/simple as the author's laying it out to be.

  • Chris Reich

    Why can we no longer log in with our Fast Company ID? My facebook account is my personal account. I don't want to use it here.

    That said, I agree with the article's thrust. I'm sick of Facebook and social media being the center of marketing as I am sick of Wall Street being the center of finance. Wall Street makes nothing. They play a paper game that enriches few.

    Start something real. Make things.


  • Building my own business is the dream, friends and I talk about creating a start-up fairly often. We have the skills, experience, and the drive to either succeed or fail in the best way possible. There is one main concern holding me back, finances. I am a recent college graduate working as a software engineer, making a decent salary, and still for the most part living paycheck to paycheck. I am not the only one, and definitely not the worst off. Despite getting financial aid (and for those that didn't) those looming loan payments look daunting from every angle. I would love to take that risk, to inspire and be inspired myself. I cannot imagine anything more satisfying. But in order to take that risk, take that leap, I need to be secure in the fact that I will not default on my loan payments or be forced into a situation I can no longer control. Many other young innovators face a similar controversy.

    If anyone has a solution to this conundrum, please let me know. Suggestions welcome

  • Don Nasca
    1. Cut expenses No software engineer should be living hand to mouth. Get roommates, move to a box in the sticks, take the bus, telecommute, buy in bulk, shop at the Salvation army, invest in your 401K up to the amount needed to get the full match, do odd jobs at night and on weekends using the skill you already have and put every penny you earn into paying off the loan. Cut all credit cards and burn them.

    2. Set a realistic timeline and income expectations Young people think everything comes tomorrow, but building a sustainable business is a lifelong task that requires great sacrifice. Think about five and ten years out and what income you want at those times and if the sacrifice of your personal and family life is worth it?

    3. Find co-founders, people with common goals and ambition. They must be self-motivated and willing to invest the time, energy, and resources they have along with you. Put it all in writing.

    Do those three and get back to me.

  • Chris Reich

    Some people are just not cut out to be entrepreneurs. To be one, you must be willing to work hard and take risk. People who want guarantees cannot make it.

    Not to be cruel. Just think about that.

  • Working hard is not my issue, and the only guarantee I would need is not sinking into debt for the most part. Success or failure of any venture is just a part of the game, and much insight can be gained from failure. But you are right, some people are just not cut out to be entrepreneurs.

    My post was more to shine light on why some "young" professionals may be more inclined to take jobs with guaranteed pay and benefits. The article seemed to suggest that professionals fresh out of college have the means to start a venture rather than take a job. If you have to work 2 jobs to make ends meet, starting a venture, unless seeking funding on the side, isn't a viable option. Although that is not the case for everyone.

    Waiting two years until I gain a monetary base is my current plan (unless great progress is made on the side), and I have met older engineers who have been successful with start ups later in their careers.

  • Shanon, I think a lot of us are in your shoes. For me personally, I really like the concept of bootstrapping — launching a successful product or service slowly, on the side, proving the concept and not taking on any additional debt. It might be slower, but there is less chance of ending up homeless :). The weakness of FastCo and similar publications is that they push venture capital and investment stories so heavily that they don't leave much room for the smaller, smarter startup stories.

  • Thanks. Sorry if it seemed like suggesting I was the only one in this predicament, was not my intent. Still work on the side when I have time :)

  • The only problem I have with this article is the old "investing is a zero sum game" fallacy. By increasing demand for an equity, you increase it's price, creating value for all shareholders, and supporting the "fighters" (who can then raise more capital by selling equity at higher prices). Sure, whoever sold it might've missed an opportunity, but they certainly weren't robbed of that profit.

    Do I think we need more entrepreneurs? Yes. And more social entrepreneurs? Absolutely. But we should also appreciate that spending a few years at a hedge fund may be the best way for a fresh college graduate (who is very likely to be graduating with debt) to get the high-level training, connections, and financial stability to support a future career "fighting" for economic, social, and environmental value.

  • From reports I have read, The Wolf on Wall Street showed a troubling trend. Many younger people viewed the story with admiration while my peers viewed the main character with disgust. Now we need a movie about the students you are taking to the inner cities to slay dragons... not get rich selling sword.

  • I tweeted this link and received some good feedback from a friend working in finance. He argued that he views his work as empowering this next generation of creative entrepreneurs, not as taking the safe career option. We need to be willing to take risks on both sides of the aisle — as a finance expert or a business builder. This piece only tells half of that story.