The word Entrepreneur is of French origin, literally translated as "undertaker". Drucker describes an entrepreneur as one who creates something new, something different, by changing or transmuting values.
More thoroughly, Smith & Smith define that an entrepreneur:
- Must recognize an opportunity to create value by re-deploying resources.
- Must create a strategy for gaining control over those resources.
- Must create a plan to execute change.
- Must harvest the rewards resulting from succeeding in the above.
The Essence of the Entrepreneur
I've met a lot of self-described entrepreneurs; most of us have. But analysis reveals that, in fact, very few entrepreneurs really exist. The above definition requires that the entrepreneur innovate. This innovation need not be of a technological or scientific nature. Innovation can come in capital structure, organizational structure, marketing approach, sales tactics, or customer relationship management. But the essential test of an entrepreneur is innovation.
When creating new markets, entrepreneurs are easier to recognize. Few would contest the entrepreneurial credentials of internet, biotech or communications hardware engineers. But most entrepreneurs innovate within existing markets. In this case, the entrepreneur seeks to innovate by trying something new, which she believes to be more efficient, effective, or profitable, within a competitive marketplace. Dell innovated not the personal computer itself, but instead a radically different way for customers to shop for and purchase those computers. Ikea did not innovate self-assembled furniture or the furniture retail chain store, but instead a retail chain of contemporary, highly stylish yet affordable self-assembled furniture.
By this logic it is possible to remove some self-described entrepreneurs from the bona fide group. Many, if not most small business operators are not entrepreneurs. Whether successful or a failure, few small businesses ever innovate, and their managers and founders are not entrepreneurs. More often, they are simply more knowledgeable or efficient than other large and small competitors. So even though the popular media will label a successful local restaurant owner as an "entrepreneur", she probably is not. The same is true of myriad service oriented small businesses, such as law firms, consultants, and accountants. It is entertainingly paradoxical to imagine an innovative accounting practice; at least one which doesn't land your picture in the Wall Street Journal in the most unflattering presentation.
Why all this focus on innovation? Innovation is the means by which the entrepreneur seeks to extract value from the process of initiating change. Innovation is the sole competitive advantage that the entrepreneur seeks to bestow upon venture. Other competitors can, and usually will, rapidly copy incremental improvements, such as with production efficiency or pricing. But innovation, by its very nature, is impossible to directly copy. Further, most innovations are defensible for at least some period of time, either by legal barriers such as patents, or by secrecy.
Another point about innovation is that it is intrinsically risky. It is risky because its outcomes are necessarily unknown. The entrepreneur is experimenting, with business and the market as her laboratory. And as is with experimentation, often the results are surprising. Sometimes for the better, often for the worse.
Because the entrepreneur is engaging in a risky venture, gambling on the outcomes of innovation, she must secure financial fuel from investors willing to bear considerable risks. But what does the entrepreneur have "in the game"? Certainly many entrepreneurs have both explicit and implicit money invested. But even this is not typically sufficient to convince outside investors of her sincerity. After all, an entrepreneur could quite easily accept funding, engage in research, proclaim failure, and move on to a nice corporate job with her new, unique and intense experience and training, all subsidized by the investors.
From the View of the Investor
Venture capitalists describe that for every plausible, innovative plan, they will receive many dozens or hundreds of similar plans. The entrepreneur does not have a monopoly on brilliance. Actually, there are no shortage of intelligent, innovative thinkers who visualize the very same idea, no matter how unlikely it may occur to each one individually. What sets them apart to the investor is their credible ability to deliver on that idea.
- Investment of money, time and learning by the entrepreneur, which are sunk. Sunk simply means that the entrepreneur cannot realize any return on her investments in the venture unless the venture proceeds forward and is successful. Any payoffs for the entrepreneur not tied to success undermine credibility.
- The preparation of detailed, specific planning for the venture. Usually including primary research (conducted by the entrepreneur herself), such plans must also be useless unless the venture proceeds and is successful. Obviously reusable plans, which the investor recognizes can readily be recyclable for other purposes, undermine credibility.
- Concrete, deliberate actions. Prototypes of software or products, test marketing, pilot customers all demonstrate to investors that the entrepreneur is credible. Such efforts can also only produce returns if the venture proceeds and is successful.
- Employment, income and career sacrifices. This particular topic demands further discussion. However, in brief, the entrepreneur signals strong and necessary commitment by sacrificing her career in order to pursue life as an entrepreneur.
It is that these actions are irreversible that makes them credible, not the actions themselves. Anything significant, which an entrepreneur can irreversibly engage in, signals to potential investors her credible devotion to the success of the venture.
I am an Entrepreneur...
Venture capitalists invest in entrepreneurs, not in raw ideas. They also don't invest in science projects, life-style companies, or veiled job search campaigns. Often, I will hear otherwise bright and talented people bemoan the ignorance of venture capitalists for not funding their venture idea. My very first question is, "when did you quit your job?" Of course, the answer is usually that they will quit after the venture gets funded and starts paying them salary.
Imagine you are the venture capitalist, responsible for investing tens of millions of your limited partners' money in risky new ventures. Two entrepreneurs come to you with the same idea. One is more educated, more experienced, appears smarter, has a better business plan, and even puts on a stellar presentation. The other is lesser on all those fronts, but still appears sufficiently capable. It is the latter that will receive the funding if she is credible, often solely due to her "need" for the venture to proceed. And she needs it because she quit her high paying, promising career to pursue this idea, and she'll never get back into that career without having suffered serious financial and advancement losses. Compare this to the first entrepreneur who has not quit her job, instead openly expecting the venture capitalists to provide a bridge to uninterrupted employment.
Similarly, hedging one's career can undermine credibility. The true sign of an entrepreneur is one who has genuinely and unmistakeably sacrificed their previous career track. Burning bridges. The entrepreneur must never be able to go back, at least not without significant financial, advancement, and emotional losses. Intent is also important. The entrepreneur is not someone who has lost their job or is undergoing a typical career transition, and merely seeking a venture capitalists to fund this transition.
...And You Are Not
While I was in business school, I presented during an entrepreneur's forum. Not everyone there was or claimed to be an entrepreneur, per se. Some were new venture CEOs, new venture Marketing types, or worked for venture funds. But many of us were self described entrepreneurs. I would say under half of those presenters were actually entrepreneurs. Many of the others worked "day jobs" and simply had happened upon neat, cool, insightful, or trendy ideas.
Interesting to me, however, was the fact that the venture capitalists participating all echoed the lessons of this article. I did not hear a single one indicate they would tolerate funding any venture where the entrepreneur was otherwise employed; nor would they make any commitments to fund on the contingency that the entrepreneur quit. Perhaps that was true during the dot-com bubble, but in a rational market, it is not typical.
Most curious, though, was the reaction of the audience. Only two of the entrepreneurs speaking, myself and one other, touched upon the importance of commitment. I emphasized the price of commitment, specifically, that you can "never go back", referring to one's previous career path. The audience did not want to hear this. They were largely overachieving, very intelligent corporate managers. They had visions of going solo, living the American Dream, etc. But they also had not considered the real, practical sacrifices they would have to make in order to achieve this. In fact, what most of my cohort seemed to be interested in was creating life-style companies, not entrepreneurial, innovative ventures.
I came away feeling as if I had just crashed some kind of party. Feeling like I'd just run over someone's dog. Feeling like I'd just informed dreamers that dreams end when you wake up. Feeling like a rare contrarian amongst people of equal or greater intelligence. Feeling even further driven to succeed in an even bigger way, if for no other reason than to validate my life ambitions. Prove to myself that I was right.
But, also I had been reminded of the lifetime of career I had sacrificed in order to be an entrepreneur.
That, after all, is the essence of an entrepreneur. Stubborn persistence and a willingness to go your own way.