Not All Business Owners Are Entrepreneurs

Andrew
Andrew

What is entrepreneurship anyway? Various definitions have been offered for this concept, but there is no one definitive answer. As opposed to the common misconception, entrepreneurship is not just starting and running your own business. The word “entrepreneur” is often used interchangeably with “business owner,” but the two are not the same. Being an entrepreneur involves much more than that. Imagine that you run a multi-generational family business that has been in operation for decades. The products you sell are known, your customers return, and your revenue is stable and relatively predictable. Would you call yourself an entrepreneur based on these conditions? Well, there are a few diverging opinions on this question. Business people running stable businesses once assumed they were entrepreneurs without question. In fact, if we take a step back and look at the bigger picture, it isn’t necessarily the case.

Let’s begin by defining what an entrepreneur is. Entrepreneurship is defined as follows by Eric Ries, the founder of the Lean Startup movement:

Anyone who is creating a new product or business under conditions of extreme uncertainty is an entrepreneur whether he or she knows it or not and whether working in a government agency, a venture-backed company, a nonprofit, or a decidedly for-profit company with financial investors.

Startups and entrepreneurs are broader concepts than you might think. Startups and entrepreneurs can be found everywhere, regardless of where they are located or what setting they are in. They can be a two-person company founded in a garage or a multimillion-dollar project embedded within a well-established company. Eric writes: “The concept of entrepreneurship includes anyone who works within my definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty.”

There are at least three essential takeaways from his definition.

  1. A must-have ingredient for entrepreneurship is novelty. An entrepreneur works on something unique that didn’t exist before.
  2. Entrepreneurship involves the rigorous management of risk and uncertainty. Throughout their entrepreneurial journey, they face many “unknown unknowns”. They often don’t know whether they can build the product they envision (market risk); they don’t know if customers will buy it (customer risk); and they are also uncertain whether they can build a successful business around the product (market risk).
  3. Startups are unique environments in which entrepreneurs operate.

A Word of Caution on Entrepreneurial Risk-Taking

Entrepreneurship is commonly associated with taking extreme risks against the odds. Although entrepreneurship often involves high-risk situations, it need not be riskier than any other kind of business activity. As management guru Peter Drucker puts it:

Entrepreneurship is “risky” mainly because so few of the so-called entrepreneurs know what they are doing. They lack the methodology. They violate elementary and well-known rules.- Peter Drucker, innovation and entrepreneurship

It is a deeply resonant viewpoint with Eric Ries‘. As he writes, entrepreneurship involves applying certain kinds of management principles to situations of extreme uncertainty.

Entrepreneurship does not mean taking extreme risks and playing against the odds. It is more about managing risk, being aware of it, trying to eliminate uncertainty as much as possible, and turning unknowns into knowns, hypotheses, and guesses into facts.

Defining Startups

Let’s check out what Steve Blank thinks about entrepreneurship, since we’re talking hypotheses and guesses here.

According to Blank, a startup is a temporary organization in search of a scalable, repeatable, profitable business model.”

Startups are temporary organizations that either grow into established companies or run out of resources and die.

In addition, startups are in “search mode”. It is common for startups to have no idea who their customers are and what they are building exactly. Too often, they don’t have a clear understanding of their pricing, channel, and positioning strategies. Initially, the founders’ vision was based mainly on guesses and hypotheses. A rigorous management process (called customer development) can help us turn hypotheses into facts and guesses into actual customer understanding. The goal of the process is to find a repeatable and scalable business model.

Not Every Business Owner is an Entrepreneur

The notion that entrepreneurship goes hand in hand with uncertainty and novelty is not a new one. In his 1985 book, Innovation and Entrepreneurship, extraordinary management guru, Peter Drucker reached a similar conclusion.

According to Drucker, the term entrepreneur was coined by the French economist J. B. Say around 1800. Say referred to entrepreneurship as the activity that “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield”. However, 200 years have passed since this definition, and there is confusion regarding the meaning of entrepreneurship today.

In the public discourse, an entrepreneur is often referred to as someone who starts his own her own (usually small) business. However, not all business owners are created equal; not everyone who owns a business can be considered an entrepreneur. Peter Drucker writes the following:

“(…)not every new small business is entrepreneurial or represents entrepreneurship. The husband and wife who open another delicatessen store or another Mexican restaurant in the American suburb surely take a risk. But are they entrepreneurs? All they do is what has been done many times before. They gamble on the increasing popularity of eating out in their area, but create neither a new satisfaction nor new consumer demand. Seen under this perspective they are surely not entrepreneurs even though theirs is a new venture.”

At the core of entrepreneurship is change; creating something new that didn’t exist before. Entrepreneurs systematize technical information; for example by standardizing the “product,” designing tools and operations, and setting the required standards. In addition, the founders systematized the process so that the same results could be achieved again and again.

McDonald’s is a good example. They did not invent anything, their main product was already well known in American restaurants. Nevertheless, they were able to organize all their knowledge and “know-how” into a coherent system. Not only did they standardize their products, but also their processes as well. As a result, they were able to increase profitability by using the same resources, create greater customer satisfaction, and ultimately create a new market for millions of customers.

Entrepreneurship cannot be imagined without a novelty component, according to Drucker. He writes:

The entrepreneur always searches for change, responds to it, and exploits it as an opportunity. (…) Entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship. (…) Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.

Wrapping it Up

Entrepreneurship is a complex phenomenon. I attempted to clarify several, sometimes contradictory definitions in this short article. I shared the viewpoints of some of the foremost experts on the topic, including Eric Ries, founder of the Lean Startup movement, Steve Blank, creator of Customer Development, and one of the greatest management experts of all time, Peter Drucker. However, this brief overview is not intended to be exhaustive, nor does it aim to provide a complete understanding of what entrepreneurship is. It is merely meant as a thought-provoking exercise. Feel free to discover your own truths or perhaps try to create something completely original, where the outcome is unknown, to gain a first-hand understanding of what it is like to be an entrepreneur.

Key Takeaways

  • Entrepreneurship is a broad concept. Entrepreneurs are found everywhere, whether they are a one-person startup or work within a large organization.
  • Every person can be considered an entrepreneur who is creating a new product or service under conditions of extreme uncertainty. Novelty and uncertainty are essential elements of entrepreneurship.
  • Entrepreneurship does not involve taking unnecessary risks. Entrepreneurship is rigorous management, one that is suited to rapid iterations and optimized for learning, not execution.
  • Entrepreneurs are primarily concerned with turning “unknowns” into “knowns,” guesses, and hypotheses into facts. A repeatable, scalable business model is the goal of this process.
  • Last but not least, if you are not attempting to build something new under uncertain conditions, you are most likely not an entrepreneur, even if you have been running your business for decades.

References

  • Drucker, Peter. Innovation and Entrepreneurship. United Kingdom, Taylor & Francis, 2014.
  • Ries, Eric. The Lean Startup: How Constant Innovation Creates Radically Successful Businesses. United Kingdom, Penguin Books Limited, 2011.
  • Blank, Steven Gary, and Dorf, Bob. The Startup Owner’s Manual: The Step-by-step Guide for Building a Great Company. Italy, K&S Ranch, Incorporated, 2012.