Understanding Entrepreneurial Behavior and Why it is Important
What is it that allows one entrepreneur’s business to succeed, and another to fail? It’s an area long studied in the world of business, and one that also has no simple answer. This hasn’t stopped academics from trying, however, with many choosing to look at entrepreneurial behaviour itself to determine if there are behaviours that those who do succeed possess.
While no two entrepreneurs are alike, academics have found that there do seem to be similar behaviours that emerge time and again. Let us explore them and understand why possessing them is so important for any entrepreneur.
What is Entrepreneurial Behaviour?
In its simplest form, entrepreneurial behaviour can be defined as a set of behaviours that an individual exhibits which allows them to innovate and/or improve upon existing ideas to market a product or service effectively in a competitive market.
While there are many different types of entrepreneurial behaviour that one might exhibit, they can typically be categorised into one of two categories – strategic entrepreneurship and effectual entrepreneurship.
Strategic entrepreneurship can be described as the pursuit of opportunity; the ability for an entrepreneur to spot an opportunity, capitalise on it using underutilised resources, and deliver value without regard to resources that are currently owned or controlled. As such, this form of entrepreneurship relies on the ability of an entrepreneur to seek both opportunity and competitive advantage simultaneously – even if it requires tapping into new resources completely.
Conversely, effectual entrepreneurship looks to generate wealth by relying on resources that the entrepreneur already has readily available and utilising them effectively to ensure success.
While both groups of behaviours have their advantages and disadvantages, the very nature of managing a successful business venture means there is no one size fits all approach.
Consider what is needed for a business to grow at the beginning of its venture. An entrepreneur is faced with lots of uncertainty, with no cash flow and limited resources available to them. Through effective management, the business can begin to grow and develop into a successful business venture, with multiple employees, additional processes and systems to manage, as well as the cash flow itself.
However, launching a startup compared to managing a fully-fledged business requires vastly different behaviours and skills. These different behaviours and skills that are required mean an entrepreneur cannot tackle these different challenges the same way he or she did at the beginning of the venture. As such, they must therefore alter their behaviour as the business continues to grow to adapt and best meet the businesses’ needs and goals at the time.
The inability of an entrepreneur to transition from a basic startup mentality to one of a manager is one of the biggest reasons why many startups fail. Starting a business and growing a business need two vastly different approaches, and those entrepreneurs able to change their behaviour accordingly are therefore far more likely to be successful.
What Are the Key Elements of Entrepreneurial Behaviour?
When we talk about entrepreneurial behaviour, it’s important to understand that the behaviour is not simply a set of desirable traits and characteristics. Instead, they are defined as key behaviours individuals exhibit early on that allow them to better navigate the world of business and see success.
The key elements of entrepreneurial behaviour include:
A common misconception surrounding entrepreneurs is that they are risk-takers, when in fact the reality is very different. Individuals who exhibit entrepreneurial behaviour are experts in mapping systemic risk and reducing it wherever possible. They can control every possible variable by understanding and measuring all areas of risk such as human, market, competitor, operational and more, allowing them the greatest chance of success.
The Ability to Bootstrap
When you begin a startup venture, limiting overhead and any unnecessary expenses is vital to allow yourself the best chance of generating profit. There is an outdated belief in the business world that you have to “spend money to make money”, whereas the best entrepreneurs know how to make use of existing resources and have the smallest overhead possible. Committing to costs when you are not fully confident in your business model is a recipe for disaster, which is why the best entrepreneurs only commit to costs once they can prove their business model will work.
Understanding Affordable Loss
That’s not to say the world of entrepreneurship is devoid of risk. Entrepreneurship involves taking chances, but the best entrepreneurs are also able to understand if these chances are worth taking in the first place. Understanding affordable loss, which is understanding if an idea is worth pursuing, and if it is, how much you can afford to pay to try it quickly, is a vital aspect of entrepreneurial behaviour that allows individuals to continue to learn and grow without sacrificing more than they can afford to lose.
Pivoting Where Necessary
The final key element of entrepreneurial behaviour is the ability to know when to pivot. Sometimes a significant change is needed. Individuals who are able to identify this, and are willing to change quickly and effectively, ensure they don’t end up either pivoting when it wasn’t required or pivoting too late.
The Truth Around Entrepreneurial Behaviour
We’ve already touched on how some aspects surrounding entrepreneurial behaviour are incorrect, such as how entrepreneurs are natural risk-takers and that they must “spend money to make money” and be successful. These generalised beliefs lead many of us to have a skewed view of not just what entrepreneurial behaviour is, but also how many businesses in the world today achieved their success.
The likes of Facebook, Amazon and Apple would lead us to believe organisations are like biological organisms in nature, that they are conceived, born young and over time become stronger and better. Add in being led by the likes of an effective entrepreneur, and it’s easy to assume this is a surefire way to take a startup to success.
The reality is far more complicated than this. The journey from startup to a large successful business is a long and difficult one, full of far more ups and downs than many people have been led to believe. Every startup is different, but this is also why one startup’s business path may be completely different from another’s.
The idea of differing business paths is one explored in the work of Garnsey, who concludes that “Dynamic processes in the early development of young firms result in variations in the timing, magnitude, duration and rate of change of growth as between firms and in the same firm over time.”
As such, while having the key elements of entrepreneurial behaviour will help you better navigate the difficult world of startups, the very nature of them means there is not a ‘one size fits all’ approach as the reality of growing a successful business is far different than one may expect when only looking at some of the biggest examples in the business world.
Understanding Other Types of Entrepreneurial Behaviour
It’s also important to understand that not all forms of entrepreneurial behaviour are inherently productive. While it might be easy to think that business by design helps grow the economy, there are plenty of examples to the contrary.
A good entrepreneur will use his idea to help grow the economy, yet there are plenty of entrepreneurs whose services only help to redistribute pre-existing wealth. Entrepreneurship that works this way is known as unproductive entrepreneurship and is often seen across many financial and legal services. Outside of specific industries, another common example is that of landlords.
While unproductive, there are some who exhibit entrepreneurial behaviour to generate a profit but at the cost of human misery. An unfortunate truth is that some of the most entrepreneurial individuals in the world operate in illegal trades such as drugs and trafficking, a prime example of what is described by Baumol as destructive entrepreneurship.
While these forms of entrepreneurship are unlikely to disappear anytime soon, the fact they are the minority, and not the majority, when it comes to entrepreneurial behaviour means those that possess it are far more likely to use their talents to benefit us rather than hinder us. And if the entrepreneurial among us harness their skills for good, the world is only going to continue to get more and more exciting.