How Do Entrepreneurs Make Money?

You did all the planning and worked hard. You have obtained financing and created your business. Now, when does the financial gain of all your efforts come into play?

Where, when, and how can you expect to realize potentially high yielding rewards? Moreover, why should your entrepreneurial project succeed where others have failed?

Key points to remember

  • Entrepreneurs should protect their hard work and profit potential with patents and copyrights.
  • Being aware of patent requirements is important to any entrepreneur’s plan for success.
  • Entrepreneurs experience growth and success over a period of time that adjusts based on the type of product or service provided.
  • During the initial investment period, time, energy and labor are limited, but funding may not be in place.
  • After the success of a product or service, an entrepreneur may choose to develop a project or sell and move on to new ventures.

Why Entrepreneurs Should Profit

Imagine two hypothetical workers. One works a standard 40-hour week and receives a standard wage. They are great at their jobs but their contributions to the world are limited to their 8 hours a day at the office.

The other has a passion for improving the lives of others by introducing new products and services. As an entrepreneur, they work well over 40 hours a week, investing time, capital and energy in trying to accomplish something that they hope will make the world a better place.

Obviously, the world would be a less dynamic place with only 40 hours of work per week. The passionate, game-changing entrepreneur takes more risks and puts in more effort, so it’s logical to think that they will have a greater impact on the lives of others with their contributions. However, without noticeable reward, they may not be willing to do so.

Entrepreneurs need appropriate rewards

According to neoclassical economic theory, a lack of appropriate rewards discourages entrepreneurs from taking risks and putting in the enormous effort needed to have positive and lasting impacts.

Government authorities rightly offer entrepreneurs special protection through patents and copyrights. Entrepreneurs are more likely to invest their time, energy and money when they see the clear potential for exceptional financial gain.

During the lifecycle of a product or service, it is imperative for an entrepreneur to weigh the perceived value of equity against taking a salary or payment.

How Entrepreneurs Make Profits

Entrepreneurs introduce new products or services that can lead to significant improvements in productivity, lower costs, and improved quality of life.

Knowing their offerings better than anyone and aware of customer needs, the entrepreneur can charge a premium for his innovations. This can translate into great rewards.

If competitors cannot create and introduce similar products or services in a short period of time, the product may become a source of profit for the entrepreneur. In fact, they could make significant profits while remaining the only manufacturer or service provider.

Patent and copyright protection

Even if competitors find it easy to replicate and quickly introduce similar products, the entrepreneur can seek protection for his particular innovation through patents or copyrights. These legal protections protect the effort of the original inventor and can pave the way for successful entrepreneurial ventures.

How long can this control of the market continue? Without the implicit government oversight that accompanies patents and copyright protection, competitors could begin to offer directly copied products and services that attract customers and eat away at an entrepreneur’s profits.

However, with or without such legal protections, the market is always open to variations of the original product or service and to new innovations. Thus, entrepreneurs must keep a close eye on the developments made by their competitors. They are circumspect enough to keep improving their products and try to maintain their market share.

Patent protection lasts from a few months to several years. In the United States, patents generally last 20 years.

This encourages healthy competition. Either entrepreneurs start working on something new, or they succumb to market Darwinism.

Development, financing and profit phases

When it comes to capitalizing on funding, timing is very important. Here is an illustrative graph showing the possible cash flows during the different phases of an entrepreneurial venture:

Image by Sabrina Jiang © Investopedia 2020

Term 1 to Term 4: The period of pain

This is the initial investment period where different activities will be carried out, including but not limited to the development of product ideas, feasibility and market study, building of prototypes and design. customer identification. The order may differ by company, but the concepts remain the same. It is assumed that angel investor funding becomes available in term 4.

Term 5 to Term 6: The introductory period

Activities in this period can range from applying for and obtaining patents and building sales channels and a distribution model to introducing the final product to market.

Term 7 to Term 9: The profit period

These terms are the profit-taking periods of market control when the entrepreneur is either protected by patents or copyrights or there are no competitors for other reasons.

Period 9 is assumed to be the maximum profit period, just before competitors enter the market. During this period, further developments are initiated to introduce new product variants.

However, reinvestment and research and development may occur sooner, depending on product life cycle and other factors. This may also be the time to introduce the original offer to new markets.

Term 10 to Term 11: The delay period

At this point, entrepreneurs can exit the business by shutting it down completely or selling it to interested parties. Or, they can continue with newly developed variants. Profits will vary significantly during these periods.

What is an entrepreneur?

An entrepreneur is someone who sees a need, designs a way to meet it, and creates the product or service that meets it. Entrepreneurs invest their time, money and effort to propel their vision in exchange for the substantial financial rewards expected

How do entrepreneurs make money?

They make money by capitalizing on an innovative solution for a single, large-scale need and, if possible, repeating the process by providing additional solutions for additional needs. Once they protect their ideas and products with legal instruments such as patents and act quickly to meet market demand, they can dominate the market at least temporarily and reap huge financial benefits.

Where do entrepreneurs get financing?

Entrepreneurs get financing for their businesses from different places. They often use their own money at first. Family and friends can help with some financing in the early years of a business. Then they can take on partners who are well capitalized and can help sustain the business financially. They can take out business loans to finance their efforts. Moreover, they could attract angel investors and venture capitalists.

The essential

Generally speaking, an entrepreneurial cycle can last several terms, during which products are created, markets are developed, patents are secured, distribution channels are selected and profits are made.

The duration of the mandates and the activities undertaken will vary according to the nature of the product and the markets. For example, a pharmaceutical drug may have a longer period of lucrative dominance due to a patent, while a mobile technology innovation may be replicated by competitors in a very short period of time.

All business ventures aim for profitability. Due to the high-risk/high-reward scenarios of entrepreneurial ventures, entrepreneurs expect to make substantial profits, provided they plan their activities carefully and achieve their goals efficiently.

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