You Don’t Get Paid for Being an Entrepreneur
Entrepreneurs make exactly how much money they would make performing their role at a company. So says Schumpeter, as outlined in Jerry Neumann’s Schumpeter and Strategy.
Businesses are a series of inputs and outputs. Inputs produce outputs, which produce cash. Saying you’re an “entrepreneur” doesn’t change any of the variables in this equation.
…entrepreneurs would earn no more than they would if they did the same job as employees for someone else. This is because even the founder, as manager of the company, is an input, just like the other employees. The founder makes the same amount of money for their job as they would working the same job in any other business..there is no other money to make, there is no surplus for the founder. There is no “entrepreneurial profit”, as Schumpeter called it.
Businesses are their own meta-market where inputs and outputs are priced and competed on.
So why do some entrepreneurs make more money?
Obviously, some entrepreneurs do make a lot of money. This is the second part of Schumpeter’s argument. Those that make money, an entrepreneurial profit, do so by breaking the status quo. They innovate. They either get their inputs for less or they sell their outputs for more.
This raises the all-important question: if you do consider yourself an entrepreneur, what job are you doing?
If you’re a code monkey who goes independent, but doesn’t change a thing about the work you’re doing, how much money will you make? On average, an amount very similar to what you were making at your job. Your inputs and outputs remain constant.
Of course an independent code monkey doesn’t really exist. Typically you have to take inputs that were previously distributed to other people and start managing them yourself. If you’re a consultant this usually means doing sales, client relationship management, project management, billing, accounting and more. However many additional inputs you can take in, the more money your business will produce (i.e. your outputs increase commensurate to your inputs).
The same logic applies to products as well. When serving a niche, the product you are replacing is often a very small portion of what a larger product does.
For example, if you create time tracking software for retail employees, you’re probably replacing Excel. Excel is made by Microsoft which has the overhead of a huge company — management, HR, an expensive CEO, and totally unrelated product lines. Your success rests on your ability to take fewer total inputs (employees, company scale) and produce an equivalent output for a subset of customers (a product to track retail employee time).
As Jim Barksdale said: “there are two ways to make money: you can bundle, or you can unbundle.” Bundling is taking in more inputs to create disproportionately more output (economies of scale). Unbundling is taking in fewer inputs to create a disproportionate amount of output (niche products).
So if you’re an entrepreneur, ask yourself: what are your inputs, and what are your outputs? Because if you’re not changing the equation, you might want to get a job — entrepreneurs don’t get paid for calling themselves entrepreneurs.