Entrepreneurial Motives

Why People Start Businesses

Starting a business means giving up a steady wage, putting savings at risk and working long hours with no guarantee of success. The reasons people do it anyway are their motives.

For many founders the motive is money, but most have a mix of reasons. The motive matters because it shapes how the business is run: what it charges, who it buys from and how fast it tries to grow.

Profit as an Incentive

Profit: the amount by which a business's total revenue exceeds its total costs.

Profit is the reward for enterprise. An entrepreneur takes a risk that employees don't, and the chance of a profit is what makes the risk worth taking. It works as an incentive in three ways:

• It rewards the owner. Profit is the entrepreneur's income, and a successful business can earn far more than a salary would.
• It pays for growth. Profit kept in the business can fund new equipment, extra staff or a second site without borrowing.
• It sends a signal. High profits in a market tell other entrepreneurs there is money to be made, so new firms enter and resources move to where consumers want them. This is the price mechanism at work (unit 1.3.4).

Profit also has to beat the opportunity cost. Someone who leaves a £35,000-a-year job to run a business that makes £20,000 profit is £15,000 a year worse off in money terms. If they stay in business, something other than money is keeping them there.

Non-Financial Motives

These are reasons for starting a business that come from the owner's values or the way they want to live. The spec names four.

Ethical Stance

An entrepreneur with an ethical stance runs the business by moral principles, such as a clothing brand that uses only organic cotton. Costs are often higher, but some customers will pay a premium for it, so ethics can also be a selling point.

Social Entrepreneurship

Social enterprise: a business that trades to tackle a social or environmental problem and reinvests most of its profit in that aim.

A social entrepreneur still needs revenue above costs, but the surplus pays for the mission. The Big Issue, founded in 1991, is a UK example: vendors who are homeless or at risk of homelessness buy the magazine and sell it on at a higher price, keeping the difference.

Independence

Many people start a business to be their own boss, with no manager above them. The price of independence is that every decision, and every loss, is theirs.

Home Working

Running a business from home cuts costs, as there is no shop or office to rent and no commute, and it fits around childcare. Selling online makes it easier still. The limits are space and the difficulty of taking on staff, so home-based businesses often stay small.