© 2007 John Wiley & Sons Australia, Ltd

Chapter 2 The personality of entrepreneurs

Chapter outline Individuals and opportunities Understanding the profile of an entrepreneur The risks of a career in entrepreneurship Relevant performance measures Entrepreneurs in a social context

Learning objectives Explain the relation between the entrepreneur and new value creation Explain why and how entrepreneurs discover and exploit opportunities List the roles and characteristics of entrepreneurs

Learning objectives Identify the relevant performance measures for an entrepreneur Define the risks of a career in entrepreneurship Explain entrepreneurial behaviour in a social context

Individuals and opportunities The entrepreneur is the central actor in the creation of a new venture. Initially, an opportunity is generally recognised by a single individual, who may decide to pursue it alone or with others.

Individuals and opportunities The opportunity becomes an entrepreneurial project and a process of new value creation is initiated.

The relationship between the individual and the opportunity The relationship between the individual  new value creation is a dialogic, or a system with a circular causality process. This dialogic means that the individual can be called an entrepreneur only because s/he is pursuing a project to commercialise a new product or service.

The relationship between the individual and the opportunity In turn, this entrepreneurial project exists only because there is an individual who has identified this opportunity and is pursuing it.

Typology of entrepreneurial outcomes Source: Adapted from C. Bruyat & P.A. Julien, ‘Defining the field of research in entrepreneurship’, Journal of Business Venturing, no. 16, 2000, p. 174.

The discovery and evaluation of entrepreneurial opportunities Opportunities rarely present themselves in neat packages; they have to be discovered and shaped. Differences between people matter regarding the discovery and exploitation of opportunities.

The discovery and evaluation of entrepreneurial opportunities 4 main differences have to be considered: –psychological characteristics –information and knowledge availability –creative processing –cognitive heuristics

The decision to exploit entrepreneurial opportunities The exploitation of an opportunity depends on the joint characteristics of the individual and the nature of the opportunity: Individuals are influenced by opportunity costs, individual risk perception, optimism, tolerance for ambiguity and need for achievement.

The decision to exploit entrepreneurial opportunities Exploitation is more common when expected demand is large, industry margins are high, the technology life cycle is young and the level of competition in the industry is low.

Triggers and barriers to start-ups Triggers Material rewards: make more money; keep the proceeds of the business; reward according to effort Creativity: use my own talents; a desire to create something; control from begin to end; passion about what I am doing Desire for autonomy: be my own boss; work my own hours; work with people I like, at a location of my choice

Triggers and barriers to start-ups Barriers Lack of resources: weak management and marketing skills; lack of information on start-ups; lack of finance Compliance costs: high taxes and costs associated with compliance to government legislation Hard reality: setting up a venture is harder than initially expected; uncertainty; fear of failure

Modes of exploitation 2 major institutional arrangements exist: the creation of new firms (hierarchies) the sale of opportunities to existing firms (markets)

Modes of exploitation Other exploitation modes are nevertheless possible: joint-ventures licensing buying a franchise...

Understanding the profile of an entrepreneur Two basic schools of thought shape the profile of the entrepreneur: economists who consider the entrepreneur as an agent who specialises in certain roles behaviourists who concentrate on the creative and intuitive character

The roles of the entrepreneur: an economic perspective From the economist point of view, entrepreneurship is considered as a function. The status of the entrepreneur can be analysed in terms of labour division which explains this function based on certain roles:

The roles of the entrepreneur: an economic perspective –risk bearer –arbitrageur –innovator –co-ordinator of scarce resources

Early studies in entrepreneurship typically focused on the psychological characteristics and the personality of the individual as determinants of behaviour. The characteristics of an entrepreneur: a behaviourist approach

Only 3 of the endless list of entrepreneurial traits have shown a high level of validity: –the need for achievement –the internal locus of control –the risk-taking propensity The characteristics of an entrepreneur: a behaviourist approach

The risks of a career in entrepreneurship There are 4 types of risks to consider before embracing a career in entrepreneurship: –financial risks –career risks –social risks –health risks

Financial risks Large amounts of own money have to be invested. After start-up most of the profits are usually reinvested.

Financial risks Borrowing funds from bankers, venture capitalists, or partners can reduce financial risks. Legal structures can help to minimise financial risks.

Career risks Questions about (re-)employment after an eventual failure must be considered. This risk is particularly acute for well-paid specialists and people close to retirement. Risks can be minimised by launching a business on a part-time basis.

Social risks Starting a business venture requires much of the entrepreneur’s energy and time. The decision to set up a venture should therefore involve the family to reduce conflict potential.

Social risks Another risk is linked to the (negative) image of failed entrepreneurs like in Singapore — hence the kia siu attitude — ‘afraid to lose’.

Health risks There is evidence that entrepreneurs experience higher job stress and psychosomatic health problems than other people. Would-be entrepreneurs should make sure that their health can cope with the demands and challenges of starting and running a business.

Relevant performance measures There are many motives for starting a business, such as achieving social status or having a new lifestyle However, a business must generate a profit to stay in the market place.

Relevant performance measures Just to break even, profits must cover –compensation for bypassed alternatives (opportunity cost) –the cash, effort and time invested in the venture (liquidity premium) –a premium for risk –a premium for uncertainty

Relevant performance measures for entrepreneurs Source: Adapted from S. Venkataraman, ‘The distinctive domain of entrepreneurship research’, in J. Katz (ed.), Advances in Entrepreneurship, Firm Emergence and Growth, vol. 3, Jai Press, Greenwich, Conn., 1997, p Figure 2.3

Entrepreneurs in a social context 3 features of a person’s social context are important to the perception of entrepreneurial opportunities and the decision to seize them: –the stage of life –position in social networks –ethnicity

Stage of life and entrepreneurial behaviour There is no general theory indicating the stage of life that is best for launching a business venture, but empirical research has shown that most of the entrepreneurs start business with post-secondary education, between the ages of 25 and 44, and with an established career record.

Stage of life and entrepreneurial behaviour Recent studies show that a strong team is critical for new venture growth.

Social networks and entrepreneurial behaviour The networks that entrepreneurs build for themselves stand out in a number of respects: –Networks are genuinely personal –Spatial dimension is relevant –Active content of an entrepreneur’s network must vary over time to be dynamic

Social networks and entrepreneurial behaviour Networks are important in both Western and Eastern cultures. However, they are central to Eastern cultures and particularly to the Chinese.

Ethnicity and entrepreneurship Ethnic entrepreneurship can be a response to the lack of opportunities in the dominant culture In this case, entrepreneurship is very often triggered by a variety of ‘push factors’

Ethnicity and entrepreneurship But ‘pull factors’ can also be important, such as the presence of entrepreneurs in the family as role models.

Summary Entrepreneurs and opportunities form a dialogic — a system with a circular causality process. The existence of an opportunity does not necessarily lead to its discovery and exploitation, and is related to personal differences of the entrepreneurs.

Summary 2 schools of thought exist on the entrepreneurial perspective in individuals: economists and behaviourists. People considering a career in entrepreneurship should be aware of the risks and develop strategies to avoid them, and also have the correct performance measures in mind.