The Critical 'I'

Read. React. Repeat.

Sunday, July 25, 2004

Why does someone become an entrepreneur? When lauding the virtues of entrepreneurship, part of the profile usually includes the possession of an outside-the-box idea that simply can't be properly brought to market by an established, hide-bound, risk-averse company. Yet the latest annual global survey by the Global Entrepreneurship Monitor indicate that the majority of start-ups are launched around a well-established product or service that's already being supplied to the market.

Thus, the question arises: What's the real motivation for entrepreneurs?

The Reuters article by Samuel Fromartz touches on teleological reasons:
"The grass-roots entrepreneurs are companies that take something someone has done before and do it better, or cheaper, or offer better service," [study co-author and professor of entrepreneurship at Babson College Bill Bygrave] said. "That's the core of the economy."
And while that may be a motivation, by itself it doesn't make sense for someone to strike out on their own and compete in a market where so many established companies have tremendous advantage. Even if venture capital and other traditional capital providers won't help unless the plan relies on low-risk propositions, risk re-emerges in the rather precarious chances for beating the dominant companies at their own game.

The way I see it, most entrepreneurs strike out on their own for three reasons, in descending order of likelihood:

1. They don't like working for someone else, to the degree that they need to be their own boss.

2. The companies where they honed their expertise are so inflexible that they can't efficiently conduct their core business, leading the entrepreneur to show how it can be done better.

3. Taking the longer-term view: An entrepreneur will launch a start-up in an established niche, with the realization that it will never reach the size of established players in the field. The goal, then, is to build the start-up to a state of critical mass where it become an attractive acquisition candidate by one of the established companies, whereupon the entrepreneurial founder can cash out--which would be the true goal of going solo in the first place.

I'd expect the first two reasons can be found as twin motivations for many freshly-launched small companies. Reason number three is more often the operating plan for those entrepreneurs who are businessmen first, and particular business-niche specialists second--in other words, those who are really in the business of starting businesses rather than any particular trade/service/vocation.

All this mainly applies to just the American business world. The Global Entrepreneurship Monitor's report looks at the entire world, so different business cultures mean different motivations apply. However, I'd bet that the above three reasons are applicable to various degrees everywhere, regardless of country.

So, it seems the usual assumption of innovative spark coming from plucky first-stage companies is largely a business myth. Then again, that small percentage (around 4 percent of the global total) that really does dabble in unique concepts is what makes all the noise, and properly garners all the attention. Even when they eventually get bought up.