How Entrepreneurs Make Money

You’ve done all the planning and hard work. You've secured funding and established your business. Now, when does the financial payoff for all your effort kick in?

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

Key Takeaways

  • Entrepreneurs should protect their hard work and potential for profits with patents and copyrights. 
  • Being aware of patent requirements is important for any entrepreneur's plan for success.
  • Entrepreneurs experience growth and success over a timeline that adjusts based on the type of product or service provided.
  • During the initial investment period, time, energy, and work are at a premium but funding may not be in place.
  • Following the success of a product or service, an entrepreneur may choose to build on 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 gets paid a standard salary. They are great at their job but their contributions to the world are confined to their 8 hours daily at the office.

The other has a passion to improve the lives of others by introducing new products and services. As an entrepreneur, they work way beyond 40 hours a week, investing time, capital, and energy to try to accomplish something that they hope will make the world a better place.

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

Entrepreneurs Require Suitable Rewards

According to neoclassical economic theory, a lack of suitable rewards discourages entrepreneurs from taking on risk and making the enormous effort required to make lasting, positive 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 a product or service lifecycle, it’s imperative for an entrepreneur to weigh the perceived value of sweat equity against taking a salary or payment. 

How Entrepreneurs Make Profits

Entrepreneurs introduce new products or services that may result in significant improvements in productivity, reduction in costs, and improvement in the quality of life.

Knowing their offerings much better than anyone else and being aware of customer needs, the entrepreneur can charge a premium for their innovations. This can translate to big rewards.

If competitors can't build and introduce similar products or services in a short span of time, the product can become a profit-maker for the entrepreneur. In fact, they might make major profits while they remain the sole manufacturer or sole service provider. 

Patent and Copyright Protection

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

How long can this market control continue? Without the implied government oversight that accompanies patents and copyright protection, competitors could start offering directly copied products and services that entice customers and eat away at an entrepreneur's profits.

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

Patent protection lasts from a few months to years. In the U.S., patents usually last for 20 years.

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

Phases of Development, Funding, and Profit

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

Image 1
 Image by Sabrina Jiang © Investopedia 2020

Term 1 to Term 4: The Pain Period

This is the initial investment period where different activities will be performed including, but not limited to, product idea development, feasibility and market study, prototype building, and customer identification. The order may differ depending on the venture, but the concepts remain the same. It is assumed that funding from angel investors becomes available in Term 4.

Term 5 to Term 6: The Introduction Period

Activities in this period may range from applying for and securing patents and building sales channels and a distribution model to final product introduction to the 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 copyright, or there are no competitors for other reasons.

Term 9 is assumed to be the peak profit period, just prior to competitors entering the market. During this term, further development is initiated to introduce new product variants.

However, reinvestment and research and development can come earlier, depending on the product's lifecycle and other factors. This can also be the time to introduce the original offering to new markets.

Term 10 to Term 11: The Sunset Period

At this point, entrepreneurs may exit the venture by closing it completely or selling it to interested parties. Or, they may continue with newly developed variants. Profits will vary greatly during these terms. 

What's an Entrepreneur?

An entrepreneur is someone who sees a need, conceives a way to satisfy it, and creates the product or service that meets it. Entrepreneurs invest their time, money, and efforts to propel their vision forward in return for hoped for substantial financial rewards

How Do Entrepreneurs Make Money?

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

Where Do Entrepreneurs Get Funding?

Entrepreneurs obtain funding for their ventures from different places. They often use their own money when first starting out. Family and friends may help with some financing in the early years of a business. Then, they may take on partners who are well capitalized and can help support the business financially. They may take out business loans to finance their efforts. Additionally, they might attract angel investors and venture capitalists.

The Bottom Line

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

The duration of terms and activities engaged in will vary depending on the nature of the product and markets. For example, a pharmaceutical drug may have a longer profit-making period of dominance because of a patent, while a mobile technology innovation may get replicated by competitors within a very short span of time.

All business ventures aim for profitability. Owing to the high-risk/high-reward scenarios of entrepreneurial ventures, entrepreneurs expect to make substantial profits, provided that they plan their activities carefully and meet their objectives effectively.

Article Sources
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  1. United States Patent and Trademark Office. "General Information Concerning Patents."