Entrepreneurship can be defined in a variety of ways. Most people believe that entrepreneurship entails an individual starting a new business to make money, but the meaning of the term is actually much broader. For our purposes, entrepreneurship refers to the identification, evaluation, and exploitation of opportunities.2 Figure A2.1 illustrates this process. Opportunities, in a general sense, are appropriate or favorable occasions.3 In the entrepreneurship sense, though, the definition of opportunity is slightly different. Specifically, an entrepreneurial opportunity is an occasion to bring into existence new products and services that allow outputs to be sold at a price greater than their cost of production.4 In other words, entrepreneurial opportunities exist when individuals are able to sell new products and services at a price that produces a profit.

Although entrepreneurship has a wide-ranging definition, the process still involves starting new businesses. Understanding entrepreneurship is important; one survey reports that, on average, 460,000 people start new businesses in the United States each month.5 Other studies suggest that somewhere between 20 and 50 percent of all individuals engage in entrepreneurial behaviors.6 Despite these new businesses, evidence also suggests that entrepreneurs find it difficult to keep their businesses going. Research reports, for example, that 34 percent of new businesses do not make it past the first two years, 50 percent do not make it past four years, and 60 percent do not make it past six years.7 Table A2.1 displays the results of studies examining the failure rates of some new businesses.

Consistent with our framework, an entrepreneur is an individual who identifies, evaluates, and exploits opportunities. Many associate the term entrepreneur with one individual starting a new business, but research suggests that approximately 75 percent of new organizations are started by entrepreneurial teams.8 In other words, many entrepreneurs work with other people when identifying, evaluating, and exploiting entrepreneurial opportunities. Research also suggests that organizations started by entrepreneurial teams tend to perform better than those started by individual entrepreneurs working by themselves.9 Many attribute this “team advantage” to the combination of diverse skills, experiences, and relationships of the entrepreneurial team members.10 In addition, as new organizations develop, they require leaders with new skills. Consequently, assembling a team makes it easier for entrepreneurs to add team members with these new skills as the venture expands.11

It is clear that entrepreneurship represents an important piece of society. Taken together, then, these high business formation rates and high failure rates suggest that understanding the fundamentals of entrepreneurship is an important activity. In the following sections, we highlight the primary issues that pertain to identifying, evaluating, and exploiting entrepreneurial opportunities.