"Entrepreneur" has become one of those buzzwords (like "globalization") that often means different things to different people. This is understandable, given that there are four distinct organizational paths for entrepreneurs: small businesses, scalable startups, large companies,and nonprofits.All of the individuals who start these organizations are "entrepreneurs," yet those in one category often think the others aren't "real" or "genuine." The confusion can be compounded by the teaching of entrepreneurship in colleges and universities, where little distinction is drawn between the four types of entrepreneurs.
For budding entrepreneurs, the first order of business is to methodically think through which one of the four categories they want to be in. Once that decision has been reached, the proper tools can be selected, and the process of entrepreneurship can move ahead.
Small Business Entrepreneurs: Hard-Working and Adaptable
My parents came to the United States through Ellis Island in steerage, and their biggest dream was to open a small grocery store on the Lower East Side of New York City, which they did in 1939. They didn't aspire to open a chain of grocery stores—they just wanted to feed their family. They went on an uncharted course, took entrepreneurial risk, and only made money if the business succeeded. The only capital available to them was their own savings and what they could borrow from relatives. They worked as hard as any Silicon Valley entrepreneur, but they had a different definition of a successful business model. When business was bad, they figured out why, adapted, and worked harder still. They were only accountable to one another.
Small business entrepreneurship is not designed for scale—like my parents, the owners want to "feed the family." Small business entrepreneurs don't become billionaires and (not coincidentally) don't make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of "entrepreneurship" than entrepreneurs in other categories.
Scalable Startup Entrepreneurs: Born to Grow
What scalable startup entrepreneurship lacks in numbers, it makes up for in publicity. Google, eBay, Facebook, YouTube, Twitter, Hotmail, and the like embody the high-flying technology-oriented companies that have become household names. Entrepreneurs who lead these startups typically start out knowing they want to build large companies—their interest is not so much in a salary but, rather, in equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff.
Consider CafePress. Its founders, Fred Durham and Maheesh Jain, had a vision of providing a home for artists who make personalized products assembled in a just-in-time factory that could deliver customized gifts. Once they found a profitable business model, they realized that scale required external venture capital to fuel rapid expansion. With venture capital came accountability to board members, forecasts, and other people's agendas. But today, CafePress is a $100+ million company, and its website receives 11 million unique visits each month.
Large Company Entrepreneurs: Innovate or Evaporate
A fundamental challenge for large companies is how to preserve a culture of innovation. Failure can be costly—"innovate or evaporate," as the saying goes—yet countless large companies choke off the spirit of enterprise as they grow. Western Union famously rejected Alexander Graham Bell's invention, the telephone. An internal memo explained why: "This 'telephone' has too many shortcomings to be seriously considered as a means of communication."
A counter-example comes from IBM. In 1980, the company decided to compete in the rapidly growing personal computer market. It was smart enough to realize that its existing processes and procedures wouldn't be agile enough to innovate in this new market. The company established its new PC division in Boca Raton, Florida—1,000 miles from IBM headquarters. This small group consisted of twelve engineers and designers, and embodied the "skunkworks" approach to innovation—emphasizing flexibility, autonomy, and creativity. The division developed the IBM PC and announced it in less than a year. Three years later, the division had sold one million PCs, employed 9,500 people, and generated $1 billion in sales. The division's funding came from IBM and its head reported up the organization, but he was no less entrepreneurial than those who lead scalable startups or small businesses.
It's thought that large company entrepreneurs have an advantage over small business entrepreneurs in that they start with an established infrastructure, and they face reduced cost pressures. That's true—sometimes. But large company entrepreneurs also can face disadvantages; they may not be given the freedom they need to really innovate and pursue ideas that seem outlandish, like open-source software. ("People thought that was the dumbest idea they had ever heard because no one had ever done it before," says Red Hat CEO Matthew Szulik.) Large company entrepreneurs also may face intense cost pressures if the accountants are calling the shots.
Nonprofit Entrepreneurs: Driven to Make a Difference
Nonprofit entrepreneurs are no less ambitious, passionate, or driven to make an impact than any other type of founder is. They simply measure their success in terms of social goals rather than profit.
Consider Irfan Alam, a twenty-seven-year-old from the Indian state of Bihar. He started the Sammaan Foundation to transform the lives of ten million rickshaw-pullers in India. Irfan got banks to finance rickshaw-pullers and designed rickshaws that can shelve newspapers, mineral water bottles, and other essentials for rickshaw passengers. These rickshaws carry ads, and the pullers get 50 percent of the ad revenue (the remainder goes to Sammaan). The pullers end up as owners after repaying the bank loan in installments. The effort started with one hundred rickshaws in 2007—today, more than 300,000 are involved.
Irfan doesn't take a salary, but he is as focused as any Silicon Valley entrepreneur is on scalability, asset leverage, return on investment, and growth metrics.
Regardless of the type of business, an entrepreneur is at the helm of each one. As a rule, all entrepreneurs demonstrate the same basic traits, often rooted in their DNA: risk tolerance; tenacity; a willingness to work extremely hard, and to do so while charting an uncertain, oft-unmapped path to the entrepreneurial success they seek. Entrepreneurs have courage in all types of startups, whether they're foregoing a paycheck to feed the family or borrowing from mom and dad to found the next Google. Understanding the different kinds of entrepreneurial businesses is critical for policymakers, educators, and—most of all—entrepreneurs. Knowing the differences at a startup's outset will strengthen the entrepreneur and help unleash the job creation, wealth creation, and social progress that entrepreneurship delivers.
This essay is an excerpt from the Kauffman Thoughtbook 2011.