Here’s the 18th part of my bi-weekly column with The Star Metrobiz. Read the original post. Hope this helps.
I have found in my discussion with others on the topic of entrepreneurship that I need to clarify the different kinds of businesses and what entrepreneurship really means.
These days, the world of work is completely different than it was a couple of decades ago. Jobs are no longer for life. For millennials, job hopping is the new normal. The average career in the US now lasts a little over four years and the same trend will follow suit here in Southeast Asia. In fact, people are increasingly choosing to run their own businesses.
However, people confuse running their own business with startups. The term “entrepreneur” has come to refer to anyone who starts or runs their own business. However, setting up or owning a business doesn’t necessarily make you an entrepreneur. Starting a business just makes you a business owner.
Definition of Entrepreneurship
My personal definition of entrepreneurship: “an entrepreneur identifies a need or gap in the market and creates a product or service to solve that problem.” Since this problem has to be big enough and affect a lot of people in the world, being an entrepreneur usually involves taking big risks, either from their own pocket or from an investor’s pocket. It is their hope that this new solution will eventually yield a sustainable profit. Therefore, the primary difference between a business owner and entrepreneur is based on risk, rate of growth and more importantly, the reason of being involved in the business.
Here are six categories of the different businesses one can start:
1) Family Businesses or Small & Medium-Sized Enterprises (SMEs)
Usually, family businesses or SMEs are synonym with “brick-and-mortar” businesses, which implies a physical presence of a building, production facilities or store for operations, and offer face-to-face customer experiences. SMEs is a common aspect in business communities everywhere in the world and makes up 95% of US companies and 97.3% of Malaysian companies.
Business owners are primarily interested in earning a living to support themselves and their families. They will usually only grow the business when they need to generate a larger income. Enterprises here are traditionally financed via microcredit or bank loans and typically do not take Venture Capital (VC) or investor money because it doesn’t yield returns in the timeframe that is expected from a VC. However, these businesses can still grow and turn into huge companies that can raise money through various means.
Examples from this category include brick and mortar stores, franchises, restaurants, retail outlets, reseller outfits, agricultural farms, etc.
2) Freelancing or Lifestyle Businesses
This category is for people who are self-employed and either work on specific projects at different companies or own a business that allows for solo remote work. Freelancers usually don’t take big financial risks because they look for clients that pay them for their work. The primary value is in their skills. How much they earn directly correlates with the time they put into their work.
Freelancers are not entrepreneurs but they sell their services and time whilst being self-employed. They have a flexible lifestyle and can fit their work around their travel. This category can also include musicians, artists, carpenters, and anyone who leverages on their specific skills for project-based work. Large freelancing websites such as Upworks and Freelancer have truly liberalised the flexible labor market where anyone can work virtually from home to monetise their time.
3) Service-Based Agencies
When one expands their freelancing or lifestyle business to include other staff members and employees, they can create a service-based agency to service more clients and projects. Consulting agencies, creative agencies, digital (web or mobile) agencies, ad agencies, etc. fit into this category and can be very profitable to business owners.
Usually, these agencies work with larger and more established clients for their projects and can continue to service them for years. Some effectively become a larger company’s outsourced arm for certain services that cannot be fulfilled in-house.
4) High-Technology Companies
High-technology (hi-tech) companies use cutting-edge technology and often requires a lot of research and development (R&D) as well as high upfront capital to develop IP. Hi-tech startups boomed in Silicon Valley with Fairchild Semiconductor’s presence in the 1950s. Employees who left Fairchild started other innovative companies that led to the innovation cycle.
Because the hi-tech sector creates new and innovative technology, it’s often seen as having the most potential for future growth. Investments usually come from larger institutional investors and VCs. However, it’s viewed as high risk since it requires high capital and takes a longer time to yield returns. If successful however, businesses in this sector can yield significant IP defensibility against competition and ultimately high profits.
Some examples of this sector include robotics, aerospace, automotive, hardware, machinery, manufacturing, biomedicine, electronics, biotechnology, greentech, computer engineering (algorithms etc), artificial intelligence, semiconductors, telecommunications, etc.
5) High-Growth and Scalable Startups
This category of businesses is currently the most popular and widely championed in Silicon Valley and most innovation hubs in the world. It’s also the category of entrepreneurs that MaGIC is developing.
Startups learn the lean startup methodology to develop their business models via rapid prototyping, quick iteration based on early customer feedback, and validation from the market via product traction. Largely leveraging technology either as its core or as an enabler, startups have the potential to scale to a large user-base very quickly and is perceived by investors to be lower risk than traditional or hi-tech businesses because of the lower capital requirements to push the product out in the early stages.
Usually, startups work on software solutions but recently, hardware or IoT startups have made a big wave with wearable technology and connected home devices. Venture capitalists and investors look for multiple returns on their investments (usually 3x for smaller investors up to 10x for larger VCs) and an exit between 5-10 years.
Local examples of high-growth startups include GrabTaxi, KFIT, iMoney, CatchThatBus, BloomThis, etc.
6) Social Enterprises
Social entrepreneurship is a relatively new form of entrepreneurship, where the social or environmental mission of the company is higher or equal to the profit-making mission. Social entrepreneurs are concerned with measuring the impact of their solutions on the world’s most pressing social and environmental problems but must have a sustainable business model.
Social enterprises (SEs) are on the rise in Southeast Asia, where people care about their communities and want to give back. MaGIC is working on developing this sector of entrepreneurship such that SEs become self sustainable and even profitable, while at the same time reinvesting back into societal needs.
Local examples of social enterprises include Epic Homes, Biji Biji Initiative, The Batik Boutique, Arus Academy, Tonibung, Mabul Skills Project, etc.
I hope these six categories of businesses will help clarify what it means to be a business owner versus an entrepreneur. Based on the different skills, resources and scale required by each business, one can figure out which kind suits them best. There is no right or wrong answer; everyone has different career ambitions and it’s very important to understand which type of businesses align with your life goals, and can be determined by lifestyle or financial priorities.