ESSAY ON ENTREPRENEURSHIP
ENTREPRENEURIAL FOLKLORE
by Robert H. Brockhaus
"Entrepreneurs are high risk-takers
who, having developed a new product
or service, obtain venture capital to
supplement their own large financial
commitment, and start a business
wbich grows to a large size, making
them wealthy." Is this statement pre-
dominantly true or predominantly
false? The answers are as varied as the
numbers of studies which have been
conducted on the subject and the meth-
odologies that have been employed.
Definition of the Term
"Entrepreneur"
To begin with, one must attempt to
define the term "entrepreneur." Re-
searchers investigating the entrepre-
neurial phenomenon have adopted a
wide range of definitions.
The noted nineteenth century British
writer, J. S. Mill, was one of the first
economists to use the term "entrepre-
neur." He considered direction, super-
vision, control, and risk-taking to be
the functions of the entrepreneur, and
appeared to feel that risk-bearing was
the main distinguisbing feature be-
tween tbe manager and the entrepre-
neur. These ideas are present in many
current definitions of entrepreneurs.'
For example, Webster's Third New
International Dictionary defines the
entrepreneur as "an organizer of an
economic venture, especially one who
' J, S. Mill. Principles of Political Economy with Some
Applications to Social Philosophy (Londun: John W,
Parker. 1984). p,:J2,
Dr. Brockhaus holds the L. L, McAninch Chair of
Kntrepreneurship at Kansas State Universily,
A
organizes, owns, manages and as-
sumes the risk of a business."
Scbumpeter, perhaps the best known
twentieth century student of entrepre-
neurship, differed from Mill in stress-
ing tbe role of innovation as the key
distinguishing factor for entrepre-
neurs. He believed that both managers
and entrepreneurs experience risk, and
he held that the entrepreneur's chal-
lenge is to find and use new ideas. The
range of possible alternatives include:
(1) developing new products or ser-
vices, (2) developing new methods of
production, (3) identifying new mar-
kets, (4) discovering new sources of
supply, and (5) developing new organi-
zational forms. Schumpeter's position
was supported later by Kirzner, who
felt that the identification of market
opportunities is the fundamental func-
tion of the entrepreneur.'
Penrose emphasized that manager-
ial activities should be distinguished
from entrepreneurial activities, thus
giving birtb to the current argument as
to how an entrepreneur and small
business owner differ. She stated that
identifying and exploiting opportun-
istic ideas for expansion of small
enterprises is the essential aspect of
entrepreneurship.^ McClelland was
less restrictive, believing that an inno-
vative manager who has decision-
-J. A. Sfhumpeler, The Theory of Kconomie Dei'elop-
menMCambridge, MaB8,; Harvard UniverBity Press. 1934),
IE, T. Fennise. Thf Theory
(Oxford; Basil Blackwell. ISKiHI, |
July 1987
 making responsibility is as much an
entrepreneur as the owner of a busi-
ness who behaves in an innovative
manner.*"
More recent writers continue to
struggle with the task of defining
'"entrepreneur." The definitions have
tended to change as business concepts
have evolved and ownership forms
have changed. Long recognizes three
recurring tliemes emerging from the
various definitions, namely that en-
trepreneurship involves uncertainty
and risk, complementary managerial
competence, and creative opportun-
ism.'^
It was once felt that one must own a
business in order to be considered an
entrepreneur. This requirement is no
longer believed to be necessary—in
fact, many researchers believe it pos-
sible for entrepreneurs to exist as
employees of large corporations, or
"intrapreneurs."
While the concept ofthe intrapreneur
has a growing number of supporters, it
also has many vocal opponents. In-
deed, some writers would distinguish
between small business owners and
entrepreneurs who own businesses.
Carland et ai., for example, have
developed the following definitions:
'•Entrepreneur ... an individual who
establishes and manages a business
fortheprincipal purpose of profit and
growth. The entrepreneur is charac-
terized principally by innovative be-
havior and will employ strategic
management practices in the husi-
neas."
"Small Business Owner... an indivi-
dual who estahlishes and manages a
business for the principal purpose of
furthering personal goals. The busi-
ness must be the primary source of
income and will consume the major-
ity of one's time and resources. The
•I). ('.McClelland, The Achieving Society iFreePrma:
Collier-McMillan. 19fil). p, 67.
"W I-ontt/'Tht^Mcanmti of Kin trepreneurship,'Mm«r-
ican Journal of .Smo// Business, vol. 8. no. 2 (1983), pp.
47'8
Journal of Small Business Management
owner perceives the business as an
extension of his or her personality,
intricately bound with family needB
and desires."''
Other researchers disagree on grounds
that this distinction is difficult to
operationalize.
It should be clear at this point that a
well-defined entrepreneurial popula-
tion does not exist and research find-
ings are often difficult to compare.
Understanding that the population is
loosely defined, we shall assume a
comparatively broad definition in this
essay, i.e., that anyone who starts a
business is an entrepreneur. A system-
atic analysis of the entrepreneurial
characteristics claimed in the opening
premise should then lead to a better
understanding of what an entrepre-
neur is, or at least to an understanding
of what he or she is not.
Risk-Taking Propensity
Is the entrepreneur a high risk-taker?
The average lay person would say
"yes," but scholars in the field are less
certain. Risk-taking is involved in
starting a business, but researchers are
divided as to the risk-taking propensity
of entrepreneurs. Their findings vary
according to the entrepreneur's sex,
cultural hackground, stage of business
development, and type of business
owned, and also according to the re-
search method employed.
Investigators using objective mea-
surement techniques to report overall
genera] risk-taking propensity tend to
conclude that entrepreneurs are no
different from the general business
population. Those using more specific
questions, such as comfort with mone-
tary risks, tend to find that entrepre-
neurs take greater risks than other
business persons. McClelland conclud-
ed as a result of his research that a high
•J. W, Carland, F. Hoy, W. R. Bouiton, and J, C-
Cartand, "Differentiating Entrepreneura from Small BUB-
inesB Owners: A Conreptualizaliiin,"/l{-orfpm> of Man
agemeni Review, vol.9, no. 211384). pp. :Kj'I-:!59,
need for achievement drove people to
become entrepreneurs, and he found
that persons with a high need for
achievement took moderate risks as a
calculated function of skill.**
More recently, however, my own
research casts douht on the validity of
general risk-taking propensity as an
entrepreneurial characteristic. No sig-
nificant statistical differences were
found in the general risk preference
patterns of a group of entrepreneurs
and a group of managers.^ Indeed, the
risk-taking score distribution was sta-
tistically similar to that of the more
f^eneral population examined hy Ko-
gan and Wallach in their studies using
their Choice Dilemma Questionnaire.'"
In another study. Sexton and Bowman
found no significant difference in the
risk-taking propensity of entrepreneur-
ship students and other students at the
same university." This failure to dis-
tinguish between the risk-taking pro-
pensity of entrepreneurs from that of
the general population appears to be a
major deviation from the widely held
theory that entrepreneurs are moder-
ate risk-takers.
Peacock used Kogan and Wallach's
Choice Dilemma Questionnaire to cor-
relate risk-taking propensity with bus-
iness success. She found that entrepre-
neurs as a whole were moderate risk-
takers, hut there was no significant
difference between successful and
failed entrepreneurs in terms of their
risk-taking propensity.'-
•D. f. McClelland, The Achieving Society iPrincetan.
N.J.: D. Van Nostrand, 1961), p. ;W.
"R. H. BroekhauB, "Risk Taking Propenaity of Entre-
preneurs," Ararfcmyo/JWafMiae'nenlJourno/, vol23,no.3
n980). pp. 509.520,
'"N. Kotcan and M, A. Wallach. Risk Taking (New
York: Holt, Rinehart and Winston, 196-1).
I'D. L. Sexton and N. B. Bowman, "tlomparative
Kntrepreneurship CharacUriHtits of Students." in Frnn-
liers of Enln^preneumhip Research. I9H.'I. ed. J. A.
Hornaday, J. Timmons, and K. H. Vesper (Wellesley.
Mass.; Babaon College, 19H:!). p. 465478.
|-:P. Peacock, "The Influence of Riak-Taking ae a
Cognitive JudRmental Buhavior of Small Business Suc-
cess," in fronfjVrHo/'^n/rt'prpnt'ursftipflcsporfA.Ji'^fi.ed.
K. Boratadt, J, Hornaday, R. Peterson, and K. Vesper,
iWetiesley, Mass.: Babson College. 1986). pp, 110-118,
July 1987
Other entrepreneurship studies have
produced still different findings. Sex-
ton and Bowman, testing female busi-
ness students, managers, and entrepre-
neurs on a personality index, found a
significantly higher risk-taking pro-
pensity among the entrepreneurial
group.'' Ray, utilizing a modified
choice dilemma questionnaire to study
the risk-taking propensity of business-
men in Singapore, found risk-taking
propensity to run the gamut from very
high to very low. He noted a similarity
of response between the general popu-
lation and entrepreneurs on questions
pertaining to everyday life situations,
while questions more specific to busi-
ness situations found entrepreneurs
assuming higher risks.'-*
In a study of businesses in Cali,
Columbia, Rodrigo utilized a direct
question metbod wbich focuses on per-
ceived financial risks. He found that 72
percent of the population perceived a
low level of risk of financial failure.'^
In a recent attempt to investigate
this issue further, Schwer and Yucelt
studied the risk-taking propensities of
a sample of small business entrepre-
neurs and managers in Vermont. Risk-
taking propensities were again mea-
sured on the basis of responses to the
Kogan-Wallach risk-taking question-
naire. The responses were found to
vary more for business risk situations
than for personal risk. In addition,
there were significant differences in
risk-taking propensities according to
differences in the respondents* years of
business experience, age, and educa-
tion. Other factors found to influence
risk-taking bebavior were the size and
"I). L, Sexton and B. Bowman. "Validation of B
Personality Index; Comparative Psychological Charac-
teristics Analysis of Female Entrepreneurs. Managers,
Entrepreneursbip Students and Business Students." in
Frontiers of Entrepreneurship Research. 1986, pp. 40-57.
" D . M. Ray. "Perceptions of Riak and New Enterprise
Formation in Singapore: An Exploratory Study," in
Frontiers af Entrepreneurship Research. /9S6, pp. 119-145.
'*V. J. Rodrigo, "Characteristics of Entrepreneurs in
Call," in Frontiers of EntrepreneurBhipResearch, 1986. pp.
82-90.
 type of business and number of years
that the business had been owned.
Finally, risk-taking propensities var-
ied significantly according to the re-
spondents' motivations, including how
they felt about themselves, the proba-
bility of improving themselves, and the
probability of accomplishing their
goals."'
It would appear from the results
recounted above that the measurement
of risk-taking propensity is not an
accurate way of identifying entrepre-
neurs, whose risk-taking propensity
appears to vary widely according to the
situation. Omitting business owner-
ship from the definition of an entre-
preneur would allow the inclusion of
corporate entrepreneurs, further reduc-
ing risk bearing as a prime entrepre-
neurial characteristic.
Far more research, applying vali-
dated and reliable instruments to a
variety of entrepreneurs and non-en-
trepreneurs, must be conducted before
the importance of risk-taking as a part
ofthe entrepreneurial equation can be
determined.
Introduction of New Products
or Services
The concept of the entrepreneur as a
person with a new idea or product to
exploit also appears suspect. In my
own research, I found that as many as
60 percent of entrepreneurs decide to
start a business before they know what
type of business they want to under-
take. Many have found their previous
employment to be unsatisfactory, and
also believe they would not enjoy
another place of employment.'^ Com-
mon motives for starting a business
include a desire to work independently,
a need for more concrete feedback, a
'•^R.K,SchwerandU.Yucelt,"AStudyofRiBk-Taking
Propensities Among Small BusinesH Rntrepreneurs and
Managers: An Empirical Evaluation," American Journal
of Small Business, vol.8, no, 3 (19841, pp. 31.17.
"R. H. BrockhauB, "The Effecl of Job Dissatisfaction
on the Decision to Start a Bu9ineBB,".4m<''-iran Journal of
Small Business Management, vol. 18. no. 1 (1980), pp,
37-43.
Journal of Small Business Management
perception of greater financial return,
a desire to complete a task involving
something unique, and the identifica-
tion of unexplored opportunities.
Not to be ignored among the reasons
for entrepreneurship are changes in
the labor supply that are not readily
accomodated by wage and salary jobs.
This type of unemployment or under-
employment is often encountered by
veterans, persons laid off due to com-
pany retrenchment, and two-income
families with flexibility constraints.
Shapero referred to this phenomenon
as a "push" from a dissatisfying envi-
ronment rather than a "pull" from an
exciting new idea begging to be mar-
keted.'** Thus many entrepreneurs are
not developers of new products.
Job dissatisfaction as a reason for
self-employment dilutes the concept of
entrepreneurs as innovators. Job dis-
satisfaction may also affect percep-
tions of risk—the strong desire for a
new working environment may lead to
an inability or disinclination to recog-
nize the possibility of failure.
Sources of Capital
Venture capital is frequently men-
tioned as a prerequisite for entrepre-
neurial activity. However, compara-
tively few businesses actually secure
funds from a venture capital firm.
Wetzel reported that the number of
firms financed by institutional venture
capitalists is less than one thousand
per year, and fewer than 50 percent of
these are start-ups. Thus, perhaps
fewer than five hundred of the five
hundred thousand businesses started
each year receive institutional venture
capital.'^
Many other sources conducted during
the period 1964 to 1984 concluded that
private investors (or "angels" are far
"A. Shapeni. '"The Displaced. Uncomfortable Entre-
preneur," Psychology Today (November 1975). pp. 83-88.
'"W. Wetzel. Jr., "Informal Risk Capital." in The
Art and Science of Entrepreneurship. ed. D. L.Sextonand
W, Simlor(CambHdge, MasB.: BallinRer PuhllshinK Co.,
1986), pp. 85-117.
 more likely than venture capital firms
to finance small start-up companies.^"
Private investors tend to provide more
funds on more liberal terms than ven-
ture capitalists. The former also tend to
fund companies in fields with which
they were familiar and in which they
hope to stay involved. In 1974, al-
though venture capital added a signi-
ficant pool of money for potential busi-
nesses, the combined contributions of
venture capitalists and private invest-
ors amounted to only 18 percent of total
start-up financial requirements.^' This
significant lack of funds for small busi-
ness was still much in evidence in 1983,
when Ohermayer determined that only
12 of the 101 firms she studied had
raised funds from private investors.^^
Do entrepreneurs themselves, then,
provide the bulk of the large financial
assets required? Apparently not—in-
dividual savings of the owner consti-
tute only 13 percent of the total capital-
ization, on the average, with the
spouse's savings providing another 6
-"Baty, The Initial Financing of the New Mesearch-
Based Enterpri.ie in New England (Boatan. Mass.: Federal
Reserve Bank of Boston. 1964|; C. A. Hoffman, "'The
Venture Capital Investment ProcesB: A Particular Aspect
of Retfional Economic Development" (Ph.D. dissertation,
the University of Texas at Austin, 19721; D. T. Brophy,
"Venture Capital Research," in Encyclopedia of Entre-
preneurship. 1982: A. S. Bean. D. Sehieffel. and M. E,
Mogee. "The Venture Capital Miirket and Technological
Innovation," Research Policy, vol. 4 (1975); Charles River
Associates Inc.. An Analysis of Capital Market Imper-
fections, prepared for the Experimental Technology fncen-
tives Program, National Bureau of Standards, Washitig
ton. n.C, 1976: E. Manficid. "Entrepreneurship and Iht
Managementof Innovation." in Entrepreneurship and the
Outlook for America, ed. J. Bachman{New York: The Free
Press. 19831; C. R. Seymour and W. E. Wet/el. Informal
Kisk Capilali't NeivEnglandiUurham.N. H.: University
of Npw Hampshire, 1981). Hee also W. E. Wetzel, -Angels
and Informal Risk Capital," Sloan Management Revieu.'
(Summer 19fl:l): A. Shapero, "The Role of the Financial
Institutions of a Community," in The Formation. Effec-
tiveness and Expansion of Innovating Companies (Col-
umbus, Ohio; Shapero-Huffman Associatefl. l9M,1l; Ruhen-
stein, Priihlems of Financing. W. E. Wetzel. "Taplin and
Montle Development Fund: A Case Study in Finance," in
Frontiers of Entrepreneurship Research. /.9M; U.S. De-
partment of Commerce. Financing New Technological
Enterprise (Washington. D.C: Report of ihe Panel on
Venture Capital to the Commerce Technical Advisory
Board. 1970).
^11). Brophy, "Venturi; Capita! Research." in The .Art
and Science of Entrepreneurship. pp. 119-14:).
'-J. H. Ohermayer. The Capital Crunch: Smalt High-
Technology Companies and National OhjectiDes During a
Period of Self re Debt and Equity Shortages (('ambridge,
Mass.: Research and Planning, Inc.. 19831.
July 1987
to 9 percent, according to a recent SBA
study. Two-thirds of capital is provided
by debt, with approximately half of
this being obtained from commercial
banks.2^ Debt is typically secured by
some asset; hence, the combined re-
sources of the entrepreneur and the
business are crucial in acquiring fi-
nancial support for a start-up business.
Long-Term Results o(
Entrepreneurial Efforts
One of tbe major factors which makes
it difficult to obtain capital funds
which are not fully secured by collat-
eral is the perception by the potential
providers of these funds that the busi-
ness will not be successful. Shapero
and Giglierano reviewed past studies
of discontinuances and found rates to
vary from 35 percent to more than 70
percent within the first five years.
Although failure rates are variously
estimated and subject to considerable
debate, it is apparent that a large
number of new enterprises do fail.
Entrepreneurs, nevertheless, tend to be
quite optimistic about their own pros-
pects for success. In a study of almost
tbree thousand entrepreneurs. Cooper,
Dunkelberg, and Woo found that 81
percent of the respondents perceived
that the odds of achieving success for
their particular businesses were seven
out of ten or better. For other busi-
nesses similar to theirs, however, only
40 percent perceived the odds to be that
The difficulty in measuring risk has
much to do with individual percep-
tions. The fact that most entrepreneurs
do not perceive a high level of risk
could indicate a lack of accurate infor-
-'The State of Small Business: A Report of the Presi-
dent. /»«ft'( Washington. D.C: U.S. Government Printing
Office, 198fi), p.e.'j,
^'A. Shapero and J. Giglierano. "ExitB and Entries: A
Study in Yellow Pages Journalism." in Frontiers of Entre
preneurship Research. 1982, pp. 113-141.
'••A. C. Cooper, W. C DunkelberK. and C. Y Woo,
"OptimistsandPessimiBts: 2.994 Entrepreneurs and Their
Perceived Chances for Success." in Frontiers of Entrepre-
neurship Research. 1986, pp. ,563-,')77.
mation about factors which affect the
probability of survival of a given
enterprise or, alternatively, could indi-
cate knowledge of specific factors
which reduce the risks of undertaking
a given venture.
Even among those businesses which
survive and achieve some degree of
success, very few grow to a large size.
Fewer than 4 percent of all businesses
have receipts in excess of $1 million
and almost 60 percent have annual
sales of less than $25,000.26
Similarly, entrepreneurial wealth is
not the typical result. According to a
recent SBA study, the average wage
and salary worker earned significantly
more ($19,700) than the average entre-
preneur ($15,200).^^ The latter group
may receive "hidden" financial bene-
fits, such as the use of company cars,
which are not included in the reported
earnings. But even with such addi-
tional financial "perks," the financial
rewards for entrepreneurial effort are
relatively small.
Summary and Recommendations
Folklore, rumors, and "common
sense" have produced many beliefs
about entrepreneurs and their busi-
'••The State of Small Businrss: A Report of the Presi-
dent, 1986. p. 63.
•••Ibid., p. 129.
nesses. Some of the beliefs examined in
this review of previous research have
been shown to be founded on incom-
plete and/or incorrect information. To
the extent tbat these beliefs are in fact
widely held folklores, this situation is a
detriment to the advancement of a
better understanding of the entrepre-
neurial process. Unfortunately, many
popular magazines, as well as some
entrepreneurship and small business
textbooks, perpetuate these myths by
failing to present accurate information
about entrepreneurship as currently
understood by researchers.
In all fairness, researchers as a
group have conducted few studies that
are truly comprehensive of the issue
being examined. The research popula-
tions must be much more fully de-
scribed to allow better interpretations
of the generalizability of the results.
Potential intervening variables need to
be more carefully considered and con-
trolled. More advanced statistical
techniques also need to be included in
entrepreneurship research, and longi-
tudinal studies are essential. Research
workshops, in which a limited range of
entrepreneurship issues are examined
and specific research agendas and
procedures are suggested, may be very
useful in focusing attention and lim-
ited resources more effectively.

EPA SMALL BUSINESS OMBUDSMAN

The U.S. Environmental Protection Agency now has a Small Business
Ombudsman to make sure your problems and suggestions are heard and
you are fairly treated. The Ombudsman is charged with giving you easier
access to the Agency, helping you comply with EPA's regulations,
investigating and resolving your disputes, and increasing the Agency's
responsiveness and sensitivity to the needs of small business.
Call toll-free: 800-368-5888 (In Virginia, call 800-468-4561; in Wash-
ington, D.C: 557-1938),

Journal of Small Business Management