Entrepreneur

What Is Entrepreneurship?

If you ask most people about their impression of entrepreneurship, they might use words like “small business” or “innovation” or describe it as “working for yourself.” Some may go beyond that and paint a picture of an audacious Silicon Valley founder who boldly takes risks and tirelessly overcomes challenges.

Q2 hedge fund letters, conference, scoops etc

Entrepreneurship

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For others, an entrepreneur is a free-spirited rebel who makes his or her own way in the business world. All these things help give color to the canvas of entrepreneurship, but they don’t paint a complete picture of the thing itself.

So, what is entrepreneurship?

Simply put, entrepreneurship is the endeavor of creating, owning, and commercializing an idea, technology, product, or service, as well as assuming the risks and rewards associated with that enterprise.

It’s an undertaking fraught with uncertainty, offering no guarantees. So, if launching a business is so challenging and uncertain, why is entrepreneurship so alluring? To answer that, let’s look at the aspects of entrepreneurship and traits of founders that paint a more vivid picture of entrepreneurship.

Entrepreneurs are often viewed as innovators or even pioneers of new industries. Sometimes innovation is not a new technology, like an autonomous vehicle, but a new application or process. Amazon is now one of the largest companies in the world, but it started by simply selling books online instead of in brick and mortar stores.

Uber disrupted the taxi industry not by launching a fleet of cabs but by developing a ride-hailing app. In addition to bold, disruptive innovations, successful entrepreneurs innovate by striving to continually improve processes, reduce costs, or make products better. Entrepreneurs are associated with innovation because innovating gives the founder’s company a competitive advantage and offers entrepreneurs an outlet for their creativity.

Responsibility. Founders are often the first chief executive officers of their startup. The founder will be responsible for seemingly endless decisions ranging from hiring and firing to product design and purchasing commercial insurance. The founder may, at times, be the visionary who lays out the mission of the company. But at other times, he or she will be mired in the unglamorous tasks of regulatory compliance, tax and financial reporting, and other tedious but necessary duties.

And unlike an employee who is confident he will receive a direct deposit of his salary each pay period, an entrepreneur bears the burden of making payroll every month—even if she is not personally drawing a salary. When the founder is also the CEO, the buck stops with her. An entrepreneur’s work is never done. When a decision needs to be made, she has to make it, even after closing time.

Compensation. Employees, from the entry-level associate to the C-suite executive, are typically guaranteed a steady monthly salary. The trade-off for this steady income is that employees may not participate in the proceeds of the sale of a company nor are they commonly guaranteed a raise if the company’s profits grow.

By contrast, it’s not uncommon for entrepreneurs to forgo salary despite working very long hours during the startup phase of a business. Founders are willing to do this because they have skin in the game. We call that “equity.” According to private equity researcher Matthew Brach, equity is “the right to all residual cash flow of an entity after all other liabilities and debts have been satisfied; but it’s also the basic form of ownership. Equity equals ownership.”

A founder is willing to make sacrifices in the short-term based on the hope of a future financial reward—which is sometimes quite substantial. When the founder eventually exits through a sale of the company, he or she will reap most, if not all, of the financial gains from the sale.

Risk of Failure. The other side of the coin is that entrepreneurs bear the risk of failure. While founders enjoy the greatest upside in an endeavor, they also have the most to lose. An entrepreneur invests time into a business, which can prove valuable in terms of opportunity cost.

However, founders often deploy personal wealth and capital to get the business off the ground, representing a significant monetary cost. The reality is that many businesses fail, and there’s no guarantee that when a business closes down the entrepreneur will recoup the value of the time and capital they have invested in that business. An employee may lose the source of their paycheck, but the entrepreneur might lose his or her entire investment (which is sometimes the bulk of their life savings).

Anyone who launches a new business, whether an environmental inspections company in Houston or a gaming startup in North Carolina’s Research Triangle Park, is an entrepreneur. According to a Harvard Business School analysis, entrepreneurs tend to share certain traits, such as a dogged commitment to hard work, resilient determination, and high-risk tolerance. They’re also self-assured and more open to new experiences.

While these traits are commonly shared by founders, they’re no litmus test for a would-be entrepreneur. Instead, developing these traits may allow a budding entrepreneur to intentionally cultivate entrepreneurial qualities even if they don’t come by them naturally.

Essentially, anyone with time, talent, and capital can become an entrepreneur if they take the leap of faith and start a business. Whether the founder’s business plan is brand new or it’s building upon a time-tested model, the entrepreneur must do the hard work of taking it from the theoretical into the tangible, recognizing that without this transformation, the idea’s potential remains unrealized. This means an entrepreneur will need a deep store of personal initiative and the acumen to see their idea through.

As we have previously written, most entrepreneurs start their businesses with funds from their own savings, as well as help from friends and family. To build something more than a small lifestyle business, a founder may need to accept outside finance.

There are various sources of capital for early-stage and emerging companies, including loans or equity investments from angel investors, and at a later stage, venture capital and private equity. Accepting investors’ dollars comes with strings attached, but investors and the capital they provide are an integral part of the entrepreneurial ecosystem, sometimes multiplying the market impact a founder would otherwise be able to have.

As mentioned earlier, people often associate entrepreneurship with small business. While this is true in many cases, the two terms aren’t synonymous. Many entrepreneurs don’t merely seek to be their own bosses. These growth-oriented founders aspire to develop a very large business or even become a unicorn, a startup business valued at over $1 billion, such as WeWork, Airbnb, and Epic Games. So, whether a business is among the 89 percent that have fewer than 20 workers or the company becomes an elite “unicorn,” each of these businesses could be considered a success on its own terms.

Part of the allure of being your own boss is the ability to define success as you see fit. Traditionally, entrepreneurs measure success based on their income, the growth in their personal wealth, or some other financial metric. But the free market also means that an entrepreneur can define success in subjective, personal terms.

An entrepreneur may judge her own success by commercializing a product that improves lives, provides employment to dozens or hundreds of people, or creates financial security and prosperity for the entrepreneur and her children.

Alternatively, a business owner may judge success based on the company’s social impact. This concept is often called social enterprise. Social enterprise revolves around “addressing a basic unmet need or solv[ing] a social or environmental problem through a market-driven approach.”

People choose to become entrepreneurs for a variety of reasons, but there are a few primary motivators that nearly half of all entrepreneurs cite as being a major factor in their decision to launch a business. At the top of the list is the ability to be one’s own boss and the possibility of greater income. Entrepreneurs also say achieving a work/family life balance and creating an outlet for their ideas are very important factors in their decision to start a business.

Although entrepreneurship includes many sacrifices and challenges, it can be very rewarding, both financially and personally. The founder/CEO of a successful startup may earn a lucrative annual income, combining a salary and dividends. Perhaps even more appealing to founders, it has the potential to generate wealth that can be passed on to one’s children and grandchildren or given to advance philanthropic pursuits.

Enjoying the fruits of one’s labor, passing financial security to children, or blessing others with charitable giving are powerful incentives for many entrepreneurs.

Preparing for entrepreneurship starts with embracing the conviction that owning and operating a business is attainable. Even before settling on a business plan, a budding founder can begin preparing by developing common entrepreneurial traits like grit, determination, and a tolerance for failure.

Beyond these personal qualities, a would-be entrepreneur should set out to learn the technical skills within their chosen industry and financial skills that will be critical to managing their business, as well as the soft skills, like effective communication and wise decision-making, that will be required when leading a company.

It takes time, talent, and capital to successfully launch a business. With careful preparation, a commitment to continual learning, cultivating industry experience and know-how, and fostering the qualities unique to gritty go-getters, an aspiring founder can begin their own journey toward entrepreneurship.

Doug McCullough

Doug McCullough

Doug McCullough is a corporate attorney at the Texas law firm, McCullough Sudan, and is a director of the Lone Star Policy Institute. Doug is a co-host of The Urbane Cowboys, a podcast on policy, society, and innovation. He is a National Review Institute Regional Fellow and Better Cities Project Fellow. He is a regular contributor to Foundation for Economic Education, and has been published in Entrepreneur, The Hill, Washington Examiner, Arc Digital, Houston Chronicle, and San Antonio Express.

This article was originally published on FEE.org. Read the original article.


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