Who is an entrepreneur really? It turns out that there are four distinct types of entrepreneurial organizations; small businesses, scalable startups, large companies and social entrepreneurs. They all engage in entrepreneurship. Yet entrepreneurs in one class think that the others aren’t the “real” entrepreneurs. This post looks at the differences and similarities and explains why there’s such confusion.
Small Business Entrepreneurship
My parents came to the United States through Ellis Island in steerage in sight of the Statue of Liberty. As immigrants their biggest dream was opening 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, just to feed their family.
My parents were no less of an entrepreneur than I was. 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. Both my parents worked as hard as any Silicon Valley entrepreneur but with a different definition of a successful business model; when they made a profit, they could feed our family. When business was bad they figured out why, adapted and worked harder still. They were only accountable to one and other.
Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses.
Scalable Startup Entrepreneurship
Unlike my parents, Fred Durham and his partner Maheesh Jain started the now $100+ million CafePress, knowing they wanted to build a large company. Founded in offices smaller than my parents grocery store, Fred and Maheesh’s vision was to provide a home for artists who made personalized products assembled in a just-in-time factory that today delivers a customized gift each second. 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. Success for a scalable startup is a three-times (or more) return on the investor’s money – either by a public offering of stock or by selling the company.
Scalable startups in technology centers (Silicon Valley, Shanghai, New York, Bangalore, Israel, etc.) make up a small percentage of entrepreneurs and startups but because of the outsize returns attract almost all the risk capital (and press.)
Large Company Entrepreneurship
At the end of 1980, IBM decided to compete in the rapidly growing personal computer market. They were smart enough to realize that IBM’s existing processes and procedures wouldn’t be agile enough to innovate in this new market. The company established their new PC division (called Entry Systems), as a Skunk Works in Boca Raton Florida a 1000 miles from IBM headquarters. This small group consisted of 12 engineers and designers under the direction of Don Estridge. Success for this new division meant generating substantial revenue and profit for company.
The division developed the IBM PC and announced it in less than a year. Three years later the division had sold 1 million PC’s, had 9500 people and a billion dollars in sales.
Don Estridge’s paycheck and funding for the division came from IBM and he reported up the organization, but in his own division he was no less entrepreneurial than Michael Dell or Steve Jobs – or Fred Durham or my parents.
Social Entrepreneurship
Irfan Alam, a 27-year-old from the Indian state of Bihar started the Sammaan Foundation to transform the lives of 10 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% of the ad revenue, the remainder going to Sammaan. The rickshaw-pullers end up as owners after re-paying the bank loan in installments. Irfan started off with 100 such rickshaws in 2007 and have 300,000 today.
Irfan doesn’t take a salary but he is as focused on scalability, asset leverage, return on investment and growth metrics as any Silicon Valley entrepreneur ever was.
Summary
If you put the four entrepreneurs in the room you would understand what they had in common- they were resilient, agile, tenacious and passionate – the four most common traits of any class of entrepreneur.
Also in common, each of their businesses initially were searching for a business model, and each was instinctively executing a customer discovery and validation process.
Yet there are obvious differences in each type; personal risk, size of vision and goal.
More on this later.
Lessons Learned
- Four different types of entrepreneurship: Small Business, Scalable, Large Company, Social.
- All searching for a sustainable business model.
- Regardless of type, entrepreneurs have common characteristics: resilient, agile, tenacious and passionate.
- Differences include level of tolerance of personal risk, size and scale of the vision and their personal financial goal.
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Great article, I get the feeling that a lot of businesses get themselves confused about their own state and ends up trying to be both a Scalable Startup and a Large Company at the same time. But maybe that is just premature scaling?
Thanks Steve!
Many of us (in the hinterlands) appreciate your recognition that e-ship started as (and continues to be) a strategy to ‘feed the family’.
While investors may not benefit from the successes of these entrepreneurs, their families (perhaps several generations) do.
— Mike
Great post Steve. A continuation of the discussion you held at the SLLConf, which was eye-opening for me.
I understand the chart you included in the summary of this post is meant to be just that – a simple summarization. But, I definitely want to “Get Rich/Implement Vision” inside my small business. It’s more than a desire to “have a job that pays the bills.”
Yet, I’m not interested in the hurly-burly fast paced VC-backed scalable startup world that, as you point out, can often end in disaster for founders.
Do you think there is another class of entrepreneur here, or am I splitting hairs?
–
Matthew Mamet
Matthew, I also seem to fall into the category of small business you propose. I have know interest in courting VC $$, but have the ambition of building something very scaleable and profitable.
Time-frame seems to be a differentiator. I am willing to accept a much slower growth rate than a VC backed company might. I suppose there is some risk that our well-funded competitors will leapfrog us in technology. But a risk I am willing to take.
Mathew – I think many small businesses can grow into a “get rich” business (as opposed to just pay the bills) without VC – it just takes the right business model and patience (also depends on your definition of rich – $10M vs $100M).
1. Try to design the biz so it’s capital efficient – example, Dell Computers – when started (and even today) most customers paid before the components were purchased and assembled, so you did not need more working capital to grow the business, in fact increasing customer orders financed the growth of the business;
2. Use Steve’s customer development principles – find a business model before you invest significant money – again part of being capital efficient;
3. If you are successful at 1. and 2. above and have a replicable, profitable business model, it’s likely you then have all sorts of financing options available to you (including organic growth) – bank debt, lines of credit, private placement of minority stake in the company, strategic investor, etc. and can avoid many of the negatives (real and or perceived) of VC.
4. I hope Steve will talk more about this, because I see a definite “gap” between traditional small businesses (lifestyle) and standard venture backed “scalable” businesses. I think technology (the ‘net) and it’s inherent capital efficiencies make this new type of business more achievable to more entrepreneurs.
Thanks Steve- as a social entrepreneur searching for a business model that also saves the world, I’d love to hear more about what you have to say on the topic!
Thank you for posting this. I would argue that most funded startups present low to moderate risk especially compared to small businesses. For 10 years, I worked at venture backed startups and for the most part, I could count on getting my salary every couple of weeks. I now have my own small business that I have self-funded and I am quite aware of how the profit and loss impacts what I can provide for my family.
Thank you very much Steve for including the distinct role of social entrepreneurs in your discussions. In our young social venture we have been following the Customer Discovery methodology even though sometimes it doesn’t quite apply to social goals. Nevertheless we have found it tremendously helpful and we hope you include more and more social entrepreneurship examples in your blog!
A quick question, why is Personal Risk only Medium in a social enterprise? We are following a for-profit model with angel investors, just like a typical Scalable Startup…
Steve, I watched your presentation at U.C. Berkeley on-line and I really enjoyed it. I deeply appreciate your passion about entrepreneurship and education. In your presentation, slide 18 you wrote:
> • The Internet allows a new class of Small Businesses
> • Not all businesses on the Internet are “Scalable Startups”
The Internet, by its very nature, scales (globally). Could you be more precise about what you mean by “Not all businesses on the Internet”, and could you provide some examples of instance of the “new class” of Small Business that the Internet allows (presumably this class was non-existent before the Internet) which are incapable of scaling? My intuition is that what you means is that businesses where substantial physical or human capital is required to scale is what you are referring to as non-scalable or difficult / cost prohibitive to scale. Or perhaps businesses with Internet presence but who are restricted legally for example due to government regulation (city, state/province, country) can’t scale or have limited scalability?
Thank you for clarifying what feels like awkward wording.
-Eddie
I think it helps to think of entrepreneurship not as a binary quality but rather a quality determined by multiple variables, primary among which is the amount of personal risk taken and the level of initiative. Surely someone like Steve’s parents, putting their life’s savings and the future of their family on the line risked a lot more than Don Estridge who ran the PC group for IBM. His and his family’s future was practically guaranteed by IBM’s full employment policy at the time. We don’t even know if IBM getting into the PC business was his idea or whether he was tapped for the job.
Between the two, who scores higher on the entrepreneurial scale?
Steve, great post as always. I loved the matrix at the end!
Nice post. People seem to have different notions about what true entrepreneurship is. I guess that’s why Jason Fried and DHH prefer the term “starter” to entrepreneur. Of course, saying you’re an entrepreneur is a lot more fun and feels better than calling yourself a starter.
[…] You’re Not a Real Entrepreneur Who is an entrepreneur really? It turns out that there are four distinct types of entrepreneurial organizations; small […] […]
Great title but an even better post. I’d love to learn more about what we in Silicon Valley have in common with the other types of entrepreneurs, outside of the high tech echo chamber.
Categorizing entrepreneurship with the memes “social”, “small business”, “scalable” is interesting. However, I question the threshold of $X million that differentiates scalable from small business in the context of being Internet-based. Just because VCs like to see a potential for the business to grow (to $100M) and get back an ROI of 3x doesn’t mean a smaller business on the Internet is non-scalable. Hence, Steve Blank’s definitions are biased (shaped by a Silicon Valley VC view). What’s to say you can’t have a privately held company with zero VC investment grow to $50M (from sub-VC investors in the pyramid) that end up churning out fantastic dividends to the shareholders? Besides, with cloud computing platforms rapidly evolving and becoming a reality for a lot of developers, a small business can be instantly scalable and Amazon would argue “elastically” so. The cloud is the new Silicon Valley, and don’t discount the attractiveness of dividends especially with the tides having turned in the larger picture (i.e., Ben Bernanke warning U.S. Congress time and again of unsustainable debt, Nassim Taleb warning of the same thing and of forthcoming austerity in many parts of the developing world)! note: take “Internet” out of the picture and scalability takes on a different meaning for example the green tech / energy stuff that Bill Joy, John Doerr are interested in, scaling those types of businesses takes massive amounts of capital that not even a single VC like Kleiner can handle on their own in most cases.
Dallas,
I don’t think he is making these classifications based on minimum external investment or whom that investment comes from. Instead, the underlying difference between all the various types of startups is the measure of success. In the case of ‘scalable startups’, the measure of success is a significant ROI for investors (ie. 3x or more). This could be from sub-VC investors as you’ve mentioned for small internet startups, or from multiple large VC firms in the case of physical-tech startups. Heck, you could extend the definition to include the founders themselves as the investors, as long as they are seeking significant ROI due to scaling.
Is that post about entrpreneurship or about businesstypes? You don’t really seem to come to the point here. For what do you need to be an entrepreneur to have a business? For what do you need a business to be an entrepreneur? I see that there is some content in this post, but there is so much consultant like business talk around it that I can’t find it.
I think you are right, this categorization seems to be more one about business types.
And I agree that running a business and being an entrepreneur is not the same thing.
Steve gives a characterization of an entrepreneur at the end of the post:
“If you put the four entrepreneurs in the room you would understand what they had in common- they were resilient, agile, tenacious and passionate – the four most common traits of any class of entrepreneur.”
I like the distinction between “entrepreneur” and “manager”. Both of them can run businesses but the innovation comes from the entrepreneur.
Thanks, Steve. Just discovered what my friend from freshman year in college went on to do… Fred lived two doors down from me and we’d often go for late night Indian food runs down on Devon.
Hi Steve,
that was was an interesting read! As with most of the things there are many possibilities to categorize entrepreneurs and I like this one although it´s not really consistent.
I love the aim of the social entrepreneur “save the world”. I actually never thought of humanitarians as entrepreneurs, but if you think about it, they are. People like Mother Teresa and Henry Dunant built huge “businesses”. It is so humbling. Entrepreneurial skills PLUS altruism.
One thing I think is missing from the goals columns for the small business is “be your own boss”. With scalable startups, you’ll have to answer to other people (VCs, investors, etc.) sooner or later, unless you self-finance entirely and never go through an IPO. With a small business, you usually have to answer to nobody but yourself.
Also, I think the grocery store example is closer to the extreme end in terms of work required for a small business. (A greengrocer is even worse.) I can think of a couple of people around me that run small businesses and seem to earn a reasonable living with a not too unreasonable amount of work. Including less than full-time for some, where the business mostly runs itself now and they don’t need to be there all the time.
Not that the other three kinds of entrepreneurs aren’t appealing too, but I felt there was a little something missing on the positive side of the “small business entrepreneur” scale, with only your parents’ grocery store as an example. Thanks for an enlightening post!
High wire acts always receive the attention, and for good reason. As Daniel Burnham said: “Make no little plans; they have no magic to stir men’s blood.”
In international development studies, there is a popular fifth type – “subsistence entrepreneur”, the one who runs a minuscule business (like a fruit cart) that barely allows him to go to bed not hungry, and that does not have any other earning choices. I think this is pretty similar to your parents at start and makes a good addition as Type 5.
Hi Steve,
great post. I was always very fast to judge other peoples enterprises. You made a very good observation and I had to learn this lesson the hard way. It’s of course essential to know what outcome you want for yourself.
Thanx for the post. Hans
I like this article, Steve! Entrepreneurs started this nation and continue to thrive today. They should be recognized, and at Grasshopper we are actually doing a petition for a National Entrepreneur’s Day in order to recognize these great people. http://entrepreneursday.org/
Another great article Steve!
[…] For the rest of the story and details on each type of entrepreneur, plus Steve’s resources for startup organizations, check out Steve’s blog here. […]
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[…] You’re Not a Real Entrepreneur « Steve BlankJun 10, 2010 … They all engage in entrepreneurship. Yet entrepreneurs in one class think that the others aren’t the “real” entrepreneurs. This post looks at the … […]
Great article to categorize entrepreneurial types. I was confused with the terms: entrepreneurs, small business owners, startup founders, etc, and how they relate to each other. You made it so clear in the article.
[…] an article in his blog, Steve Blank pointed out the four kind of entrepreneurship that he identified: SMB, Scalable Startups, Large Company, Social […]
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