What Is an Entrepreneur?

An entrepreneur is an individual who creates a new business, 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.

Entrepreneurs play a key role in any economy, using the skills and initiative necessary to
anticipate needs and bringing good new ideas to market. Entrepreneurship that proves to
be successful in taking on the risks of creating a startup is rewarded with profits, fame,
and continued growth opportunities. Entrepreneurship that fails results in losses and less
prevalence in the markets for those involved.

KEY TAKEAWAYS

 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.
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Entrepreneur
How Entrepreneurship Works
Entrepreneurship is one of the resources economists categorize as integral to production,
the other three being land/natural resources, labor, and capital. An entrepreneur combines
the first three of these to manufacture goods or provide services. They typically create
a business plan, hire labor, 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:

1. Overcoming bureaucracy
2. Hiring talent
3. 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 flavored ice
cream for the local market.2  Today, Ben & Jerry’s hauls in millions in annual revenue.

Although the "self-made man" (or woman) 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, fka Google (GOOG), and
Facebook (FB), both of which have made their founders wildly wealthy, have made
people enamored 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 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 on 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 but a few.3

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. 3  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 healthy 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.

Entrepreneurship Financing
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 labor
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.

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.

 
There are many benefits entrepreneurs can achieve through taxes, such as deducting their
home office and utilities, mileage for business travel, advertising, and travel expenses.

C-Corporation: A C-corporation is a separate legal entity and has separate taxes filed
with the IRS from the entrepreneur. The business income will be taxed at the corporate
tax rate rather than the personal income tax rate.
Limited Liability Company (LLC) or S-Corporation: These two options are taxed in
the same manner as a C-corporation but usually at lower amounts.

7 Characteristics of Entrepreneurs
What else do entrepreneurial success stories have in common? They invariably involve
industrious people diving into things they’re naturally passionate about.

Giving credence to the adage, “find a way to get paid for the job you’d do for free,”
passion is arguably the most important component startup business owners must have,
and every edge helps.

While the prospect of becoming your own boss and raking in a fortune is alluring to
entrepreneurial dreamers, the possible downside to hanging one’s own shingle is vast.
Income isn’t guaranteed, employer-sponsored benefits go by the wayside, and when your
business loses money, your personal assets can take a hit; not just a corporation’s bottom
line. But adhering to a few tried and true principles can go a long way in diffusing risk.
The following are a few characteristics required to be a successful entrepreneur.

1. Versatile
When starting out, it’s essential to personally handle sales and other customer
interactions whenever possible. Direct client contact is the clearest path to obtaining
honest feedback about what the target market likes and what you could be doing better. If
it’s not always practical to be the sole customer interface, entrepreneurs should train
employees to invite customer comments as a matter of course. Not only does this make
customers feel empowered, but happier clients are more likely to recommend businesses
to others.

Personally answering phones is one of the most significant competitive edges home-
based entrepreneurs hold over their larger competitors. In a time of high-tech backlash,
where customers are frustrated with automated responses and touch-tone menus, hearing
a human voice is one surefire way to entice new customers and make existing ones feel
appreciated; an important fact, given that some 80% of all business is generated from
repeat customers.

Paradoxically, while customers value high-touch telephone access, they also expect a
highly polished website. Even if your business isn’t in a high-tech industry, entrepreneurs
still must exploit internet technology to get their message across. A startup garage-based
business can have a superior website than an established $100 million company. Just
make sure a live human being is on the other end of the phone number listed.

2. Flexible
Few successful business owners find perfect formulas straight out of the gate. On the
contrary: ideas must morph over time. Whether tweaking product design or altering food
items on a menu, finding the perfect sweet spot takes trial and error.

Former Starbucks Chair and CEO Howard Schultz initially thought playing Italian opera
music over store speakers would accentuate the Italian coffeehouse experience he was
attempting to replicate. But customers saw things differently and didn’t seem to like arias
with their espressos. As a result, Schultz jettisoned the opera and introduced comfortable
chairs instead.

3. Money Savvy
Through the heart of any successful new business, a venture beats the lifeblood of steady
cash flow, which is essential for purchasing inventory, paying rent, maintaining
equipment, and promoting the business. The key to staying in the black is rigorous
bookkeeping of income versus expenses. And since most new businesses don’t make a
profit within the first year, by setting money aside for this contingency, entrepreneurs can
help mitigate the risk of falling short of funds. Related to this, it’s essential to keep
personal and business costs separate, and never dip into business funds to cover the costs
of daily living.
Of course, it’s important to pay yourself a realistic salary that allows you to cover
essentials, but not much more; especially where investors are involved. Of course, such
sacrifices can strain relationships with loved ones who may need to adjust to lower
standards of living and endure worry over risking family assets. For this reason,
entrepreneurs should communicate these issues well ahead of time, and make sure
significant loved ones are spiritually on board.

4. Resilient
Running your own business is extremely difficult, especially getting one started from
scratch. It requires a lot of time, dedication, and failure. A successful entrepreneur must
show resilience to all the difficulties on the road ahead. Whenever they meet with failure
or rejection they must keep pushing forward.

Starting your business is a learning process and any learning process comes with a
learning curve, which can be frustrating, especially when money is on the line. It's
important never to give up through the difficult times if you want to succeed.

5. Focused
Similar to resilience, a successful entrepreneur must stay focused and eliminate the noise
and doubts that come with running a business. Becoming sidetracked, not believing in
your instincts and ideas, and losing sight of the end goal is a recipe for failure. A
successful entrepreneur must always remember why they started the business and remain
on course to see it through.

6. Business Smart
Knowing how to manage money and understanding financial statements are critical for
anyone running their own business. Knowing your revenues, your costs, and how to
increase or decrease them, respectively, is important. Making sure you don't burn through
cash will allow you to keep the business alive.
Implementing a sound business strategy, knowing your target market, your competitors,
your strengths and weaknesses, will allow you to maneuver the difficult landscape of
running your business.

7. Communicators
Successful communication is important in almost every facet of life, regardless of what
you do. It is also of the utmost importance in running a business. From conveying your
ideas and strategies to potential investors to sharing your business plan with your
employees to negotiating contracts with suppliers all require successful communication.

Types of Entrepreneurs
Not every entrepreneur is the same and not all have the same goals. Here are a few types
of entrepreneurs:

Builder
Builders seek to create scalable businesses within a short time frame. Builders typically
pass $5 million in revenue in the first two to four years and continue to build up until
$100 million or beyond. These individuals seek to build out a strong infrastructure by
hiring the best talent and seeking the best investors. They have temperamental
personalities that are suited to the fast growth they desire but can make personal and
business relationships difficult.4

Opportunist
Opportunistic entrepreneurs are optimistic individuals with the ability to pick out
financial opportunities, getting in at the right time, staying on board during the time of
growth, and exiting when a business hits its peak.

These types of entrepreneurs are concerned with profits and the wealth they will build, so
they are attracted to ideas where they can create residual or renewal income. Because
they are looking to find well-timed opportunities, opportunistic entrepreneurs can be
impulsive.4

Innovator
Innovators are those rare individuals that come up with a great idea or product that no one
has thought of before. Think of Thomas Edison, Steve Jobs, and Mark Zuckerberg. These
individuals worked on what they loved and found business opportunities through that.

Rather than focusing on money, innovators care more about the impact that their products
and services have on society. These individuals are not the best at running a business as
they are idea-generating individuals, so often they leave the day-to-day operations to
those more capable in that respect.4

Specialist
These individuals are analytical and risk-averse. They have a strong skill set in a specific
area obtained through education or apprenticeship. A specialist entrepreneur will build
out their business through networking and referrals, resulting in slower growth than a
builder entrepreneur.4

4 Types of Entrepreneurship
As there are different types of entrepreneurs, there are also different types of businesses
they create. Below are the main different types of entrepreneurship.

Small Business Entrepreneurship

Small business entrepreneurship is the idea of opening a business without turning it into a
large conglomerate or opening many chains. A single-location restaurant, one grocery
shop, or a retail shop to sell your handmade goods would all be an example of small
business entrepreneurship.
These individuals usually invest their own money and succeed if their business turns a
profit, which they live off of. They don't have outside investors and will only take a loan
if it helps continue the business.

Scalable Startup
These are companies that start with a unique idea; think Silicon Valley. The hopes are to
innovate with a unique product or service and continue growing the company,
continuously scaling up as time moves on. These types of companies often require
investors and large amounts of capital to grow their idea and reach multiple markets.

Large Company
Large company entrepreneurship is a new business division created within an existing
company. The existing company may be well placed to branch out into other sectors or it
may be well placed to become involved in new technology.

CEOs of these companies either foresee a new market for the company or individuals
within the company generate ideas that they bring to senior management to start the
process.

Social Entrepreneurship
The goal of social entrepreneurship is to create a benefit to society and humankind. They
focus on helping communities or the environment through their products and services.
They are not driven by profits but rather by helping the world around them.

Entrepreneurs and the Economy

In economist-speak, an entrepreneur acts as a coordinating agent in a capitalist economy.
This coordination takes the form of resources being diverted toward new potential profit
opportunities. The entrepreneur moves various resources, both tangible and intangible,
promoting capital formation.
In 2020, there were 31.7 million small businesses in the United States. 5
In a market full of uncertainty, it is the entrepreneur who can actually help clear up
uncertainty, as they make judgments or assume the risk. To the extent that capitalism is a
dynamic profit-and-loss system, entrepreneurs drive efficient discovery and consistently
reveal knowledge.

Established firms face increased competition and challenges from entrepreneurs, which
often spurs them toward research and development efforts as well. In technical economic
terms, the entrepreneur disrupts the course toward steady-state equilibrium.

How Entrepreneurship Helps Economies

Nurturing entrepreneurship can have a positive impact on an economy and a society in
several ways. For starters, entrepreneurs create new businesses. They invent goods and
services, resulting in employment, and often create a ripple effect, resulting in more and
more development. For example, after a few information technology companies began in
India in the 1990s, businesses in associated industries, like call center operations and
hardware providers, began to develop too, offering support services and products.

Entrepreneurs add to the gross national income. Existing businesses may remain confined
to their markets and eventually hit an income ceiling. But new products or technologies
create new markets and new wealth. And increased employment and higher earnings
contribute to a nation’s tax base, enabling greater government spending on public
projects.

Entrepreneurs create social change. They break tradition with unique inventions that
reduce dependence on existing methods and systems, sometimes rendering them obsolete.
Smartphones and their apps, for example, have revolutionized work and play across the
globe.
Entrepreneurs invest in community projects and help charities and other non-profit
organizations, supporting causes beyond their own. Bill Gates, for example, has used his
considerable wealth for education and public health initiatives.

Entrepreneurial Ecosystems
There is research that shows high levels of self-employment can stall economic
development: Entrepreneurship, if not properly regulated, can lead to unfair market
practices and corruption, and too many entrepreneurs can create income inequalities in
society. Overall, though, entrepreneurship is a critical driver of innovation and economic
growth. Therefore, fostering entrepreneurship is an important part of the economic
growth strategies of many local and national governments around the world.

To this end, governments commonly assist in the development of entrepreneurial

ecosystems, which may include entrepreneurs themselves, government-sponsored
assistance programs, and venture capitalists. They may also include non-government
organizations, such as entrepreneurs' associations, business incubators, and education
programs.

For example, California's Silicon Valley is often cited as an example of a well-

functioning entrepreneurial ecosystem. The region has a well-developed venture capital
base, a large pool of well-educated talent, especially in technical fields, and a wide range
of government and non-government programs fostering new ventures and providing
information and support to entrepreneurs.

Questions for Entrepreneurs

Embarking on the entrepreneurial career path to “being your own boss” is exciting. But
along with all your research, make sure to do your homework about yourself and your
situation.

A Few Questions to Ask Yourself:

  Do I have the personality, temperament, and mindset of taking on the world on my
own terms?
 Do I have the required ambiance and resources to devote all my time to my
venture?
 Do I have an exit plan ready with a clearly defined timeline in case my venture
does not work?
 Do I have a concrete plan for the next "x" number of months or will I face
challenges midway due to family, financial, or other commitments? Do I have a
mitigation plan for those challenges?
 Do I have the required network to seek help and advice as needed?
 Have I identified and built bridges with experienced mentors to learn from their
expertise?
 Have I prepared the rough draft of a complete risk assessment, including
dependencies on external factors?
 Have I realistically assessed the potential of my offering and how it will figure in
the existing market?
 If my offering is going to replace an existing product in the market, how will my
competitors react?
 To keep my offering secure, will it make sense to get a patent? Do I have the
capacity to wait that long?
 Have I identified my target customer base for the initial phase? Do I have
scalability plans ready for larger markets?
 Have I identified sales and distribution channels?

Questions That Delve into External Factors:

 Does my entrepreneurial venture meet local regulations and laws? If not feasible
locally, can I and should I relocate to another region?
  How long does it take to get the necessary license or permissions from concerned
authorities? Can I survive that long?
 Do I have a plan about getting the necessary resources and skilled employees, and
have I made cost considerations for the same?
 What are the tentative timelines for bringing the first prototype to market or for
services to be operational?
 Who are my primary customers?
 Who are the funding sources I may need to approach to make this big? Is my
venture good enough to convince potential stakeholders?
 What technical infrastructure do I need?
 Once the business is established, will I have sufficient funds to get resources and
take it to the next level? Will other big firms copy my model and kill my
operation?

Frequently Asked Questions about Entrepreneurship

What Does It Mean to Be an Entrepreneur?
An entrepreneur is an individual who takes the risk to start their own business based on
an idea they have or a product they have created while assuming most of the risks and
reaping most of the rewards of the business.

What Is the Best Definition of Entrepreneurship?

Entrepreneurship is the process of setting up a business, taking it from an idea to
realization.

What Are the 4 Types of Entrepreneurs?

Small business, scalable startup, large company, and social.

What Are the 7 Characteristics of Entrepreneurs?

Versatile, resilient, flexible, money-savvy, business smart, focused, and communicators.
The Bottom Line
An entrepreneur is an individual who takes an idea or product and creates a business, a
process known as entrepreneurship. Creating a business requires a lot of work and
dedication, which not everyone is cut out for. Entrepreneurs are highly motivated risk-
takers that have a vision and sacrifice a lot to achieve that vision.

Entrepreneurs enter the market because they love what they do, believe their product will
have a positive impact, and hope to make profits from their efforts. The steps
entrepreneurs take fuel the economy; they create businesses that employ people and make
products and services that consumers buy.