Entrepreneurship

EntrepreneurshipEntrepreneurship is the recognition and exploitation of market opportunities. Recognizing that an opportunity exists is not enough; to be entrepreneurial involves the pursuit of that opportunity. Therefore, being an entrepreneur involves both cognition and behavior. As a state of mind, entrepreneurship is valuable within existing organizations as well as in the establishment of new ventures. Sometimes referred to as creative destruction, entrepreneurship has been viewed as the engine of progress in capitalistic societies and is inseparably linked to innovation and competitive advantage. Evidence of the importance of entrepreneurship exists in public policy initiatives that encourage new business development and also within established organizations that actively encourage the development and pursuit of new opportunities.

Entrepreneurs possess the ability to identify and capitalize on opportunities to start new business ventures, whereas intrapreneurs apply these same skills to venture creation within an existing organization. Often when one speaks of entrepreneurs, images of individuals such as Bill Gates, Oprah Winfrey, and Donald Trump come to mind. Yet in reality, these cases are more the exception than the rule. In fact, research has shown that it is virtually impossible to “stereotype” the typical entrepreneur. What is common to entrepreneurs is their proclivity to recognize and capitalize on market opportunities. Not all entrepreneurs become successful, rich, and famous. What prompts some people but not others to become entrepreneurs and what makes some people but not all successful have intrigued businesspeople and academics alike. The past 10 years have seen a proliferation of research dedicated specifically to understanding entrepreneurs and their careers.

Distinguishing characteristics that separate entrepreneurs from non-entrepreneurs is an important part of gaining an understanding of entrepreneurship as a career. Initially, these efforts included studies of demographic characteristics and personality traits. Demographic characteristics thought to distinguish entrepreneurs from others include socioeconomic indicators, educational background, and influences in an individual’s family of origin (e.g., parents/siblings owned businesses). In general, entrepreneurs tend to come from middle- to upper-class families with one or more parent considered an entrepreneur, self-employed, or owning his or her own business. Educational levels and backgrounds of entrepreneurs vary, and therefore the role that education plays in entrepreneurial career choice is inconclusive.

Other research focused on individual traits, such as need for achievement, need for autonomy, internal locus of control (individuals who believe they have control over their own lives), gender identity (masculinity versus femininity), proactive personality (individuals who take action to influence their environments), risk-taking propensity, and tolerance for ambiguity. While some entrepreneurs are likely to exhibit some of these personality traits, there is no conclusive evidence to suggest that only entrepreneurs exhibit these traits, and therefore personality traits alone do not seem to distinguish entrepreneurs from others.

More recent research suggests that some people become entrepreneurs not because they have distinct traits but because they perceive situations and opportunities differently than others perceive them. More specifically, cognitive factors for entrepreneurs differ from those of non-entrepreneurs. Although there are many cognitive factors that affect thinking, in particular the perception of risk, several specific cognitive biases have been suggested to influence risk perception as they relate to entrepreneurs: overconfidence, illusion of control, and belief in the law of small numbers.

Overconfidence is the belief that one knows all there is to know about a particular topic. Recent research has shown that entrepreneurs may be more susceptible to overconfidence than are other individuals and are more optimistic in their assessments of business situations. Overconfident individuals are less likely to perceive risk in business situations because they believe they know what they need to know. More specifically, entrepreneurs are more likely than non-entrepreneurs to overestimate the accuracy of their predictions of uncertain events. For example, new competitors surface even in the mature, uncertain environment of the airline industry because entrepreneurs believe they have an inside understanding of how the industry works.

Illusion of control refers to an overestimation of one’s skills in situations and a belief that one’s skills can control outcomes. Like overconfidence, an illusion of control also decreases risk perception. This suggests that individuals starting ventures might not acknowledge that certain factors important to a venture’s success are beyond their control. Individuals who believe that their skills are the primary determinant of the success of their businesses have strong illusions of control.

Belief in the law of small numbers occurs when an individual uses a limited number of informational inputs (a small sample of information) to draw firm conclusions. Some entrepreneurs have a tendency to use limited information in decision making. Entrepreneurs typically find themselves in circumstances of information overload, high uncertainty, novel situations, strong emotions, time pressure, and fatigue. In dealing with these tense circumstances, entrepreneurs may (a) focus on limited amounts of information to gain support for risky actions and (b) focus on recent success stories or positive outcomes that relate to the situation at hand. Generalizing from a small sample can effectively reduce the perception of risk for a particular opportunity.

In addition to the personal characteristics that help explain why some individuals become entrepreneurs and others do not, a number of career factors also play into this phenomenon. Entrepreneurs prefer to be innovative or to accomplish something new. In addition, they are intrinsically and extrinsically motivated. Intrinsic rewards such as autonomy, personal challenge, learning and growth, and the ability to influence organizations are appealing to entrepreneurs. Extrinsically, financial independence and success, status, and recognition drive individuals to choose entrepreneurial careers.

In general, individuals often choose careers they believe will match their talents, skills, abilities, needs, and preferences. For example, individuals who believe they have strong analytical skills and prefer to work with numbers seek jobs or careers that allow them to do so. Entrepreneurs are no exception. Many entrepreneurs attribute their prior work experience as a major influence on their desire to start new ventures. A major drive for many entrepreneurs is the desire to create something new. Therefore, entrepreneurs are likely to seek opportunities to explore and nurture their preferences for creating new products, services, or businesses.

The image of an entrepreneur as a rugged individualist who forges his or her own path is another myth about entrepreneurship. One key and consistent research finding is that networks are critical to entrepreneurs and to the success of new ventures. Networks and the social capital inherent in them are essential to entrepreneurship. Social capital, sometimes referred to as network resources, consists of the goodwill that can be obtained from the web of relationships developed by individuals and can be mobilized to facilitate action. Social capital theory proposes that networks of relationships are a valuable resource for the conduct of social affairs and economic action. It has been applied to individuals, familial relationships, communities, and organizations. Social capital is a resource that brings a higher rate of return on investments and creates an advantage by fostering entrepreneurial opportunities for some and not for others.

Not only do individual, personal, historical, and psychological factors influence the decision to become an entrepreneur, but contextual factors also contribute to this type of career. In the following sections, we describe two categories of entrepreneurship that derive from both individual characteristics and environmental circumstances: serial entrepreneurs and second-career entrepreneurs.

Although the concept of serial entrepreneurs has come into greater prominence in the past few years, certainly there have always been particular groups of people who are seemingly addicted to starting one business after another. Recently, however, with the prominence of venture capital firms and the popularity of start-ups, particularly in the technology sector, more individuals are getting into business with the idea that they will exit sooner, rather than later, and start other businesses. Serial entrepreneurship is an identifiable occurrence and extends into many different industries. Approximately 43 percent of the chief executives of current Inc. 500 companies indicate their intentions to start other companies after they leave the ones they are running now.

Some make the distinction between serial entrepreneurs and portfolio entrepreneurs. The former group of people creates and becomes involved in a business; that is, they manage it, improve it, sell it, and then move on to another business, whereas the latter group operates several businesses simultaneously.

Despite the semantic distinction, both types of entrepreneurs get tremendous personal satisfaction out of taking an idea to market and making it happen. They are more devoted to the creation of something than to the actual business idea. Once they establish a new venture, it is almost as though boredom sets in and they are ready for the next challenge. Serial entrepreneurs focus on the creation of something new. They possess the drive to overcome obstacles, the readiness to take risks, and the need for personal prominence in whatever is accomplished.

Second-career entrepreneurs are sometimes referred to as older entrepreneurs, senior entrepreneurs, and third-age entrepreneurs. All terms refer to individuals who decide to start their own companies after they have been employees for most of their professional lives. Demographic profiles in the United States point to the fact that the number of individuals between the age of 45 and 64 will grow significantly by the year 2006. Many of these people will likely begin new ventures in this life stage. A recent survey of the American Association of Retired Persons (AARP) found that 80 percent of this group planned to work beyond retirement age and 17 percent intended to start their own businesses.

Corporate layoffs, shifting values (i.e., flexibility in working hours to pursue family obligations and/or nonwork interests) and rising life expectancy have contributed to this phenomenon. Aside from these specific factors, reaching midlife is historically a time of change for people, and the midlife transition often spurs adults to change careers. Individuals reach midlife and realize that the dreams and passions of youth have been subjugated to economic obligations and early career choices. Facing the reality that they still have half a lifetime to live provides individuals with the courage to venture out on their own and pursue their passions and interests. Many of these individuals launch their ventures from their homes.

Technology has facilitated a proliferation of home-based businesses to accommodate the lifestyles of second-career entrepreneurs. Powerful software applications combined with the Internet technology have allowed home-based businesses to compete with larger firms. Home offices can be furnished and wired for under $5,000, a relatively small amount for starting a new venture. The Internet allows for reaching a potentially global customer base that brings home-based businesses into a competitive realm. While second-career entrepreneurs (like first-career and serial entrepreneurs) are most often men, the proportion of self-employed women increases from 6 percent among women age 25 to 54, to 9 percent among women age 55 to 64, and 16 percent for employed women 65 and older. Since women are more likely to be primary caretakers of children, they have in the past, been less likely to pursue entrepreneurial opportunities until reaching midlife.

In the United States, this trend seems to be changing. Many younger women, particularly those with school-age children, are giving up corporate jobs to start home-based businesses. These career choices are a response to the “glass ceiling” in the corporate world and the need for more flexible work arrangements. More than likely, many more women will become second-career entrepreneurs much earlier in life than did their older counterparts.

As of 2002, women were responsible for 6.5 million businesses in the United States, a 20 percent increase since 1997. The current state of women’s business ownership in the United States is quite strong. The number of women-owned businesses continues to grow at twice the rate of all U.S. firms, and these firms are increasing in economic influence. One in 18 women in the United States is a business owner. Prior to 2002, most of the companies started by women were in the service sector, including industries such as health care, professional services, real estate, and finance. Since 2002, women-owned businesses have been expanding into nontraditional industries, such as construction, manufacturing, agriculture, and transportation. Growth rates are higher than average among women-owned firms with $1 million or more in sales and 100 or more employees. Ongoing studies that focus on the characteristics of women entrepreneurs indicate that women take substantial business risks, use technology to achieve growth, and seek advice from multiple sources.

Despite the remarkable growth in women-owned businesses, most women-owned firms are very small— with no employees or fewer than 10 employees—and continue to face challenges, including access to capital, access to markets, access to training and technical assistance, access to networks, and the need for legitimacy, in other words, to be taken seriously as business owners, employers, and contributors to economic growth.

Minorities are another fast-growing group of U.S. entrepreneurs. Sometimes starting businesses as a response to the glass ceiling encountered in corporate America, minority entrepreneurs account for 3.9 million businesses, or 14 percent of the total number of businesses in the United States. Of this number, 39.5 percent of businesses are Hispanic owned; 30.0 percent are Asian owned; 27.1 percent are African American owned; and 6.5 percent are Native American owned. Most Hispanic-owned businesses are in administration and support, waste management, health care, and construction industries. African American ventures are primarily health care, retail, and other service-type businesses.

Challenges of minority entrepreneurs are similar to those of women, with limited access to financial resources being the number 1 reason for minority business failures. Most minority business owners seek financing through family rather than seeking commercial capital opportunities. With the entrepreneurial landscape changing, women and minority entrepreneurs are more able to rely on role models and mentors who can offer access to financial and market resources. As with the factors that influence second-career entrepreneurs, the Internet, because it tends to be gender and race neutral, has opened markets and opportunities to minority and women entrepreneurs that were previously closed.

Like the American economy, the economy of the European Union relies heavily on the “creative destruction” of entrepreneurship as it continues to evolve toward more capitalistic principles. Small-and medium-sized enterprises (i.e., employing 10 or fewer employees) constitute 90 percent of the private businesses in Europe (28 countries of the European Economic Area plus candidate countries to the European Union). The challenges of underrepresented populations of entrepreneurs (women, ethnic minorities, and young people) in Europe are similar to those faced by their American counterparts. Government-sponsored programs that help encourage and fund women and minorities with small businesses are in place in Europe, as they are in the United States.

Finally, no discussion of entrepreneurship would be complete without a description of social entrepreneurs. A social entrepreneur crafts innovative, long-term solutions to social problems. Just as traditional entrepreneurs create and transform whole industries, social entrepreneurs act as societal change agents, recognizing and exploiting opportunities others miss in order to advance sustainable solutions that create social value. Unlike traditional entrepreneurs, social entrepreneurs primarily seek to generate “social value” rather than profits. And unlike the work of the majority of nonprofit organizations, their work targets long-term reform rather than small-scale change.

The concept of social entrepreneurship has been in existence for a long time but has recently reached a new level of prominence as a field of study and career choice. The social sector has increasingly relied on the business skills of entrepreneurs to increase awareness and generate funding. Mission-based businesses have traditionally been nonprofit organizations. The marriage of solid entrepreneurial principles and the need to effect sweeping societal change have resulted in the transformation of many societies, particularly in developing nations. The trend to making money and contributing to the social good continues to increase, and as it does, so will career opportunities for social entrepreneurs.

In sum, entrepreneurship as a career alternative is becoming more and more popular across age, gender, and ethnic origin. Being an entrepreneur is not limited to certain personality types or stereotypes; there is possibly an entrepreneurial spirit in all of us. As the global economy grows and changes, there are more and more opportunities for individuals to become entrepreneurs and adopt careers that fit their lifestyles. Entrepreneurship is a vital part of any national economy.

See also:

References:

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