The Definition of Entrepreneurship
Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values than simply economic ones.
An entrepreneur is an individual who creates and/or invests in one or more businesses, bearing most of the risks and enjoying most of the rewards.
The process of setting up a business is known as entrepreneurship. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services, and business/or procedures.
More narrow definitions have described entrepreneurship as the process of designing, launching and running a new business, which is often similar to a small business, or as the “capacity and willingness to develop, organize and manage a business venture along with any of its risks to make a profit.”
The people who create these businesses are often referred to as entrepreneurs.
While definitions of entrepreneurship typically focus on the launching and running of businesses, due to the high risks involved in launching a start-up, a significant proportion of start-up businesses have to close due to “lack of funding, bad business decisions, government policies, and economic crisis, lack of market demand, or a combination of all of these.”
In the field of economics, the term entrepreneur is used for an entity which has the ability to translate inventions or technologies into products and services.
In this sense, entrepreneurship describes activities on the part of both established firms and new businesses.
Perspectives on entrepreneurship
As an academic field, entrepreneurship accommodates different schools of thought.
It has been studied within disciplines such as management, economics, sociology and economic history.
Some view entrepreneurship as allocated to the entrepreneur. These scholars tend to focus on what the entrepreneur does and what traits an entrepreneur has (see for example the text under the headings Elements below).
This is sometimes referred to as the functionalistic approach to entrepreneurship.
Others deviate from the individualistic perspective to turn the spotlight on the entrepreneurial process and immerse in the interplay between agency and context.
This approach is sometimes referred to as the processual approach or the contextual turn/approach to entrepreneurship.
- A person who undertakes the risk of starting a new business venture is called an entrepreneur.
- An entrepreneur creates a firm to realize their idea, known as entrepreneurship, which aggregates capital and labor in order to produce goods or services for profit.
- Entrepreneurship is highly risky but also can be highly rewarding, as it serves to generate economic wealth, growth, and innovation.
- Ensuring funding is key for entrepreneurs: Financing resources include SBA loans and crowdfunding.
- The way entrepreneurs file and pay taxes will depend on how the business is set up in terms of structure.
How Entrepreneurship Works
Entrepreneurship is one of the resources economists categorize as integral to production, the other three being land/natural resources, labour, and capital. An entrepreneur combines the first three of these to manufacture goods or provide services. They typically create a business plan, hire labour, acquire resources and financing, and provide leadership and management for the business.
Entrepreneurs commonly face many obstacles when building their companies. The three that many of them cite as the most challenging are as follows:
- Overcoming bureaucracy
- Hiring talent
- Obtaining financing
Economists have never had a consistent definition of “entrepreneur” or “entrepreneurship” (the word “entrepreneur” comes from the French verb entreprendre, meaning “to undertake”). Though the concept of an entrepreneur existed and was known for centuries, the classical and neoclassical economists left entrepreneurs out of their formal models: They assumed that perfect information would be known to fully rational actors, leaving no room for risk-taking or discovery. It wasn't until the middle of the 20th century that economists seriously attempted to incorporate entrepreneurship into their models.
Three thinkers were central to the inclusion of entrepreneurs: Joseph Schumpeter, Frank Knight, and Israel Kirzner. Schumpeter suggested that entrepreneurs—not just companies—were responsible for the creation of new things in the search for profit. Knight focused on entrepreneurs as the bearers of uncertainty and believed they were responsible for risk premiums in financial markets. Kirzner thought of entrepreneurship as a process that led to the discovery.
How to Become an Entrepreneur
After retiring her professional dancing shoes, Judi Sheppard Missett became an entrepreneur by teaching a dance class to civilians in order to earn some extra cash. But she soon learned that women who came to her studio were less interested in learning precise steps than they were in losing weight and toning up. Sheppard Missett then trained instructors to teach her routines to the masses, and Jazzercise was born. A franchise deal followed. Today, the company has more than 8,300 locations worldwide.1
Following an ice cream making correspondence course, two entrepreneurs, Jerry Greenfield and Ben Cohen paired $8,000 in savings with a $4,000 loan, leased a Burlington, Vt., gas station, and purchased equipment to create uniquely flavoured ice cream for the local market.2 Today, Ben & Jerry's hauls in millions in annual revenue.
Although the self-made person has always been a popular figure in American society, entrepreneurship has gotten greatly romanticized in the last few decades. In the 21st century, the example of Internet companies like Alphabet, formerly Google (GOOG), and Meta (FB), formerly Facebook, both of which have made their founders wildly wealthy, have made people enamoured with the idea of becoming entrepreneurs.
Unlike traditional professions, where there is often a defined path to follow, the road to entrepreneurship is mystifying to most. What works for one entrepreneur might not work for the next and vice versa. That said, there are seven general steps that most, if not all, successful entrepreneurs have followed:
Ensure Financial Stability
This first step is not a strict requirement but is definitely recommended. While entrepreneurs have built successful businesses while being less than financially flush (think of Facebook, now Meta, founder Mark Zuckerberg as a college student), starting out with an adequate cash supply and ensuring ongoing funding can only help an aspiring entrepreneur, increasing their personal runway and giving them more time to work on building a successful business, rather than worrying about making quick money.
Build a Diverse Skill Set
Once a person has strong finances, it is important to build a diverse set of skills and then apply those skills in the real world. The beauty of step two is it can be done concurrently with step one.
Building a skill set can be achieved through learning and trying new tasks in real-world settings. For example, if an aspiring entrepreneur has a background in finance, they can move into a sales role at their existing company to learn the soft skills necessary to be successful. Once a diverse skill set is built, it gives an entrepreneur a toolkit that they can rely on when they are faced with the inevitability of tough situations.
Much has been discussed about if going to college is necessary to become a successful entrepreneur. Many famous entrepreneurs are famous for having dropped out of college: Steve Jobs, Mark Zuckerberg, and Larry Ellison, to name a few.
Though going to college isn't necessary to build a successful business, it can teach young individuals a lot about the world in many other ways. And these famous college dropouts are the exception rather than the norm. College may not be for everyone and the choice is personal, but it is something to think about, especially with the high price tag of a college education in the U.S.
It is not true that majoring in entrepreneurship is necessary to start a business. People that have built successful businesses have majored in many different subjects and doing so can open your eyes to a different way of thinking that can help you in establishing your business.
Consume Content Across Multiple Channels
As important as building a diverse skill set is, the need to consume a diverse array of content is equally so. This content can be in the form of podcasts, books, articles, or lectures. The important thing is that the content, no matter the channel, should be varied in what it covers. An aspiring entrepreneur should always familiarize themself with the world around them so they can look at industries with a fresh perspective, giving them the ability to build a business around a specific sector.
Identify a Problem to Solve
Through the consumption of content across multiple channels, an aspiring entrepreneur is able to identify various problems to solve. One business adage dictates that a company's product or service needs to solve a specific pain point; either for another business or for a consumer group. Through the identification of a problem, an aspiring entrepreneur is able to build a business around solving that problem.
It is important to combine steps three and four so it is possible to identify a problem to solve by looking at various industries as an outsider. This often provides an aspiring entrepreneur with the ability to see a problem others might not.
Solve That Problem
Successful startups solve a specific pain point for other companies or for the public. This is known as “adding value within the problem.” Only through adding value to a specific problem or pain point does an entrepreneur become successful.
Say, for example, you identify the process for making a dentist appointment is complicated for patients, and dentists are losing customers as a result. The value could be to build an online appointment system that makes it easier to book appointments.
Network Like Crazy
Most entrepreneurs can't do it alone. The business world is a cutthroat one and getting any help you can will always help and reduce the time it takes to achieve a successful business. Networking is critical for any new entrepreneur. Meeting the right people that can introduce you to contacts in your industry, such as the right suppliers, financiers, and even mentors can be the difference between success and failure.
Attending conferences, emailing and calling people in the industry, speaking to your cousin's friend's brother who is in a similar business, will help you get out into the world and discover people that can guide you. Once you have your foot in the door with the right people, conducting a business becomes a lot easier.
Lead by Example
Every entrepreneur needs to be a leader within their company. Simply doing the day-to-day requirements will not lead to success. A leader needs to work hard, motivate, and inspire their employees to reach their best potential, which will lead to the success of the company.
Look at some of the greatest and most successful companies; all of them have had great leaders. Apple and Steve Jobs, Bill Gates and Microsoft, Bob Iger and Disney, and so on. Study these people and read their books to see how to be a great leader and become the leader that your employees can follow by the example you set.
Given the riskiness of a new venture, the acquisition of capital funding is particularly challenging, and many entrepreneurs deal with it via bootstrapping: financing a business using methods such as using their own money, providing sweat equity to reduce labour costs, minimizing inventory, and factoring receivables.
While some entrepreneurs are lone players struggling to get small businesses off the ground on a shoestring, others take on partners armed with greater access to capital and other resources. In these situations, new firms may acquire financing from venture capitalists, angel investors, hedge funds, crowdfunding, or through more traditional sources such as bank loans.
Resources for Entrepreneurs
There are a variety of financing resources for entrepreneurs starting their own businesses. Obtaining a small business loan through the Small Business Administration (SBA) can help entrepreneurs get the business off the ground with affordable loans. SBA helps connect businesses to loan providers.
If entrepreneurs are willing to give up a piece of equity in their business, then they may find financing in the form of angel investors and venture capitalists. These types of investors also provide guidance, mentorship, and connections in addition to just capital.
Crowdfunding has also become a popular way for entrepreneurs to raise capital, particularly through Kickstarter. An entrepreneur creates a page for their product and a monetary goal to reach while promising certain givebacks to those who donate, such as products or experiences.
Bootstrapping for Entrepreneurs
Bootstrapping refers to building a company solely from your savings as an entrepreneur as well as from the initial sales made from your business. This is a difficult process as all the financial risk is placed on the entrepreneur and there is little room for error. If the business fails, the entrepreneur also may lose all of their life savings.
The advantage of bootstrapping is that an entrepreneur can run the business with their own vision and no outside interference or investors demanding quick profits. That being said, sometimes having an outsider's assistance can help a business rather than hurt it. Many companies have succeeded with the bootstrapping strategy, but it is a difficult path.
Small Business vs. Entrepreneurship
A small business and entrepreneurship have a lot in common but they are different. A small business is a company, usually, a sole-proprietorship or partnership, that is not a medium-sized or large-sized business, operates locally, and does not have access to a vast amount of resources or capital.
Entrepreneurship refers to an individual that has an idea and intends to execute on that idea, usually to disrupt the current market with a new product or service. Entrepreneurship usually starts as a small business but the long-term vision is much greater, to seek high profits and capture market share with an innovative new idea.
How Entrepreneurs Make Money
Entrepreneurs make money like any business: they seek to generate revenues that are greater than costs. Increasing revenues is the goal and that can be achieved through marketing, word-of-mouth, and networking. Keeping costs low is also critical as it results in higher profit margins. This can be achieved through efficient operations and eventually economies of scale.
Taxes for Entrepreneurs
The taxes you will pay as an entrepreneur will depend on how you set up your business in terms of structure.
Sole Proprietorship: A business set up this way is an extension of the individual. Business income and expenses are filed on Schedule C on your personal tax return and you are taxed at your individual tax rate.3
Partnership: For tax purposes, a partnership functions the same way as a sole proprietorship, with the only difference being that income and expenses are split amongst the partners.