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Entrepreneurship is the act of being an entrepreneur, which is a French word meaning "one who undertakes an endeavor". Entrepreneurs assemble resources including innovations, finance and business acumen in an effort to transform innovations into economic goods. This may result in new organizations or may be part of revitalizing mature organizations in response to a perceived opportunity. The most obvious form of entrepreneurship is that of starting new businesses; however, in recent years, the term has been extended to include social and political forms of entrepreneurial activity. When entrepreneurship is describing activities within a firm or large organization it is referred to as intra-preneurship and may include corporate venturing, when large entities spin-off organizations.[1]

According to Paul Reynolds, entrepreneurship scholar and creator of the Global Entrepreneurship Monitor, "by the time they reach their retirement years, half of all working men in the United States probably have a period of self-employment of one or more years; one in four may have engaged in self-employment for six or more years. Participating in a new business creation is a common activity among U.S. workers over their course of their careers." [2] And in recent years has been documented by scholars such as David Audretsch to be a major driver of economic growth in both the United States and Western Europe.

Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part-time) to major undertakings creating many job opportunities. Many "high value" entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Angel investors generally seek returns of 20-30% and more extensive involvement in the business.[3] Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. In more recent times, the term entrepreneurship has been extended to include elements not related necessarliy to business formation activity such as conceptualizations of entrepreneurship as a specific mindset (see also entrepreneurial mindset) resulting in entrepreneurial initiatives e.g. in the form of social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship have emerged.

Contents

History

The entrepreneur is an actor in microeconomics, and the study of entrepreneurship reaches back to the work of Richard Cantillon and Adam Smith in the late 17th and early 18th centuries, but was largely ignored theoretically until the late 19th and early 20th centuries and empirically until a profound resurgence in business and economics in the last 40 years.

In the 20th century, the understanding of entrepreneurship owes much to the work of economist Joseph Schumpeter in the 1940s and other Austrian economists such as Carl Menger, Ludwig von Mises and Friedrich von Hayek. In Schumpeter, an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation.[4] Entrepreneurship employs what Schumpeter called "the gale of creative destruction" to replace in whole or in part inferior innovations across markets and industries, simultaneously creating new products including new business models. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. The supposition that entrepreneurship leads to economic growth is an interpretation of the residual in endogenous growth theory and as such is hotly debated in academic economics. An alternate, description posited by Israel Kirzner suggests that the majority of innovations may be much more incremental improvements such as the replacement of paper with plastic in the construction of a drinking straw.

For Schumpeter, entrepreneurship resulted in new industries but also in new combinations of currently existing inputs. Schumpeter's initial example of this was the combination of a steam engine and then current wagon making technologies to produce the horseless carriage. In this case the innovation, the car, was transformational but did not require the development of a new technology, merely the application of existing technologies in a novel manner. It did not immediately replace the horsedrawn carriage, but in time, incremental improvements which reduced the cost and improved the technology led to the complete practical replacement of beast drawn vehicles in modern transportation. Despite Schumpeter's early 20th-century contributions, traditional microeconomic theory did not formally consider the entrepreneur in its theoretical frameworks (instead assuming that resources would find each other through a price system). In this treatment the entrepreneur was an implied but unspecified actor, but it is consistent with the concept of the entrepreneur being the agent of x-efficiency.

Different scholars have described entrepreneurs as, among other things, baring risk. For Schumpeter, the entrepreneur did not bare risk: the capitalist did.

Some notable persons and their works in entrepreneurship history.

For Frank H. Knight [5] (1921) and Peter Drucker (1970) entrepreneurship is about taking risk. The behavior of the entrepreneur reflects a kind of person willing to put his or her career and financial security on the line and take risks in the name of an idea, spending much time as well as capital on an uncertain venture. Knight classified three types of uncertainty.

  • Risk, which is measurable statistically (such as the probability of drawing a red colour ball from a jar containing 5 red balls and 5 white balls).
  • Ambiguity, which is hard to measure statistically (such as the probability of drawing a red ball from a jar containing 5 red balls but with an unknown number of white balls).
  • True Uncertainty or Knightian Uncertainty, which is impossible to estimate or predict statistically (such as the probability of drawing a red ball from a jar whose number of red balls is unknown as well as the number of other coloured balls).

The acts of entrepreneurship are often associated with true uncertainty, particularly when it involves bringing something really novel to the world, whose market never exists. However, even if a market already exists, there is no guarantee that a market exists for a particular new player in the cola category.

The place of the disharmony-creating and idiosyncratic entrepreneur in traditional economic theory (which describes many efficiency-based ratios assuming uniform outputs) presents theoretic quandaries. William Baumol has added greatly to this area of economic theory and was recently honored for it at the 2006 annual meeting of the American Economic Association.[6]

The entrepreneur is widely regarded as an integral player in the business culture of American life, and particularly as an engine for job creation and economic growth. Robert Sobel published The Entrepreneurs: Explorations Within the American Business Tradition in 1974. Zoltan Acs and David Audretsch have produced an edited volume surveying Entrepreneurship as an academic field of research, [7] and more than a hundred scholars around the world track entrepreneurial activity, policy and social influences as part of the Global Entrepreneurship Monitor (GEM)[8] and its associated reports.


Entrepreneurs have many of the same character traits as leaders, similar to

Promotion of entrepreneurship

Given entrepreneurship's potential to support economic growth, it is the policy goal of many governments to develop a culture of entrepreneurial thinking. This can be done in a number of ways: by integrating entrepreneurship into education systems, legislating to encourage risk-taking, and national campaigns. An example of the latter is the United Kingdom's Enterprise Week, which launched in 2004.

Outside of the political world, research has been conducted on the presence of entrepreneurial theories in doctoral economics programs. Dan Johansson, fellow at the Ratio Institute in Sweden, finds such content to be sparse. He fears this will dilute doctoral programs and fail to train young economists to analyze problems in a relevant way.[9]

Many of these initiatives have been brought together under the umbrella of Global Entrepreneurship Week, a worldwide celebration and promotion of youth entrepreneurship, which started in 2009

Financial bootstrapping

Financial bootstrapping is a term used to cover different methods for avoiding using the financial resources of external investors. Bootstrapping can be defined as “a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors”[10]. The use of private credit card debt is the most known form of bootstrapping, but a wide variety of methods are available for entrepreneurs. While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. Many successful companies including Dell Computers were founded this way.

There are different types of bootstrapping:

  • Owner financing
  • Minimization of the accounts receivable
  • Joint utilization
  • Delaying payment
  • Minimizing inventory
  • Subsidy finance

See also

References

  1. ^ Shane, Scott "A General Theory of Entrepreneurship: the Individual-Opportunity Nexus", Edward Elgar, 2003, ISBN 1843769964
  2. ^ Reynolds, Paul D. "Entrepreneurship in the United States", Springer, 2007, ISBN 978-0-387-45667-6
  3. ^ Angel Investing, Mark Van Osnabrugge and Robert J. Robinson
  4. ^ Schumpeter, Joseph A. "Capitalism, Socialism and Democracy", 1942
  5. ^ Knight, Francis A. "Risk, Uncertainty and Profit"
  6. ^ "Searching for the invisible man". The Economist (The Economist Newspaper Limited): pp. 67. 2006-03-11. http://www.economist.com/finance/displaystory.cfm?story_id=E1_VGDTRJD. Retrieved 2008-03-05. 
  7. ^ Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction
  8. ^ www.gemconsortium.org
  9. ^ Johansson, Dan. "Economics Without Entrepreneurship or Institutions: A Vocabulary Analysis of Graduate Textbooks" (December 2004). [1]
  10. ^ Ebbena, Jay; Johnson, Alec, "Bootstrapping in small firms: An empirical analysis of change over time", Journal of Business Venturing, Volume 21, Issue 6, November 2006, Pages 851-865

Further reading

External links

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Entrepreneurship is the act of being an entrepreneur, which is a French word meaning "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response to a perceived opportunity. The most obvious form of entrepreneurship is that of starting new businesses (referred as Startup Company); however, in recent years, the term has been extended to include social and political forms of entrepreneurial activity. When entrepreneurship is describing activities within a firm or large organization it is referred to as intra-preneurship and may include corporate venturing, when large entities spin-off organizations.[1]

According to Paul Reynolds, entrepreneurship scholar and creator of the Global Entrepreneurship Monitor, "by the time they reach their retirement years, half of all working men in the United States probably have a period of self-employment of one or more years; one in four may have engaged in self-employment for six or more years. Participating in a new business creation is a common activity among U.S. workers over their course of their careers." [2] And in recent years has been documented by scholars such as David Audretsch to be a major driver of economic growth in both the United States and Western Europe.

Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part-time) to major undertakings creating many job opportunities. Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) in order to raise capital to build the business. Angel investors generally seek annualized returns of 20-30% and more, as well as extensive involvement in the business.[3] Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. In more recent times, the term entrepreneurship has been extended to include elements not related necessarily to business formation activity such as conceptualizations of entrepreneurship as a specific mindset (see also entrepreneurial mindset) resulting in entrepreneurial initiatives e.g. in the form of social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship have emerged.

Contents

History

The entrepreneur is an actor in microeconomics, and the study of entrepreneurship reaches back to the work of Richard Cantillon and Adam Smith in the late 17th and early 18th centuries, but was largely ignored theoretically until the late 19th and early 20th centuries and empirically until a profound resurgence in business and economics in the last 40 years.

In the 20th century, the understanding of entrepreneurship owes much to the work of economist Joseph Schumpeter , Arjay Nieva, Shannen Yap, Royce Salva, and Donna Alegado in the 1930s and other Austrian economists such as Carl Menger, Ludwig von Mises and Friedrich von Hayek. In Schumpeter, an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation.[4] Entrepreneurship employs what Schumpeter called "the gale of creative destruction" to replace in whole or in part inferior innovations across markets and industries, simultaneously creating new products including new business models. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. The supposition that entrepreneurship leads to economic growth is an interpretation of the residual in endogenous growth theory and as such is hotly debated in academic economics. An alternate, description posited by Israel Kirzner suggests that the majority of innovations may be much more incremental improvements such as the replacement of paper with plastic in the construction of a drinking straw.

For Schumpeter, entrepreneurship resulted in new industries but also in new combinations of currently existing inputs. Schumpeter's initial example of this was the combination of a steam engine and then current wagon making technologies to produce the horseless carriage. In this case the innovation, the car, was transformational but did not require the development of a new technology, merely the application of existing technologies in a novel manner. It did not immediately replace the horsedrawn carriage, but in time, incremental improvements which reduced the cost and improved the technology led to the complete practical replacement of beast drawn vehicles in modern transportation. Despite Schumpeter's early 20th-century contributions, traditional microeconomic theory did not formally consider the entrepreneur in its theoretical frameworks (instead assuming that resources would find each other through a price system). In this treatment the entrepreneur was an implied but unspecified actor, but it is consistent with the concept of the entrepreneur being the agent of x-efficiency.

Different scholars have described entrepreneurs as, among other things, bearing risk. For Schumpeter, the entrepreneur did not bear risk: the capitalist did. For Frank H. Knight [5] (1921) and Peter Drucker (1970) entrepreneurship is about taking risk. The behavior of the entrepreneur reflects a kind of person willing to put his or her career and financial security on the line and take risks in the name of an idea, spending much time as well as capital on an uncertain venture. Knight classified three types of uncertainty.

  • Risk, which is measurable statistically (such as the probability of drawing a red color ball from a jar containing 5 red balls and 5 white balls).
  • Ambiguity, which is hard to measure statistically (such as the probability of drawing a red ball from a jar containing 5 red balls but with an unknown number of white balls).
  • True Uncertainty or Knightian Uncertainty, which is impossible to estimate or predict statistically (such as the probability of drawing a red ball from a jar whose number of red balls is unknown as well as the number of other colored balls).

The acts of entrepreneurship are often associated with true uncertainty, particularly when it involves bringing something really novel to the world, whose market never exists. However, even if a market already exists, there is no guarantee that a market exists for a particular new player in the cola category.

The place of the disharmony-creating and idiosyncratic entrepreneur in traditional economic theory (which describes many efficiency-based ratios assuming uniform outputs) presents theoretic quandaries. William Baumol has added greatly to this area of economic theory and was recently honored for it at the 2006 annual meeting of the American Economic Association.[6]

The entrepreneur is widely regarded as an integral player in the business culture of American life, and particularly as an engine for job creation and economic growth. Robert Sobel published The Entrepreneurs: Explorations Within the American Business Tradition in 1974. Zoltan Acs and David Audretsch have produced an edited volume surveying Entrepreneurship as an academic field of research, [7] and more than a hundred scholars around the world track entrepreneurial activity, policy and social influences as part of the Global Entrepreneurship Monitor (GEM)[8] and its associated reports.

Entrepreneurs have many of the same character traits as leaders, similar to[clarification needed]

Promotion of entrepreneurship

Given entrepreneurship's potential to support economic growth, like Mr. Arthur Valdez it is the policy goal of many governments to develop a culture of entrepreneurial thinking. This can be done in a number of ways: by integrating entrepreneurship into education systems, legislating to encourage risk-taking, and national campaigns. An example of the latter is the United Kingdom's Enterprise Week, which launched in 2004.

Outside of the political world, research has been conducted on the presence of entrepreneurial theories in doctoral economics programs. Dan Johansson, fellow at the Ratio Institute in Sweden, finds such content to be sparse. He fears this will dilute doctoral programs and fail to train young economists to analyze problems in a relevant way.[9]

Many of these initiatives have been brought together under the umbrella of Global Entrepreneurship Week, a worldwide celebration and promotion of youth entrepreneurship, which started in 2008.

Financial bootstrapping

Financial bootstrapping is a term used to cover different methods for avoiding using the financial resources of external investors. Bootstrapping can be defined as “a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors”[10]. The use of private credit card debt is the most known form of bootstrapping, but a wide variety of methods are available for entrepreneurs. While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. Many successful companies including Dell Computers were founded this way.

There are different types of bootstrapping:

  • Owner financing
  • Sweat equity
  • Minimization of the accounts receivable
  • Joint utilization
  • Delaying payment
  • Minimizing inventory
  • Subsidy finance
  • Personal Debt

Traditional Financing

Having outside investors is not necessarily beyond the realm of entrepreneurship. In many cases, leveraging the owners' credit cards and personal assets, such as mortgages, may not be sufficient. Inadequate investment can also kill a start up. And bringing in outsiders can be beneficial. Outsiders can provide financial oversight, accountability for carrying out tasks and meeting milestones, and many can even bring valuable business contacts and experience to the table.

See also

References

  1. ^ Shane, Scott "A General Theory of Entrepreneurship: the Individual-Opportunity Nexus", Edward Elgar, 2003, ISBN 1-84376-996-4
  2. ^ Reynolds, Paul D. "Entrepreneurship in the United States", Springer, 2007, ISBN 978-0-387-45667-6
  3. ^ Angel Investing, Mark Van Osnabrugge and Robert J. Robinson
  4. ^ Schumpeter, Joseph A. "Capitalism, Socialism and Democracy", 1942
  5. ^ Knight, Francis A. "Risk, Uncertainty and Profit"
  6. ^ "Searching for the invisible man". The Economist (The Economist Newspaper Limited): pp. 67. 2006-03-11. http://www.economist.com/finance/displaystory.cfm?story_id=E1_VGDTRJD. Retrieved 2008-03-05. 
  7. ^ Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction
  8. ^ www.gemconsortium.org
  9. ^ Johansson, Dan. "Economics Without Entrepreneurship or Institutions: A Vocabulary Analysis of Graduate Textbooks" (December 2004). [1]
  10. ^ Ebbena, Jay; Johnson, Alec, "Bootstrapping in small firms: An empirical analysis of change over time", Journal of Business Venturing, Volume 21, Issue 6, November 2006, Pages 851-865

Further reading

External links


Financial bootstrapping is a term used to cover different methods for avoiding using the financial resources of external investors. Bootstrapping can be defined as “a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors” (Ebben and Johnsen, 2006:853). The use of private credit card debt is the most known form of bootstrapping, but a wide variety of methods are available for entrepreneurs. While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. Many successful companies including Dell Computers were founded this way.

Contents

Types of bootstrapping

There are many different types of bootstrapping methods. Winborg and Landström (2001) categorized six types of bootstrapping methods when they surveyed the use of bootstrapping in 262 Swedish small businesses.

Owner financing

Minimization of the accounts receivable

Joint utilization

  • Share office, supplies, equipment
  • Share employees
  • Outsourcing
  • Risk Your Life (RYL)

Delaying payment

Minimizing inventory

  • Using the logistics to minimize inventory needed
  • Using the pre-order for the sold goods
  • Seeking best possible terms from suppliers

Subsidy finance

  • Governmental grants
  • Research grants

Bootstrapping as a strategic tool

Bootstrapping has been used as an explanation for how companies get resources when they cannot get external investors or debt finance. Ebben and Johnson (2006) want to expand the explanation of bootstrapping to being a strategic tool for getting resources and they show that bootstrapping fits with organizational theory. In the case studies of Wennberg and Berglund (2006) firms continued to use bootstrapping even after they could get both debt and equity investments.

In large corporate environments, bootstrapping is often termed bootlegging.

The use of bootstrapping

Some of the studies on bootstrapping have looked into how technology firms and fast growing firms use bootstrapping. In the study by Winborg and Landström (2001) they found that young fast growing companies used owner financing as the main method of financing and that they used very little subsidy finance and joint utilization. Van Auken (2005b) found that technology based firms in general value methods that increase cash inflow higher than other methods, but he also found that they have an overall low estimation of the effects of bootstrapping. Ebben and Johnson (2006) argue that methods that involve customers or suppliers are hard to utilize for young companies because they have not had time to build a relationship with these entities.

Financial bootstrapping in academic literature

Lahm and Little (2005) compared how business practice and education in entrepreneurship differ in their article: "Bootstrapping business start-ups: Entrepreneurship literature, textbooks, and teaching versus current business practices?" Their conclusion is that bootstrapping receives little attention in entrepreneurship education and textbooks.

See also

External links

References

  • Ebben, J., & Johnson, A., (2006). Bootstrapping in small firms: An empirical analysis of change over time. Journal of Business Venturing, Vol. 21, issue 6: 851-865
  • Lahm, R.J., Little, H.T, (2000). Bootstrapping business start-ups: Entrepreneurship literature, textbooks, and teaching versus current business practices? Proceedings of the Academy of Entrepreneurship, Volume 11, Number 2
  • Winborg, J., & Landstrom, H., (2001). Financial bootstrapping in small businesses: examining small business managers’ resource acquisition behaviors. Journal of Business Venturing Vol.16: 235– 254.
  • Wennberg, K., & Berglund, H., (2006). Social networking and the development of new ventures, Advances in Interdisciplinary Studies of Work Teams, Vol. 12: 203–225
  • Van Auken, H., (2005). A Model of Small Firm Capital Acquisition Decisions, International Entrepreneurship and Management Journal, Vol.1: 335–352
  • Van Auken, H., (2005b). Differences in the Usage of Bootstrap Financing among Technology-Based versus Nontechnology-Based Firms. Journal of Small Business Management, Vol.43: 93–103


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