Learn about the challenges facing entrepreneurs as they start new businesses

By ADAM HAYES

Updated July 19, 2022

Reviewed by AMY DRURY

Fact checked by KATRINA MUNICHIELLOWhat Is an Entrepreneur?

An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The process of setting up a business is known as entrepreneurship. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services, and business/or procedures.

Entrepreneurs play a key role in any economy, using the skills and initiative necessary to anticipate needs and bring good new ideas to market. Entrepreneurship that proves to be successful in taking on the risks of creating a startup is rewarded with profits, fame, and continued growth opportunities. Entrepreneurship that fails results in losses and less prevalence in the markets for those involved.How Entrepreneurship Works

Entrepreneurship is one of the resources economists categorize as integral to production, the other three being land/natural resources, labor, and capital. An entrepreneur combines the first three of these to manufacture goods or provide services. They typically create a business plan, hire labor, acquire resources and financing, and provide leadership and management for the business.

Entrepreneurs commonly face many obstacles when building their companies. The three that many of them cite as the most challenging are as follows:

1. Overcoming bureaucracy

2. Hiring talent

3. Obtaining financing

Economists have never had a consistent definition of "entrepreneur" or "entrepreneurship" (the word "entrepreneur" comes from the French verb entreprendre, meaning "to undertake"). Though the concept of an entrepreneur existed and was known for centuries, the classical and neoclassical economists left entrepreneurs out of their formal models: They assumed that perfect information would be known to fully rational actors, leaving no room for risk-taking or discovery. It wasn't until the middle of the 20th century that economists seriously attempted to incorporate entrepreneurship into their models.

Three thinkers were central to the inclusion of entrepreneurs: Joseph Schumpeter, Frank Knight, and Israel Kirzner.1 Schumpeter suggested that entrepreneurs—not just companies—were responsible for the creation of new things in the search for profit. Knight focused on entrepreneurs as the bearers of uncertainty and believed they were responsible for risk premiums in financial markets. Kirzner thought of entrepreneurship as a process that led to the discovery.

Not every entrepreneur is the same and not all have the same goals. Here are a few types of entrepreneurs:

Builders seek to create scalable businesses within a short time frame. Builders typically pass $5 million in revenue in the first two to four years and continue to build up until $100 million or beyond. These individuals seek to build out a strong infrastructure by hiring the best talent and seeking the best investors. They have temperamental personalities that are suited to the fast growth they desire but can make personal and business relationships difficult.2

Opportunistic entrepreneurs are optimistic individuals with the ability to pick out financial opportunities, get in at the right time, stay on board during the time of growth, and exit when a business hits its peak.

These types of entrepreneurs are concerned with profits and the wealth they will build, so they are attracted to ideas where they can create residual or renewal income. Because they are looking to find well-timed opportunities, opportunistic entrepreneurs can be impulsive.2

Innovators are those rare individuals that come up with a great idea or product that no one has thought of before. Think of Thomas Edison, Steve Jobs, and Mark Zuckerberg. These individuals worked on what they loved and found business opportunities through that.

Rather than focusing on money, innovators care more about the impact that their products and services have on society. These individuals are not the best at running a business as they are idea-generating individuals, so often they leave the day-to-day operations to those more capable in that respect.2

These individuals are analytical and risk-averse. They have a strong skill set in a specific area obtained through education or apprenticeship. A specialist entrepreneur will build out their business through networking and referrals, resulting in slower growth than a builder entrepreneur.2

As there are different types of entrepreneurs, there are also different types of businesses they create. Below are the main different types of entrepreneurship.

Small business entrepreneurship is the idea of opening a business without turning it into a large conglomerate or opening many chains. A single-location restaurant, one grocery shop, or a retail shop to sell your handmade goods would all be an example of small business entrepreneurship.

These individuals usually invest their own money and succeed if their business turns a profit, which they live off of. They don't have outside investors and will only take a loan if it helps continue the business.

These are companies that start with a unique idea; think Silicon Valley. The hopes are to innovate with a unique product or service and continue growing the company, continuously scaling up as time moves on. These types of companies often require investors and large amounts of capital to grow their idea and reach multiple markets.

Large company entrepreneurship is a new business division created within an existing company. The existing company may be well placed to branch out into other sectors or it may be well placed to become involved in new technology.

CEOs of these companies either foresee a new market for the company or individuals within the company generate ideas that they bring to senior management to start the process.