What is an Entrepreneur?
Before reading further, I encourage you to pause for a moment and reflect. What - or maybe who - comes to mind when you hear or read this word, entrepreneur?
The act of entrepreneurship, at its basic level, is the activity of setting up a new business. But please understand, there is nothing BASIC about starting a new venture. A lot of work, strategy, and investment is involved.
The first time I did something truly entrepreneurial was probably when my high school best friend, Sean Gross, and I started an auto detailing business around our junior year in high school.
We didn’t have to invest that much, but for high school kids on a budget, going out and getting all the materials was still a bit of an investment. Then, we had to spend time advertising. Fortunately for us, we hit up various medical offices around Broward County and spread the word to friends and family.
We were in business. We tried to undercut the market rate so people by offering our services at a lower rate than most people might pay to have their vehicle detailed. Doing this would give us a chance to enter the market and win over new customers. It worked -- for what we needed it to work anyways.
For more than a year, we were getting a few hundred bucks profit a month each and using it to have some fun, such as many of the concerts and sporting events we attended in South Florida in the mid 1990s.
At another level, the entrepreneur is also seen as an innovator, a source of new ideas, goods, services, and business/or procedures.
Entrepreneur is a French word probably coined by the economist Jean-Baptiste Say from the word entreprendre, which is usually translated as "undertaker" or "adventurer." Say studied Adam Smith's book, The Wealth of Nations, which was published in 1776. While agreeing on all points, Say found that the omission of enterprising businessmen was a serious flaw in Smith’s classic work.
The verb entreprendre goes back to the war vocabulary -- which referred to surrounding a town. That’s an interesting concept. Surrounding a town is indeed comparable to an entrepreneurial activity since it is an act that combines strategy, organization, and risk. In some sense, my friend Sean and I might have thought we were “surrounding the towns” in west Broward County in the mid 1990s, taking the market by storm.
Jean-Baptiste Say pointed out in his own writings that it was entrepreneurs who sought out inefficient uses of resources and capital and moved them into more productive, higher yield areas. Simply put, entrepreneurs seek opportunities for profit and, by doing so, create new markets and fresh opportunities. By constantly disrupting the balance of competition, entrepreneurs prevent monopolies from forming and create a wide diversity of products that keep consumers consuming and producers producing.
Three thinkers were central to the inclusion of entrepreneurs in later iterations of economics: 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 of profit.
Knight focused on entrepreneurs as the bearers of uncertainty and believed they were responsible for risk premiums in financial markets. A risk premium is the investment return an asset is expected to yield in excess of the risk-free rate of return. An asset's risk premium is a form of compensation for investors. It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset.
Today, many start-ups look for investors to support them initially. For the entrepreneur, they get access to capital. For the investor, they have an opportunity to support a new venture while of course taking some risk -- and if they are smart, they go through a process of risk assessment. If their investment works out, both the investor and the entrepreneur can stand to profit, sometimes handsomely. Ultimately, customers purchase a product they either could not produce on their own or that would take them too long to do so. At the end of the day, it’s a potential win-win-win for everyone.
Kirzner thought of entrepreneurship as a process that led to the discovery. And it is. Think of all the new technology we create and the many things in our world we discover (including other people we meet) because of entrepreneurs. Not to mention the services. That car isn’t going to wash itself.
A few years ago, I knew I “made it” in life when I realized it was more worth my time to pay someone else to wash and detail my car than doing it myself -- something I had done for twenty years beyond the time Sean and I started that business in high school.
These economic thinkers mentioned above were simply identifying actions between human beings that they observed. Human beings are in constant activity with one another. Trade between us makes it possible for us to consume a bundle of goods and services far beyond what we would be able to produce ourselves. It allows individuals to cooperate, specialize, and trade. Sometimes we think of trade as trading one product for another. But more often today we trade the currency we’ve earned through our work to purchase other items that others produced through their work.
This entire process of economic activity is hard to see. It’s partially why Adam Smith dubbed the process as the work of “the invisible hand” in the marketplace.
All of the abundance and creativity we see in our world is made possible by entrepreneurs - and those who work on their behalf. Entrepreneurs see something in the marketplace that others do not. And when they do, it becomes their competitive advantage. More than that, it becomes the fruit for all of us to enjoy. Anytime you use a product or service, from your smartphone to the food on your table, you can thank an entrepreneur -- and perhaps aspire to be one yourself.