Passion before a paycheck

SAN FRANCISCO - Alex White was exhilarated when he handed back a $10,000 signing bonus and rejected a job offer worth at least $60,000 a year.

White's decision to continue developing his online music business instead of joining a consulting company puts him in a small group of recent college graduates who bypass steady paychecks to pursue their entrepreneurial dreams.

"I knew if I took the safe job and let (my company) kind of die, for the rest of my life I'd be wondering 'What if?,'" White said. "And I didn't want that to happen."

Other college graduates or even dropouts have forgone the 9-to-5 grind to start their own companies - think Bill Gates at Microsoft Corp. or Steve Jobs at Apple Inc. - but rarely in recent years has the economic deck been so heavily stacked against young entrepreneurs.

To cite just one daunting statistic, the national unemployment rate is 9.5 percent, a nearly 30-year high. But the situation is much worse for people age 20-24, who face a labor market in which the unemployment rate for people their age has nearly doubled to 15.2 percent in June from 8.1 percent two years ago.

And this second dot.com wave isn't as generous with funding; entrepreneurs need more than a business plan and a URL to get started.

One-third of new employer firms don't last at least two years, 56 percent can't make it to four years and 69 percent won't get past seven years, according to the U.S. Small Business Administration.

Yet the obstacles don't deter these students. In some cases, they may actually be an incentive.

"With the latest economic downturn, students have done the calculation and realized that the risk of taking a traditional job compared to the risk of starting a company has essentially equalized," said Tina Seelig, executive director the Stanford Technology Ventures Program, which promotes entrepreneurship among students.

White, 23, decided to create his own track when he co-founded The Next Big Sound, which began as a music database of aspiring artists. In order to generate revenue, its focus is evolving to analytical data catered to industry executives, White said.

The company's concept took shape the summer after White's freshman year of college while he interned at Universal Motown Records in New York. In an entrepreneurship class during White's senior year, he teamed with three partners and batted around ideas for a start-up to pursue. The Next Big Sound hit the right note.

After White graduated early from Northwestern University in 2008, he spent the spring raising money to get the company off the ground. In June 2008, having gathered $25,000, White and the co-founders moved to an office in Champaign, Ill. provided by their first investors, and launched the site Aug. 1.

After a short hiatus - White's partners were finishing school - The Next Big Sound team approached TechStars, which provides money and mentoring for entrepreneurs. After a round of meetings in spring 2009, the start-up was accepted into TechStars' summer mentoring program.

TechStars and another similar organization called Y Combinator offer cash and mentoring to help entrepreneurs toward their end goal: a successful business. Though both said their typical participant is in his or her late 20s, they said they have seen an increase in college graduates applying for their programs.

"I was worried last fall," said Y Combinator Co-founder Jessica Livingston. "I thought people would be going the safe route and taking a job with a monthly salary and medical benefits ... but we've had increased applications for funding."

Almost 40 percent of the start-up founders in Y Combinator, the first of these mentorship-driven investment funds, are current undergraduates or a 2009 graduate. That's up 10 percent from 2005.

TechStars President David Cohen said he has seen his applicant pool balloon. Seventy percent of the companies TechStars has funded are profitable or have received investment.

"Every year it seems to be there are more people right out of college who are willing to jump into a start-up," he said.

TechStars' business connections - offered to entrepreneurs as part of the mentoring process - allowed The Next Big Sound to receive free legal advice and to connect with a MySpace executive - a "nearly impossible task" last year, White said.

"The amount of uncertainty is staggering," he said. "But it's really great having the mentors; they're kind of like bumpers in a bowling alley keeping you on track."

Many Internet start-ups are hatched during college, when interested students sign up for an entrepreneurship class or school business competition. Those competitions can award tens of thousands of dollars to the winner; they also offer business connections, which can be priceless.

Dana Lampert, who graduated from Cornell University in 2008 and founded online group collaboration tools company Wiggio.com, received $1,000 after winning Cornell's Venture Challenge, which ultimately helped him raise $450,000 through four angel investors.

He turned down a job offer from Goldman Sachs Group Inc. and deferred his job with Bain & Co. for an indefinite period.

Though company is in pre-revenue right now, Lampert, 23, said he hopes to monetize the application in the next two months.

"I wanted to take this risk and see what I could make from it," Lampert said. "Since I started I've been working as hard as ever. I'm hoping it'll make me a better employee in the long run."

The success of Lampert and other students like him has increased interest and participation in such entrepreneurship programs and competitions.

The Business Association of Stanford Entrepreneurial Students, one of the largest entrepreneurial student groups in the country, has seen a 25 percent increase in applicants for its E-Challenge competition in the last three years, where each year's winning project is awarded $100,000 from sponsors including Philips Electronics (PHG) and venture capital firms.

BASES President Ricky Yean, an incoming Stanford University senior, said he thinks the student group has expanded because of the economy's downturn.

"People are starting to explore different options, not traditional paths," said Yean, 21. "When those (high-paying job) opportunities stop appearing, then they start looking into more unconventional start-ups and pursuing their own ideas. ... Those are common themes in the new graduating class."

Outplacement consulting organization Challenger, Gray & Christmas found in a recent study that 8.7 percent of job seekers gaining employment in the second quarter of 2009 resulted from their own start ups. That is nearly double the start-up rate of 4.3 percent in the year-ago period.

"They've watched this job market and the economy tank, and more have come to the conclusion that they have to make it on their own," said John Challenger, the organization's chief executive officer.

Neil Joglekar, a Stanford 2008 graduate and founder of ReelSurfer.com, which collects short video segments into a searchable database, said he declined "high five-figure" offers from a commodities trading firm and a corporate finance company.

"You never know how long you're going to be in a job anyway, especially a commodities trading job," Joglekar said. "If something went wrong and they kicked me out the door, then what would I do?"

(c) 2009, MarketWatch.com Inc.

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