Learn about the challenges entrepreneurs face when starting new businesses.
What is an Entrepreneur?
An entrepreneur is someone who starts a new business, taking on most of the risks while enjoying the potential rewards. The act of starting a business is called entrepreneurship.
Entrepreneurs are essential to any economy, as they use their skills and initiative to anticipate needs and introduce new ideas to the market. Successful entrepreneurship, which involves taking on the risks of launching a startup, is rewarded with profit and growth opportunities.
Why Are Entrepreneurs Important?
Entrepreneurship is one of the key resources economists consider essential for production, along with land/natural resources, labor, and capital. Entrepreneurs bring together these resources to create products or services. They typically develop a business plan, hire employees, secure resources and funding, and lead and manage the business.
Economists have long debated the definitions of “entrepreneur” and “entrepreneurship.” Though the concept of an entrepreneur has been around for centuries, early economists did not include them in formal models, assuming that everyone had perfect information and left no room for risk-taking or discovery. It wasn’t until the mid-20th century that economists seriously considered entrepreneurship in their models.
Three key thinkers contributed to this change: Joseph Schumpeter, Frank Knight, and Israel Kirzner. Schumpeter argued that entrepreneurs, not just companies, create new things in the quest for profit. Knight emphasized the entrepreneur’s role in handling uncertainty, and Kirzner saw entrepreneurship as the discovery of new opportunities.
Today, entrepreneurs face many challenges when building their companies. The three most common difficulties they mention are overcoming bureaucracy, hiring skilled workers, and securing funding.
Different Types of Entrepreneurs
Not all entrepreneurs are the same, and their goals can vary. Here are a few types of entrepreneurs:
1. Builder
Builders aim to quickly grow businesses to a large scale. These individuals often reach $5 million in revenue within two to four years and continue to grow to $100 million or more. Builders focus on building strong teams and securing top investors but may face challenges in personal and business relationships due to their intense focus on rapid growth.
2. Opportunist
Opportunistic entrepreneurs are skilled at recognizing financial opportunities, getting involved at the right time, and exiting once the business reaches its peak. They are often driven by profits and the potential for long-term income but may act impulsively in their pursuit of well-timed opportunities.
3. Innovator
Innovators are rare individuals who come up with new ideas or products. Famous innovators include Thomas Edison, Steve Jobs, and Mark Zuckerberg. They are more focused on the impact their ideas have on society than on making money. Innovators are often not as skilled at running day-to-day business operations and may leave management tasks to others.
4. Specialist
Specialists are analytical and tend to avoid risk. They have developed expertise in a particular area through education or training and often grow their business through networking and referrals. This type of entrepreneur may experience slower growth compared to builders.
4 Types of Entrepreneurship
1. Small Business
This type of entrepreneurship involves starting a business without the intention of turning it into a large company. Examples include small, local businesses like restaurants or retail shops. These entrepreneurs usually invest their own money and rely on the profits of the business for income.
2. Scalable Startup
These businesses begin with an innovative idea that has the potential to grow significantly. Companies like those in Silicon Valley are examples. Scalable startups often require large investments to expand into different markets.
3. Large Company
This involves starting a new division within an existing large company. The parent company may have opportunities to enter new markets or develop new technologies, and leadership decides to capitalize on these opportunities.
4. Social Entrepreneurship
Social entrepreneurs aim to create businesses that benefit society or the environment. They are more concerned with positive impacts than with profits.
How to Become an Entrepreneur
After retiring from her career as a professional dancer, Judi Sheppard Missett became an entrepreneur by teaching dance classes to earn extra money. She realized that many women attending her classes were more interested in losing weight than learning precise dance steps. Missett adapted her approach, trained other instructors to teach her routines, and eventually created the Jazzercise brand. Today, Jazzercise has over 8,300 locations worldwide.
Similarly, Ben Cohen and Jerry Greenfield, after completing an ice cream-making course, pooled their savings and a loan to lease a gas station in Burlington, Vermont. They purchased equipment to create unique ice cream flavors, and their business, Ben & Jerry’s, has grown to earn millions in annual revenue.
Internet companies like Google, Facebook, and their parent companies (Alphabet and Meta, respectively) have shown the significant impact entrepreneurs can have on society, making their founders incredibly wealthy.
Unlike many traditional professions, entrepreneurship doesn’t follow a clear path. What works for one entrepreneur may not work for another. However, many successful entrepreneurs follow these seven steps:
1. Ensure Financial Stability
While financial stability isn’t a strict requirement, having a stable financial foundation gives entrepreneurs more time to focus on building their businesses without worrying about running out of money.
2. Build a Diverse Skill Set
It is important to develop a wide range of skills and apply them in real-world settings. Entrepreneurs often need to be adaptable and rely on these skills in challenging situations.
3. Consume Content Across Multiple Channels
Entrepreneurs should absorb information from many different sources, including podcasts, books, articles, and lectures, to gain a broad perspective on the world.
4. Identify a Problem to Solve
Entrepreneurs need to find specific problems that their products or services can solve. This allows them to build businesses around offering solutions to these issues.
5. Solve That Problem
Adding value to a specific problem or pain point is crucial for success. Entrepreneurs should focus on solving these problems to create a successful business.
6. Network Like Crazy
Building a network of contacts is essential for success. Entrepreneurs can benefit from mentors, suppliers, financiers, and others in their industry.
7. Lead by Example
Entrepreneurs need to inspire and lead their employees. A strong leader motivates their team to perform at their best, which contributes to the company’s success.
Entrepreneurship Financing
Financing a new business is often a challenge, and many entrepreneurs rely on bootstrapping, which involves funding a business with personal savings and early sales. Other entrepreneurs seek outside investors, such as venture capitalists, angel investors, and crowdfunding.
Resources for Entrepreneurs
Entrepreneurs can seek funding through small business loans from the Small Business Administration (SBA) or by attracting angel investors or venture capitalists. Crowdfunding through platforms like Kickstarter is another option for raising money.
Bootstrapping for Entrepreneurs
Bootstrapping is when an entrepreneur funds their business using their own savings and early business profits. This approach allows entrepreneurs to maintain control over their vision but involves significant financial risk.
Small Business vs. Entrepreneurship
While small businesses and entrepreneurship have similarities, they are not the same. A small business is typically local, with limited access to resources. Entrepreneurship often begins as a small business but is aimed at disrupting markets with new ideas and seeking long-term growth.
How Entrepreneurs Make Money
Entrepreneurs aim to generate more revenue than they spend. They can increase profits through marketing, networking, and keeping costs low. Efficiency and economies of scale help boost profit margins.
How Taxes Work for Entrepreneurs
Entrepreneurs’ tax obligations depend on their business structure, whether it’s a sole proprietorship, partnership, corporation, or LLC. Each structure has different tax rules, and entrepreneurs can often deduct business expenses to lower their tax bills.
Seven Key Traits of Entrepreneurs
What do successful entrepreneurs tend to share? They are often hardworking individuals who jump into projects they are deeply passionate about.
The saying “find a way to get paid for doing what you love” highlights how passion is one of the most important traits entrepreneurs need. Every advantage helps when pursuing entrepreneurial success.
The dream of being your own boss and earning significant profits is appealing, but the risks of starting your own business are just as real. There’s no guaranteed income, benefits provided by employers disappear, and when the business loses money, it’s your personal finances that take the hit, not a corporation’s. However, following a few reliable principles can help reduce the risks. Below are some characteristics that are crucial for becoming a successful entrepreneur.
1. Versatility
When you’re starting out, it’s important to personally handle sales and interact with customers whenever you can. Direct contact with customers gives you the best feedback about what they like and what can be improved. If you can’t always do this yourself, train your employees to regularly ask for customer feedback. This not only empowers your customers but also increases the chance they will recommend your business to others.
Answering the phone personally is a big advantage for home-based entrepreneurs over larger companies. In a world where people are tired of automated systems and menus, speaking to a real person can attract new customers and make existing ones feel appreciated. Given that a large portion of business comes from repeat customers, this is key.
At the same time, while customers value personal attention, they also expect a professional website. Even if your business isn’t in a tech field, entrepreneurs should use the internet to communicate their message. A small startup can have a better website than a company worth millions. Just be sure to include a phone number where a real person can be reached.
2. Flexibility
Most successful business owners don’t find the perfect approach right away. Their ideas usually evolve over time. Whether you’re adjusting a product design or changing the menu at a restaurant, finding what works best takes time and adjustments.
Take the example of former Starbucks CEO Howard Schultz, who once thought playing Italian opera in his coffee shops would enhance the experience. Customers didn’t like it, so Schultz switched gears and replaced the music with comfortable chairs, which worked much better.
3. Financial Awareness
A steady flow of cash is essential for any new business. It’s needed for buying inventory, paying rent, maintaining equipment, and promoting the business. Keeping track of your cash flow carefully and regularly is crucial, especially since most new businesses don’t turn a profit in the first year. Setting money aside for this helps reduce the risk of running out of funds. It’s also important to keep personal and business expenses separate and avoid using business money for personal living costs.
It’s smart to pay yourself enough to cover your essential needs, but not much more, especially if you have investors. This may require sacrifices that could strain relationships with family members who need to adapt to a lower standard of living. It’s best to discuss these challenges early on and make sure loved ones understand the commitment.
4. Resilience
Running a business is tough, especially when you’re starting from scratch. It takes a lot of time, dedication, and sometimes dealing with failure. A successful entrepreneur needs resilience to overcome these challenges. Every time you face rejection or failure, you have to keep moving forward.
Starting a business is a learning process. Like any learning curve, it can be frustrating—especially when your finances are at stake. But persistence through tough times is key to success.
5. Focus
Staying focused is just as important as being resilient. It’s easy to get distracted, doubt your ideas, or lose sight of your goals. But a successful entrepreneur remembers why they started and stays on track to see their vision come to life.
6. Business Smarts
Being able to manage money and understand financial statements is critical when running a business. Knowing your revenue, expenses, and how to adjust them is crucial. Keeping a tight grip on cash will help your business survive.
A solid business strategy is also important. Understanding your market, competitors, and your strengths and weaknesses will help you navigate the difficulties of running a business.
7. Communication Skills
Being able to communicate effectively is important in almost all areas of life, and it’s especially true in business. Whether you’re pitching your idea to investors, sharing your plans with employees, or negotiating with suppliers, strong communication is essential.
The Role of Entrepreneurs in the Economy
Economists describe entrepreneurs as key players in a capitalist system. They take on the responsibility of directing resources toward new profit opportunities. Entrepreneurs help clear uncertainty in the market by making decisions and taking risks. Their actions drive innovation, create jobs, and fuel economic growth.
In 2023, there were about 33.2 million small businesses in the United States, showcasing the importance of entrepreneurs in the economy.
How Entrepreneurs Boost Economies
Entrepreneurs not only create businesses, but they also help grow the economy in several ways. They introduce new products and services, which creates jobs and leads to further growth. For example, when technology companies began popping up in India in the 1990s, they led to the creation of call centers and hardware support businesses as well.
Entrepreneurs also contribute to national income. Existing companies may reach a point where their income plateaus, but new businesses create new markets and new wealth. This in turn raises employment and wages, which contributes to a nation’s tax base and allows for more government spending on public projects.
Entrepreneurs can bring about social change too. Their innovations can make older methods and systems obsolete. Smartphones and their apps, for instance, have changed how people work and play worldwide.
Many entrepreneurs invest in their communities as well, supporting charities and other causes. A well-known example is Bill Gates, who has used his wealth for education and health initiatives.
Entrepreneurial Ecosystems
Entrepreneurship is a vital driver of innovation and growth, so governments often work to foster entrepreneurial ecosystems. These ecosystems might include entrepreneurs, government support programs, venture capitalists, and non-government groups such as business incubators or entrepreneur associations. Silicon Valley is often seen as a prime example of a successful entrepreneurial ecosystem.
Questions for Aspiring Entrepreneurs
If you’re thinking about becoming an entrepreneur, it’s important to ask yourself some critical questions:
– Do you have the mindset to take on the world on your terms?
– Can you dedicate enough time to your venture?
– Do you have an exit plan in case things don’t work out?
– Are your loved ones prepared for the sacrifices you might have to make?
– Do you have a strong network and access to mentors for advice?
Understanding these aspects will help set you up for success in your entrepreneurial journey.
