Concept 4: Entrepreneurship
Entrepreneurs are people who develop ways to combine the other productive resources to produce goods and services. They take financial risks – often using personal savings or borrowed money – to bring these goods and services to market. Their reasons for taking these risks can vary. Most entrepreneurs seek profits for selling their goods and/or services. Others, however, use their skills to create non-profit organizations that strive to improve society. Successful entrepreneurs typically identify a problem or need in a market that is not currently being met and develop a solution.
Entrepreneurship often requires a high tolerance for risk, many hours of work, and long-term persistence to pay off.
Entrepreneurs are sometimes confused with inventors. Inventors use many of the same skills as entrepreneurs such as creative thinking, persistence, personal sacrifice, etc. What separates an entrepreneur is the financial risk taking.
There are thousands of garage “inventors” all over the world who create solutions to small household problems on a daily basis. Hobbies like sewing, baking, car restoration, homebrewing, and many others all involve gathering and using productive resources. The vast majority of these actions are done for personal enjoyment, not to be taken to market. Thus, there is no financial risk to the individual.
Also, an entrepreneur does not need to be an actual inventor. Howard Schultz, the entrepreneur behind Starbucks, didn’t invent coffee or coffee shops – but he did take financial risks to launch his own style of café.
Entrepreneurs often seek patents, copyrights, and trademarks on their products. These are property rights protections that prevent others from stealing their ideas. The United States offers strong property rights protections which encourages entrepreneurs to continue to take risks.
Financial risks for entrepreneurs can take many forms. The magazine Entrepreneur says that over 94% of entrepreneurs use personal savings and credit cards at some point in starting their businesses. Entrepreneurs risk losing their savings permanently or damaging their credit rating if the business is not successful, and according to Forbes magazine, 9 out of 10 will fail.
Business loans and lines of credit are also sources of funding. These involve promises to repay with interest – whether the business is successful or not.
Venture capital is another way entrepreneurs raise money. In this scenario, which is featured in shows like Shark Tank, wealthy investors provide the entrepreneur with money in exchange for equity or ownership of part of the business.
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Below are five questions about this concept. Choose the one best answer for each question and be sure to read the feedback given. Click “next question” to move on when ready.
Explain the motivations that influence entrepreneurs to take risks (e.g., profit, job creation, innovation, and improving society).