I was working on my book about entrepreneurs the other day when I had a brilliant (though tardy) insight: It might be a good idea to actually define the term. After all, "entrepreneur" is used endlessly in the press, academia and in conversation, and we simply take it for granted that we're all talking about the same thing.
But we're not. Not even close.
Suppose I have a great job with IBM and can see my career path unfold over the next decade. One day I decide I hate my boss. So I quit my job, borrow money from my family, friends and 401K, mortgage my house, and open a McDonald's franchise in suburban Boston. I have many a sleepless night. If I'm unsuccessful I'm bankrupt and probably have to beg IBM for my old job.
Am I an entrepreneur? After all, I'm willing to take on incredible risk. I've put skin in the game. I'll start my own business, work like a dog, and be my own boss. Isn't that being an entrepreneur?
My bet is that many, or most people would agree.
I know that Scott Shane, author of The Illusions of Entrepreneurship (2008) agrees, writing that "I use. . .definitions of entrepreneur and entrepreneurship. . .most closely aligned with common sense. Entrepreneurship is. . .“the activity of organizing, managing, and assuming the risks of a business or enterprise.”
I enjoyed Shane's book, but found this definition of entrepreneur so broad as to be unhelpful. In fact, by his own admission, it's hard to find anyone in the workforce who isn't, or won't be, an entrepreneur:
First, entrepreneurship is as a very common vocation, much more common than our myths suggest. . .In 2005, approximately 13 percent of people in the United States between the ages of 18 and 74 were in the process of starting a business. In fact, each year in the United States, more people start a business than get married or have children. And as much as 40 percent of the U.S. population will be self-employed for some part of their work life! . . .
The typical American entrepreneur is a married white man in his forties who attended but did not complete college. He lives in a place like Des Moines or Tampa, where he was born and has lived much of his life. His new business is a low-tech endeavor, like a construction company or an auto repair shop, in an industry where he has worked for years. The business that the typical entrepreneur has started is a sole proprietorship financed with $25,000 of his savings and maybe a bank loan that he guarantees personally. . .It. . .employs one person— the founder—and it isn’t innovative and has no intention, or prospects, of growing.
When most people say "entrepreneur," they are unintentionally describing a 40-something married white guy launching a low-tech endeavor that isn't innovative and probably won't grow.
Take the example above of the new McDonald's, the same location in suburban Boston, but this time it's launched, owned and operated by McDonald's Corporation. Its placement is the result of a careful market study that shows, despite other McDonald's in the area, that this one can make money without cannibalizing nearby stores. In other words, total McDonald's revenue in the area should increase.
Is that entrepreneurial? It has precisely the same impact in the market as when our former IBMer does it on his own, creating precisely the same competitive dynamics and serving precisely the same consumers. In fact, given the company's experience, it's likely McDonald's will make fewer mistakes, grow faster, and be more successful--a better "entrepreneur," as it were.
But here we get push back. Having McDonald's simply open another restaurant seems hardly entrepreneurial. Once a wildly entrepreneurial business, McDonald's is now simply repeating a formula that it's already perfected, in markets where it already does business?
You see the issue? One person's entrepreneur is another person's Bacon Double Cheeseburger.
It Always Ends With Schumpeter
That's when I decided I'd better begin at the beginning. That would be Richard Cantillon (1680-1734), an Irish-French economist who coined the word "entrepreneur," saying that entrepreneurship entails bearing the risk of buying at certain prices and selling at uncertain prices. That's a good start, but still pretty much captures anyone who has gone into business. A bit later, Jean Baptiste Say (1767-1832), a French merchant and economist, added that an entrepreneur shifts economic resources out of an area of lower into an area of higher productivity and greater yield.
That's when I decided I'd better begin at the beginning. That would be Richard Cantillon (1680-1734), an Irish-French economist who coined the word "entrepreneur," saying that entrepreneurship entails bearing the risk of buying at certain prices and selling at uncertain prices. That's a good start, but still pretty much captures anyone who has gone into business. A bit later, Jean Baptiste Say (1767-1832), a French merchant and economist, added that an entrepreneur shifts economic resources out of an area of lower into an area of higher productivity and greater yield.
Now we're getting somewhere.
But it wasn't until Joseph Schumpeter (1883-1950) that I had the breakthrough I needed. His 1934 work, The Theory of Economic Development, considers entrepreneurship something that disrupts market equilibrium--say, by offering something novel, or in a novel way, or in a novel place--and is the essential ingredient in moving an economy forward. Schumpeter says entrepreneurs can come from any function and any type of company so long as they practice the carrying out of new combinations.
By new combination, Schumpeter describes some very specific activities:
- Introducing a new product, or new quality product
- Introducing a new method of production, or of handling a commodity commercially
- Opening of a new market, whether or not the new market has existed before
- Exploiting a new source of supply of raw materials or half-manufactured goods, whether the source already exists or not
- Introducing a new way of organizing any industry
Schumpeter's definition makes it crystal clear why new combination--or what we might call today innovation--is so closely affiliated with entrepreneurship. Without it, we may be launching a business, and we may be taking on risk, and we may show great courage and have many sleepless nights, but we're still not being an entrepreneur.
In Innovation and Entrepreneurship (1985), Peter Drucker echoes Schumpeter: "Entrepreneurs. . .create something new, something different; they change or transmute values." This makes them different, Drucker says, than most new businesses.
Based on Schumpeter, I've elected as a shorthand definition the following:
An entrepreneur combines resources in a novel way to disrupt the status quo of a market.
This might involve intent, but it might not; I believe I will be able to describe at least one remarkable entrepreneur in my book who had no intention of being entrepreneurial.
Being a successful entrepreneur may involve certain personality traits, but it is not uncommon to have a single person involved in a series of business ventures, only some of which are tried, true and traditional, and some of which are entrepreneurial.
Being an entrepreneur may involve taking on risk, but it might also be largely risk-free: Malcolm Gladwell's Feburary 2010 article in the New Yorker quoted a recent study by two French scholars who claim that an entrepreneur "occupies a 'structural hole,' a niche that gives him a unique perspective on a particular market. . .[and] looks for partners. . .who undervalue what they sell to him or overvalue what they buy from him in comparison to his own evaluation. He moves decisively. He repeats the good deal over and over again, until the opportunity closes, and—most crucially—his focus throughout that sequence is on hedging his bets and minimizing his chances of failure. The truly successful businessman. . .is anything but a risk-taker. He is a predator, and predators seek to incur the least risk possible while hunting."
It's not intent, it's not personality, and it's not risk
that defines an entrepreneur.
It's offering an innovation that alters the status quo. Leibenstein (1968) called it an entrepreneur's ability to destroy pockets of inefficiency. That makes sense to me, and is different than simply opening another auto parts store, gas station, bowling alley or fast food restaurant.
Do you know who are brilliant at finding entrepreneurs? Venture capitalists.
Shane writes:
Since 1970, venture capitalists have funded an average of 820 new companies per year. These 820 start-ups—out of the more than 2 million efforts to start businesses in this country every year—have enormous economic impact.
In 2003, companies that were backed by venture capitalists employed 10 million people, or 9.4 percent of the private sector labor force in the United States, and generated $1.8 trillion in sales, or 9.6 percent of business sales in this country.
In 2000, the 2,180 publicly traded companies that received venture-capital backing between 1972 and 2000 comprised 20 percent of all public companies in the United States, 11 percent of their sales, 13 percent of their profits, 6 percent of their employees, and one-third of their market value, a figure in excess of $2.7 trillion dollars.
Between 2003 and 2005, venture capital-backed start-ups made up 23 percent of the companies that went public. In short, almost all of the value generated by start-ups comes from this handful of firms.
Here's the bottom line: The definition of entrepreneur begins and ends with market impact. We care about entrepreneurs for one and only one reason: They offer an innovation that disrupts an economic flow. It's an outside-in view that cuts through all the clutter and eliminates the drama.
That's an especially good thing to remember when someone asks, "What does it take to be an entrepreneur?" It's not passion. It's not risk-taking. It's not being an extrovert, and sometimes not even intent. (Some of America's most influential entrepreneurs didn't even see it coming.) And most of all--as much as I like 40-something white guys launching barber shops, dry cleaning stores and fast food restaurants--if we confuse it with "people starting businesses," we draw all the wrong conclusions.
That's an especially good thing to remember when someone asks, "What does it take to be an entrepreneur?" It's not passion. It's not risk-taking. It's not being an extrovert, and sometimes not even intent. (Some of America's most influential entrepreneurs didn't even see it coming.) And most of all--as much as I like 40-something white guys launching barber shops, dry cleaning stores and fast food restaurants--if we confuse it with "people starting businesses," we draw all the wrong conclusions.