Defining the Entrepreneur: Characteristics and Types

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Defining the Entrepreneur: Characteristics and Types

Business Essentials · Chapter 4: Business Ownership, Growth, and EntrepreneurshipSection 4.4 · lesson 22 of 10514 min · free with a free account

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In this lesson

Who starts ventures, what the research shows, and how a venture begins.

  • Distinguish entrepreneurship from small business ownership
  • Compare five types of entrepreneur
  • Weigh what trait research can and cannot show
  • Trace the four-stage entrepreneurial process

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Everything said in the video, section by section (2,049 words). Read along, or search it.

Business Ownership, Growth, and Entrepreneurship

Defining the Entrepreneur: Characteristics and Types

Most people carry a picture of an entrepreneur. Bold, young, and willing to bet everything. This section tests that picture against the evidence, and much of it doesn't survive. We'll start with a careful definition, and separate entrepreneurship from simply owning a small business. Then we'll meet five types of entrepreneur, each building a different kind of venture. We'll look at what research says about entrepreneurial traits. Just as important, we'll see what it can't say. After that comes the process itself, from spotting an opportunity to launching a venture. And we'll finish with failure rates, and with two kinds of risk that founders often confuse.

Defining The Term

Opportunity, Organization, and Risk

Entrepreneurship is the identification and pursuit of an opportunity, through the creation of an organization. It means accepting risk, in exchange for the potential return. An entrepreneur is a person who does this. Three elements are packed into that definition, and each one does real work. First, an opportunity. That's a chance to meet a need, or exploit a gap, in a way that can earn a return. Second, the creation of an organization. The opportunity is pursued through a new venture, not merely thought about. Plenty of people have good ideas over dinner. The definition starts only when someone builds something. Third, risk is accepted, because the outcome is uncertain. The founder commits time and money before knowing whether customers will pay. This should sound familiar. It matches the fourth factor of production, from section two point one. There, it meant organizing the other factors, and bearing the risk. Its reward is a profit, or a loss.

Not The Same Thing

Entrepreneur or Small Business Owner?

Entrepreneurship is often used as a grand word for running a small business. They aren't the same thing. Small business ownership is simply the ownership and operation of a business that's small in size. You can do that without being an entrepreneur, in the sense we just defined. Picture someone who buys an established dry cleaner. Or someone who opens a franchised outlet. Both own a business, and both run it. But neither needs to have identified a new opportunity, or introduced anything new. And neither needs to intend the business to grow beyond a comfortable size. The reverse holds too. An entrepreneur needn't own a small business for long, because a venture that succeeds may become large. So the line is innovation, and the intention to grow. It isn't size on any given day. And it isn't a ranking. Small business ownership is a legitimate and important activity. It doesn't need to be entrepreneurial to be valuable. Section four point five, which closes this chapter, gives it full attention.

Table 4.4.1

Five Types of Entrepreneur

Entrepreneurs are usefully classified by what the venture is for. There are five types. The lifestyle, or small business, entrepreneur starts a venture to earn a living. The point is control over how and where to work. There's no plan to build a large organization. The growth-oriented entrepreneur designs a venture to be scalable, meaning revenue can grow much faster than costs. These founders often plan to raise outside investment, and to become large, or to be sold. The social entrepreneur pursues a social or environmental mission, through a business model. The aim is to solve a problem while covering costs, or earning a return. Growth is a means of reaching more people. The intrapreneur acts entrepreneurially inside an existing organization, with its money, staff, and brand. That carries less personal financial risk, but it needs the parent's approval. And the serial entrepreneur starts one venture after another, applying what's been learned. These types overlap, and one person may move between them over a career. So before starting anything, ask which type the venture is meant to be. The answer decides how much money, how many people, and what kind of support it will need.

What Research Reports

Four Tendencies Linked to the Role

Researchers have long looked for characteristics associated with entrepreneurial activity. The findings must be stated carefully. Four tendencies are commonly reported. The first is tolerance of ambiguity. That's the ability to act without full information, and to accept uncertain outcomes. The second is an internal locus of control. It's the belief that your outcomes are shaped mainly by your own actions, not by luck, or by other people. The third is need for achievement, a strong motivation to accomplish challenging goals. The fourth is a willingness to bear calculated risk. Notice the word calculated. It's a readiness to take risks that have been weighed, not to take them blindly. Together, those four sound like a recipe for spotting future founders. They aren't.

What Research Cannot Show

Four Cautions on Trait Findings

Four cautions apply, and they're as important as the tendencies. First, the associations are modest. They describe small differences between groups of people, not sharp lines. Second, much of the research is retrospective. It studies people after they've become entrepreneurs. So it can't tell whether the traits led to the venture, or were shaped by the experience. Third, the research is open to survivor bias. That's the error of drawing conclusions from those who succeeded, or stayed visible, while ignoring those who tried and stopped. Here's why it bites. A trait seen among successful founders may be just as common among unsuccessful ones. Fourth, and above all, no profile identifies who should, or shouldn't, start a business. These traits are tendencies, and they can be developed, or lacking, in anyone. And a person who lacks one can compensate, through partners, advisers, and method.

Myths Worth Correcting

Four Common, Misleading Beliefs

Four beliefs about entrepreneurs are common, and misleading. The first is that entrepreneurs are reckless risk-takers. Research on how founders describe their own decisions points the other way. They more often see themselves taking risks they've examined, and tried to reduce. They test an idea cheaply, start part-time, or keep a job at first. The second myth is that the idea is the hard part. In fact, ideas are plentiful, and cheap. What separates ventures is execution. Building the product, finding customers, managing cash, and adapting to what's learned. The third myth is that youth is required. Founders are found at all ages. No research finding marks an age when starting a business becomes necessary, or impossible. The fourth myth is that funding is the main obstacle. Many ventures begin with little outside money. The more basic obstacle is whether customers want the product, at a price that covers its cost. And that's a question money can't answer.

Figure 4.4.1

The Entrepreneurial Process

The entrepreneurial process is commonly described in four stages. Each stage answers a different question. And each is a point at which ventures stop. Opportunity recognition comes first. It's identifying a need, or a gap, worth pursuing. Evaluation is next. It tests whether that opportunity is real, and viable. Resource assembly gathers the money, people, suppliers, and permissions the venture needs. And launch and management is the start of operation, and its ongoing direction. The reasons for stopping vary. At stage one, a venture never begins, because no opportunity is seen. At stage four, it may simply run out of cash. The stages aren't always sequential. What a founder learns later often sends them back to an earlier one. But the questions stay distinct, and a venture that skips one does so at its own risk. Here's the key point. The cost of discovering a fatal flaw rises at every stage. So evaluation is the cheapest place to find one. That's why skipping it is the costliest shortcut of all.

Where Opportunities Come From

Four Recurring Sources

Where do opportunities come from? Four sources keep recurring. The first is an unmet need, a problem where existing solutions are missing, inadequate, or too costly. It's often noticed first by someone who has the problem. The second is an inefficiency, a wasteful way of doing something that a better method could remove. Think of a process that takes days, cut down to hours. The third is a change in regulation or technology, of the kind described in section one point two. A change like that can make something possible, or lawful, that wasn't before. Or it can lower a barrier that used to protect incumbents. The fourth is a market a larger firm won't serve. It's too small, too specialized, or too local for a big competitor. Yet it's large enough to sustain a smaller one. Recognition depends on looking closely at a field you know well. And an idea that appeals to the founder isn't the same as an opportunity others will pay for.

Testing The Opportunity

Four Questions, Weakest First

Recognizing an opportunity isn't the same as confirming it. Four questions test it. The customer question asks who will pay, and why they'd choose this over what they use now. Only evidence from potential customers can answer it. The founder's belief doesn't count. The size question asks whether the market is large enough, at the scale intended. The capability question asks whether the team can actually build and deliver the product. That means having the skills, licenses, and access it needs. The economics question asks whether each sale earns more than it costs to make, sell, and serve. That has to hold at a price customers will accept, so the venture can eventually cover its fixed costs. A weakness in any one can defeat the venture, and strength in the others won't compensate. So examine the weakest first. Many founders also write a business plan, describing the venture, its market, its operations, and its finances. It communicates with lenders and investors. It's a benchmark for progress, and a check that the pieces fit. Honestly, though, its main value is often the thinking that writing it forces. A plan written for a reader guides less well than one tested against real customers, and revised. Financing a venture, and the accounting behind it, come later, in chapters twenty through twenty-two.

Failure And Risk

Reading Survival Data, Separating Two Risks

New ventures fail often. The Bureau of Labor Statistics tracks new establishments, through its Business Employment Dynamics program. Its data show that a substantial minority close within their first year. Roughly half, or somewhat fewer, remain after five years. Survival differs by industry, and by starting year. Read those figures with care. The unit is an establishment, a single location, and not a firm. A closure isn't necessarily a failure. An owner may sell, retire, merge, or close a profitable business for personal reasons. And because the figures shift, check the current release for exact percentages. Risk itself comes in two kinds, which are often confused. Risk to the venture is the chance that the business fails. Good evaluation and prudent commitment limit it. Risk to the founder is the chance of losing savings, credit, and time. It depends on ownership form, and financing terms. As section four point one explained, a sole proprietor bears the venture's risk without limit. Even the owner of a limited liability company or corporation often signs a personal guarantee, for a loan or a lease. That makes the founder personally liable for that obligation. So ask two questions. Might the venture fail? And if it does, how much of your own position is exposed?

Case Vignette (Composite)

A Strong Idea and No Evidence

Let's close with a case. It's a composite, constructed for instruction. Noor is convinced people would use an app to schedule home repairs, matching homeowners with local tradespeople. She's worked in the property trade, and she believes the idea is obvious, and strong. She leaves her job, and spends six months of savings building the app. Friends and family all say they'd use it. But she hasn't asked one homeowner who doesn't know her. And no tradesperson has agreed to be listed. The stage she skipped was evaluation. Her recognition may be sound, since scheduling repairs is a real inconvenience. But the customer question has been tested only on people who wish her well. The economics question, whether tradespeople will accept the fees she needs, hasn't been asked at all. And the size question, how many local homeowners need repairs often enough, was left to her impression. At each point the trade-off was speed against evidence. Building felt like progress, and testing felt like delay. And her limited savings made every month of building costly. A cheaper route existed. Ask twenty homeowners she didn't know how they find tradespeople now. Offer a manual matching service to a few, before building anything. Ask three tradespeople whether they'd pay for leads. On reflection, Noor sees the lesson. The idea, however strong, was a hypothesis. Evaluation is where a hypothesis becomes evidence, or gets discarded cheaply.

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FAQ

Questions students ask us

About Defining the Entrepreneur: Characteristics and Types

What is the difference between an entrepreneur and a small business owner?
The difference is innovation and the intention to grow, not size. An entrepreneur identifies and pursues an opportunity by creating a new organization, accepting risk in exchange for a potential return. A small business owner simply owns and runs a small business, such as an established dry cleaner or a franchised outlet, without necessarily introducing anything new or planning to grow. Both are legitimate, and a successful entrepreneur's venture may become large.
What are the five types of entrepreneurs?
The five types are lifestyle, growth-oriented, social, intrapreneur, and serial entrepreneurs. A lifestyle entrepreneur wants a living and control over how and where to work. A growth-oriented founder builds a scalable venture, often with outside investment. A social entrepreneur pursues a social or environmental mission through a business model. An intrapreneur innovates inside an existing organization using its resources. A serial entrepreneur starts one venture after another. One person can move between types.
What personality traits are linked to successful entrepreneurs?
Research commonly reports four tendencies: tolerance of ambiguity, an internal locus of control, a strong need for achievement, and willingness to bear calculated risk. The associations are modest, though. Much of the research is retrospective and open to survivor bias, because it studies people who succeeded and stayed visible. No trait profile identifies who should or shouldn't start a business, and a missing trait can be offset through partners, advisers, and method.
What are the stages of the entrepreneurial process?
The four stages are opportunity recognition, evaluation, resource assembly, and launch and management. Evaluation tests whether an opportunity is real by asking who will pay and why, whether the market is large enough, whether the team can deliver, and whether each sale earns more than it costs. Founders often loop back to earlier stages, but skipping evaluation is the costliest shortcut, because the cost of discovering a fatal flaw rises at every later stage.

About the Business Essentials course

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