What is Entrepreneurship?
Entrepreneurship refers to the process of identifying, and then setting up a business to leverage a business opportunity, which involves either product or process innovation Product innovation is the development of a new product category or improvements in an existing product whereas process innovation changes in the way a product or service is created or provided. Those developing or identifying the business opportunity are referred to as entrepreneurs and are willing to accept the risks associated with setting up a new business.
The term entrepreneur is derived from the French word entreprendre which means ‘to undertake’. Many definitions of an entrepreneur describe them as individuals who set up businesses, assuming the risk with the aim of generating a profit. Stevenson (1999) defines entrepreneurship as the pursuit of opportunity without regard to resources currently controlled. Entrepreneurs often perceive the presence of a short window of opportunity, which supports the motivation to act and leverage their idea. Opportunity refers to the entrepreneurs’ idea or innovation. Entrepreneurs often face resource constraints requiring innovative business approaches to maximise the return from the resources deployed and this is often referred to as entrepreneurial stretch.
Three core economic theories around entrepreneurship exist, in which the development and continuance of entrepreneurship is built on how economic value can be obtained through the creation of the new business or bringing the new idea to market.
Classical theory support the ideals of free trade, specialisation, and competition. The entrepreneur is an agent able directing and creating value by bringing together land, labour and capital. Whilst the industrial revolution is cited as being the key point of evidence (entrepreneurs leveraging the new opportunities presented by technology advances), it is criticised as it does not adequately explain the economic upheaval that resulted. Neo-classical theory developed in the light of these criticisms and the entrepreneur is seen a part of the model of pure exchange which reflects optimum production levels within a closed economy. The model assumes perfect competition and states that the impetus for entrepreneurship can be explained by the presence of diminishing marginal utility and the process of exchange. However, neo-classical theory only uses aggregate demand and does not account for the individuality of different entrepreneurial ventures. It also assumes perfect competition (that market actors will behave rationally such as in resource allocation) and makes no allowances for the future value of innovations
The Austrian Market Process (AMP) addresses some of the issues seen in the neo-classical model, focussing on the way people act in the economy of knowledge and the entrepreneur is a driver within a market based economy. This allows for a dynamic environment in which knowledge moves around the economy and accepts the presence of information inequalities. However, the theory does not allow for antagonist competition or entrepreneurship occurring in non-commercial, non-competitive scenarios.
Sociological theories examine the relationship between social contexts and entrepreneurship. Social networks may help promote entrepreneurship through the building of relationships characterised by trust, rather than opportunism. Entrepreneurs may find support within social networks, without the need for opportunism. The life course stage considers the life situation as well as the characteristics of an entrepreneur when they pursue entrepreneurship. Individual life experiences influence decisions around entrepreneurship, particularly the drive to do something meaningful.
Ethnic identification suggests that an individual’s background is a major influence on entrepreneurship. Social backgrounds influence motivation and population ecology considers the environmental factors which shape business survivability (e.g. the legislative environment, political systems, competition, industry structure and the type/power of customers).
Anthropological theories consider how community values, customs and beliefs influence entrepreneurship decisions. It is also described as the cultural entrepreneurship model, considering the cultural traits of different countries (such as risk avoidance) and how they impact entrepreneurship.
This broad concept considers how entrepreneurs take advantage of opportunities, arguing that entrepreneurs respond to (and exploit) change rather than create it. Examples of such opportunities include changes in customer tastes or technology.
These theories state that access to resources (e.g. financial, social and human) will be a predictor of opportunity based entrepreneurship. Empirical research demonstrates that more enterprises are initiated by individuals with access to capital as they are able to access the resources needed to develop innovations and pursue opportunities. However, there is also evidence demonstrating how poor access to resources encourages greater levels of innovation (described as entrepreneurial stretch).
Entrepreneurs are part of larger social networks and these connections can overcome resource constraints (e.g. by providing capital). Human capital (shaped by education and experience) is also required to leverage opportunities, providing the skills and knowledge needed by both entrepreneurs and their employees.
The presence of entrepreneurs in an economy provides the potential for economic growth, providing jobs and supporting gross domestic product (GDP). Entrepreneurs start businesses which generate income. Research has shown that (on average) a UK entrepreneur who had been trading full time would show a trading profit of around £10,000 after five years with mean profit levels rising consistently for the following five years (Centre for Enterprise, 2016). The indirect benefit is greater, as the money earned is spent supporting economic growth through the multiplier effect and taxation. The jobs created by new enterprises is proportionally/significantly higher than those created within established businesses
Psychological studies have sought to identify common entrepreneurial traits or characteristics. Trait theorists believe individuals have enduring, stable, personal qualities which define their character. Some traits or characteristics are more likely to be associated with entrepreneurship such as:
- High levels of creativity, innovation and motivation.
- Optimistic, self-effacing and visionary.
- Non-conforming, performing well under pressure and able to make quick decisions.
- High levels of emotional energy and resilience.
- A competitive nature, underpinned by perseverance, commitment and a competitive nature.
- Dissatisfied with the status quo, willing to take risks and tolerate ambiguity.
- Believing they can personally make a difference to the world
Locus of control theory examines individual traits considering the way in which rewards or punishments may be manifested. An internal control orientation indicates that an individual believes that their life is shaped by their own actions and decisions. An external control orientation indicates a belief that factors such as luck and fate are the main influence on life’s events. Entrepreneurs, along with business owners, often have a higher level of an internal locus of control, indicating a greater level of self-belief.
The need for achievement theory argues that some individuals have an inherent need to be successful in life and that this is a significant motivator. Such motivation is also positively associated with the willingness to take risks and tolerate ambiguity.
Theories concerning the manifestation of entrepreneurship and assessment of traits highlights the debate regarding whether entrepreneurs are born or made. There is some evidence to support how various combinations of the identified traits are more likely to be found in entrepreneurs, some of which may be the result of nature and personal development. However, many traits, for example risk aversion and optimism, are acquired from a young age and personal life experiences also shape traits such as self-efficacy and resilience. How individuals choose to respond to issues presented by their environment (such as education and business experience) also shapes this debate. Nature may provide a basic personality foundation, but this is then shaped and developed as a result of such external environmental influences.
The first challenge is to recognise a viable opportunity and if/how this opportunity reflects either product or process innovation. This requires research such as engaging with potential customers to determine if the perceived opportunity is real. Such research should also consider the way in which existing needs are satisfied, examining competing products or services. This effort can also establish the size of the potential market and the likely value of the opportunity presented. Patents searches (to identify if the idea has already been developed and registered) should also be undertaken.
If an idea is deemed to be a real opportunity, the entrepreneur should develop a business plan which should include:
- Describing the company and its legal form (e.g. sole proprietorship or limited company).
- A description of the company’s products or services and associated manufacturing/outsourcing plans. This should include product/service benefits, the potential market, the source of competitive advantage, the product/service life-cycle and any details regarding patents, copyrights and risks.
- A market analysis identifying, including demographic details, and the way in which this market has evolved and may evolve in the future.
- The company’s organisational structure and the expertise of the management team.
- Financial plans, including a breakdown of costs and financial projections/goals based on sales forecasts. This should include forecast income statements, balance statements, cash flows, planned capital expenditure and operating budgets (usually covering five years).
Such plans provide a framework for the entrepreneur to examine their business ideas whilst also establishing clear goals. This documentation also assists in raising business capital, demonstrating the viability of the concept to potential investors/lenders.
In establishing a business, an entrepreneur can consider legal forms such as:
- Sole proprietorship. This is simple to set up and the entrepreneur retains sole control but the proprietor also remains liable for all debts as there is no distinct legal entity.
- Limited company. Debts are seen as a company rather than a personal liability. This provides a framework to raise share capital, but there are associated set-up costs and control implications.
- Partnerships. These provide shared responsibility and management flexibility, but there remains an unlimited liability for partnership debts. Tax assessments are based on personal rather than corporate liabilities.
- Limited Liability Partnerships. These are separate legal identities with codified rights/responsibilities (limiting the liabilities of partners), but the accounts are a matter of public record.
Different finance sources include:
- Bootstrapping - using own resources rather than considering external investors. This could include their own unpaid labour or even free, informal support from friends and family. Entrepreneurs may obtain capital by increasing personal debt and then transferring those funds to the business.
- External Investors - a sound business plan or potential assets that can be used as security (or even just faith in the company/entrepreneur) can attract/support external investment. The can include so-called angel investors (those using private wealth in exchange for either an ownership stake, or convertible debt) and venture capitalist (often requiring the company to show a level of successful trading, as proof of concept and viability).
- Crowdfunding. Using online platforms, the company will put forward a proposal, stating the amount of money they wish to raise and the associated incentive/reward for investors. A large number of individual and unrelated investors may provide funds in order to gain the rewards, but they receive no equity stake in the company.
- Hedge funds - private funds from institutional investors and accredited individuals.
- Lines of credit from financial institutions such as banks, government, or other businesses. As the company develops a credit history, there may be increased opportunities for loans for the company, based on their trading record.
Entrepreneurship is important within the UK economy, accounting for 60% of all jobs in the private sector, and 47% of private sector revenues earned. Entrepreneurs operate by setting up new businesses based on product or process innovations, which provide a commercial opportunity. The motivations of the entrepreneurs may be financial, but they may also be based on psychological drives, and supported by sociological or anthropological factors.
Once an entrepreneur has identified an opportunity and decided to set up a business, the opportunity needs to be assessed to ensure that it is viable. This may include market research, but the development of a business plan provides a framework against which current and future viability (particularly the anticipated financial returns) may be assessed.
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