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A Theory of Entrepreneurship [Entrepreneurship
Posted on August 15, 2013 @ 05:59:00 AM by Paul Meagher

There are a few theories out there that try to explain successful entrepreneurship. Currently, the best candidate explanation is called the "Lean Startup" theory. It has many useful things to say about how to adapt a service to a market base in a reliable and cost-effective manner. Universities looking to offer courses on entrepreneurship now use Lean Startup Theory as part of the foundational framework for their curriculum. It has some traction.

It is a difficult task to try to explain why some entrepreneurs are successful while others are not. The very definition of what an entrepreneur is fuzzy. Are small business owners entrepreneurs? Or, is that title reserved only for those are trying to bring an innovative product to market? Is the mother who sells Avon on the side an entrepreneur? What about farmers tending to their crops and animals? Or those who fish the oceans? An actor looking for gigs? In my view, entrepreneurship pervades all of these activities and a theory of entrepreneurship should explain why some mothers, farmers, fishers, and actors are more financially successful than others. While being "lean" may be part of the explanation, I conjecture that a factor that has more explanatory weight is how many lines-of-business they have established and are in the process of realistically establishing.

Lines-Of-Business Theory

My theory on successful entrepreneurship can be most easily understood using a farming business as an example. Farmer Joe and Farmer Sally both own farms of equal size and capacity to raise crops and animals. It turns out, however, that Farmer Sally is more successful than Farmer Joe as measured by the amount of profit generated at the end of the year. How might we explain the difference?

If we examine Joe's operation, we might observe that he is raising beef cattle and spends most of his time doing all the chores required to raise his animals. Some years Joe does well and other years not so well, much depends on the price of beef when he is ready to sell. Sally also has some animals, some hens and sheep, and also vegetable gardens, an orchard, and rents out rooms in her house as a bed and breakfast. Sally has not placed all of her eggs in one basket. Instead she has diversified into several lines of business which generate separate streams of income (e.g., sells eggs, lamb, vegetables, apples, and rooms). Her cashflow is also more regular than Joe's. Sally is not making millions of dollars but she is making a comfortable living, is not worrying about how to pay her bills, and has saved money to buy plants and equipment for a new line of business for next year (growing blueberries). Sally is growing her business each year by adding a new line of business each year. Some years, one of her lines of business might do better (room rentals) than another one (pests damage to crops) but overall they compensate for each other because they are fairly separate lines of business.

It is easy to see that having multiple profitable lines-of-business can explain why Sally is more successful than Joe. At the very least, we could use the lines-of-business theory to explain why some farmers are more successful than other farmers - they have more than one line of business, they have chosen lines of business that can compensate each other, they have chosen profitable lines of business, they are investing in new lines-of-business each year, and they are able to manage all of these lines-of-business without a marital, health or stress breakdown.

So does this line-of-business theory explain why some entrepreneurs are successful? It would suggest that they are successful because they have more than one profitable line-of-business, that they have used one line-of-business to bootstrap another line-of-business, that their focus is always divided between expanding existing lines-of-business while also exploring and investing in new lines-of-business. This theory, if true, would have some explanatory force in explaining differential success of entrepreneurs and also offers some suggestions as to what to look for when trying to explain entrepreneur success (define, count, and measure each line of business and see if there is a difference among entrepreneurs that correlates with profit level). It also explains why some mothers, farmers, and actors are more entrepreneurial than others - it has to do with wanting to setup new lines of business (another stream of income). This theory says that successful entrepreneurs do not just do one thing well, they do multiple things well and are always engaged in finding and establishing profitable new lines-of-business.




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