Entrepreneurship, Employment, and Economic Growth: Some Useful Definitions

This article, composed by Jim Flowers of VT KnowledgeWorks, was originally published on Source Link Virginia.

When considering local or regional initiatives to encourage entrepreneurship, it is important to understand clearly the true objectives. Most of these efforts are really aimed at economic development by way of job creation. They are not aimed simply at encouraging independent behaviors, for example. Occasionally, there is a socio-political undercurrent of encouraging personal self-sufficiency in a general sense. In any case, if the defining point is to increase employment through entrepreneurship initiatives, entrepreneurship itself must be well understood.

The words entrepreneur and entrepreneurship are currently popular, but widely misused, because they are being applied in bulk to several quite different business and personal behaviors. Suppose we define an entrepreneur as “someone who conceives and launches a significant new initiative, and takes personal responsibility for its success or failure.” The initiative could be a whole new business, an extension of an existing business, a Boy Scout project, a garden club, whatever. Since we’re talking about job creation, let’s take a closer look just at the businesses.

First, it’s important to address different points of view. The early-stage investment community, including both angels and venture capitalists, tends to draw a broad distinction between emerging enterprises that appear to have an opportunity to grow quickly toward an eight or nine digit payoff and those that, while potentially worthy, are likely to top out either too small or too late to be of interest to high-risk investors. They often label the second group as life-style businesses. And the labeling is often at least mildly derogatory.

It can be argued, however, that all entrepreneurial businesses are “life-style” businesses in that the entrepreneur’s payoffs are personal. If, at any point, she decides that it is unlikely that those personal payoffs will be realized, she will abandon the venture. The energy and focus required of successful entrepreneurs demands high motivation. If the objectives of that motivation fade into the distance, the energy disappears. This is not speculation; it is observable history.

Public figures with interest in economic growth and development, on the other hand, are typically interested in job creation and retention, rather than high-gain exits. The current common wisdom is that corporately small and young companies are creating the most jobs. That makes it easy to generalize to entrepreneurship as being a major positive force that deserves encouragement and support. In a time when automation, information, and communication advances have vastly increased individual worker productivity, job creation is much less automatic than it was in the 20th century.

Wealth creation, on the other hand, has at least the opportunity to generate jobs steadily over time as that wealth is distributed throughout the economy. So local wealth creation has become another favored target for some. Unfortunately, that also means wealth re-distribution, at least in relative terms. The owners get rich; and that money eventually gets re-invested to create another round of growth. This is the essence of the trickle down arguments.

Let’s presume, for our immediate purposes, that increases in jobs and/or wealth are positive outcomes as regards long-term economic well-being. What does that mean for the design and funding of entrepreneurship encouragement initiatives?

There are, in fact, radically different types of entrepreneurs. Here is a short list. It is not meant to be academically complete, or exhaustive in any sense, but rather to point out the complexity of the entrepreneurial landscape, particularly as it relates to job and wealth creation.

  • Solo-preneurs
  • Network-preneurs
  • Org-preneurs (at least four sub-types)
    • Mainstreet-preneurs
    • Expert-preneurs
    • Busi-preneurs
    • Invento-preneurs
  • Fun-preneurs

The simplest are solo-preneurs operating as professional service providers, launching single person service businesses. The personal life-style payoff for which they strive is just that, personal. And it is at least unfair, and perhaps foolish, to judge them on the basis of some standardized, presumptive payoff that is “good for the economy.” They want to make a living, doing what they choose, unencumbered by direct supervision.

By the way, if these folks bother to set up an LLC to limit their personal liability, or register a Federal Employer Information Number (FEIN), they are counted by the SBA as a new business establishment, just as if they were General Electric. Think what this does to all those statistics regarding business start-ups and failures.

There are also network-preneurs launching multi-person/entity service or product businesses without formally employing others in the traditional sense. Loose associations of subject matter experts who come together to execute large projects are a common example of this behavior. Their selected payoffs are also personal, and, again, not to be judged by some general set of standards. They are related to the busi-preneurs (see below), but more autonomous, unconventional and free-spirited.

There are org-preneurs who elect an enterprise strategy to achieve their personal payoffs – with traditional employees and a fixed place of business. In fact, often, the organization itself is part of the desired payoff. They enjoy leading a team. There appear to be at least four sub-species of this type.

There are copycat, mainstreet-preneurs, who open hair salons, restaurants, and auto repair shops. They usually follow growth in local/regional wealth, rather than creating it. So, in a very real sense, they don’t matter, at least from an increased prosperity standpoint. They don’t bring any new money to town. They just help re-allocate local money. Growth in the numbers or size of such businesses, including the jobs they provide, must, by definition, follow some increase in the local money supply.

There are expert-preneurs who must fund and assemble a team in order to achieve personal satisfaction and recognition in their desired field of expertise, such as the microbiology of pathogens. The financial aspects of these businesses are often personally secondary to the founders, especially in view of the fact that they are often tenured professors with financial stability in place. The businesses themselves tend to remain small, even when they are stable and successful. Growth per se is not a primary objective for them. They do bring new money to town – often as federal grants.

There are busi-preneurs who are somewhat market-neutral, in that their personal payoff is related more to measuring achievement by traditional business metrics than to personal autonomy. They make money for others (investors) in order to make money for themselves, and to receive recognition and approval for having done so. Their personal payoffs are related to the risk capital culture and its social structure. Often they become what investors like to call serial entrepreneurs, cashing out various ventures and moving on to others. They generally bring new money to town by selling to widely dispersed markets and clients; but they can actually be serving locals and sending the profits out of town, like Wal-Mart.

And there are invento-preneurs, who really do come up with better mousetraps and take them to market. Often they partner with busi-preneurs. Venture capitalists like this combination. And with innovative products and venture capital, they can create more jobs, more quickly, than most other types. Their clients are almost always out of town, and their profits come to town, except for the venture capitalists’ share. It’s important to point out, however, that these companies usually are acquired by larger ones. At that point they often disappear into the larger entity, and the new jobs disappear and the founders move to better weather.

And, finally, there are serial, recreational, fun-preneurs, who start low risk ventures (usually internet-related) for fun, and occasionally pop out of the pack, almost by accident, to become fabulously wealthy. They are similar to the people who like to walk the beaches and fields with metal detectors and occasionally find a gold coin or a sale-able meteorite. Or, we might compare them to the people who play slot machines. Any given coin placed in the machine has a low chance of being a winner; but it’s only a small investment. Once in a while, someone wins the jackpot. By the way, have you noticed how the casinos make sure everyone hears about the big winners? And how they do not mention the billions of attempts that go unrewarded? Silicon Valley is like that, too.

Two commonly used terms are incubator and accelerator. A practical distinction is that incubators emerged from the economic development community and accelerators from the investment community. Incubators tend to be place and job oriented. Accelerators tend to be wealth oriented. Incubators are generally established and run by economic development professionals. Accelerators are commonly established and run by cashed out mentor/investors. Incubators strive for employment growth and sustainability. Accelerators strive for speedy return on investment.

Fast-paced startup brainstorming events can certainly create fresh local energy and attention to entrepreneurship in general. To the extent that they actually spawn enterprises, their offspring are more commonly accelerator material than incubator material.

Business plan contests also build local awareness; and they generally deliver more fully-formed, investment-grade enterprise opportunities that have the potential to grow into permanent contributors to a local economy.

So, as regards job creation and increased prosperity, all entrepreneurship is not created equal. With this understanding, localities and regions have the opportunity to direct various growth and development initiatives with more focused effect, if they address, encourage, and support the various types of entrepreneurs separately and appropriately.

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