The Difference between an Entrepreneur and an Investor

Entrepreneurship and investing are closely linked and often confused with each other. Simply put, an entrepreneur is someone who starts his or her own business. An investor is defined as someone who commits money or any other form of capital to a project or business with the intention of earning a profit or income from it. The two overlap in the sense that an entrepreneur invests in his or her own business. The difference lies in the fact that most entrepreneurs work hard for their money. They own a job which creates an income for them, whereas an investor earns an income whether or not he or she is directly involved in the running of the business. An investor makes their money work for them. An investor has the time and financial freedom to play golf, travel, socialise and pursue hobbies whilst earning an income. If your ordinary entrepreneur stops working, he or she also stops earning.

The four types of people

In order to understand entrepreneurship and investing, we first need to familiarise ourselves with the group we belong to in terms of our financial mindset. The Cashflow Quadrant theory is outlined by Robert Kiyosaki in his best-selling book Rich Dad Poor Dad. Kiyosaki divides people into four quadrants according to their financial education and income earning capacity. The four quadrants or groups are employees (E), small business owners or self-employed professionals (S), big business owners (B) and investors (I).

People in different quadrants have different values. For example, employees value the security of having a job. Anybody who works for a boss is part of the E quadrant.

Self-employed individuals value independence and having the opportunity to do their own thing. People in the S group include commissioned sales people, small business owners and people who sell their time and skills such as doctors, lawyers and accountants.

People who build big businesses and form part of the B quadrant usually have powerful life missions. For example, Steve Jobs of Apple and Oprah Winfrey, the owner of a cable television network and magazine. While people in the S quadrant may be the best at what they do, those in the B quadrant seek to find people with the best skills to become a part of their team and thus add to the overall efficiency and success of the business. An investor in the I quadrant values financial freedom. Investors are the driving force behind other businesses.

The theory is that people generally move from quadrant to quadrant in the order stated above as their financial education increases. Employees usually become small business owners. People from either of those two groups can learn and acquire big businesses and big business owners become investors. The ultimate goal is to become an investor if you want to become financially free.

Most people are slaves to their jobs

The majority of society falls into the E quadrant. These people usually work a typical nine to five shift. People become entrepreneurs because they feel they want to grow their own assets rather than contribute to the growth of another business. People also leave their jobs because it is unlikely to achieve financial freedom as an employee. In today’s economic climate, jobs do not hold the same security as they did at the dawn of the industrial age. Rather than working for one employer your entire career, as was the norm a century ago, you are more likely to be retrenched and change careers several times. Most people are expendable to companies unless they are truly exceptional in their work. Having a job limits your freedom in that you are bound to adhere to the employer’s rules.

In the E quadrant, the taxes are the highest and there is the least amount of freedom. Entrepreneurs sometimes joke that JOB stands for “Just Over Broke” because most people with jobs live on a month to month basis. When their salaries are earned and all the bills, taxes and expenses are deducted, they are left with very little and often run out of money in the last week before their next paycheque. An employee’s life is usually lived from paycheque to paycheque. For this reason, employees are also slaves to debt.

Most entrepreneurs are slaves to their businesses

Most entrepreneurs work hard for their money. They have a job to fulfill. Although they have provided that job for themselves, if they do not work they do not earn. Small businesses drive the local economy and employ the most people. Entrepreneurs in the SME (small and medium enterprise) sector often feel that if they want the job done right they need to do it themselves. They do not trust that somebody else or their employees can carry on the business without them. They play a full-time role in the business, often as managers. What this type of entrepreneur fails to realise is that by hiring the right people who they can trust and implementing the right systems, they can free up their own time and earn more money. That is the difference between them and B quadrant entrepreneurs.

Big businesses employ systems

Big businesses include brands such as Virgin, McDonald’s and Bosch. Although not all big businesses are famous and well known, they are grown on the same principles. Big businesses employ systems to run them. Employees work as part of the system. Entrepreneurs start the business and rather than run it themselves, they get the right team together to run it for them. The goal of the big business owner is to grow the business to a level in which their participation is no longer necessary but they will continue to earn from their accumulated efforts.

An example of a typical big business model is a franchise. Rather than restrict the growth of the business by running one office or outlet, for example: a restaurant, a restaurant owner will employ a manager and show them how to run the restaurant. The owner will then open other restaurants under the same brand name and teach the new managers how to run these restaurants as well. Once the chain of restaurants is proven successful, the owner chooses to sell the restaurant name under a franchise. Each franchise owner may be a small business owner but the owner of the franchise owns a big business. Once the owner no longer wants to participate in the managing of the business, he or she hires other people to fulfill the role but retains shares in the franchise business. This then turns the business owner into an investor whose money works for him or her. A big business owner may also choose to sell the business and invest their money elsewhere.

Entrepreneurs in this quadrant also know how to use debt and other people’s money to grow their own businesses.

Investors start out as entrepreneurs

You have to become an entrepreneur before you become an investor. The reason for this is that you cannot recognise an opportunity and its possible flaws or obstacles if you have no business experience. The School of Entrepreneurship gains you a diploma in investing so that you can invest your money and resources wisely. Moreover, you have to be the right type of entrepreneur. An entrepreneur from the SME sector will only be able to be an investor in the SME sector because that is where his or her knowledge and expertise lie. However, there is much more money to be made from big business models.

Investors are owners and not managers

Investors are shareholders in a business. They have already put in the capital or work and earn as a result of this. They do not need to manage the business in order to earn. They can do whatever they want. They have financial freedom, which buys them the time freedom to enjoy their lives.

The life of an investor

The goal of any independent thinker or entrepreneur is financial freedom. The path to the I quadrant is not easy. There are many lessons to be learnt and hardships to be faced. In the beginning you may feel somewhat lonely because you are choosing your own path. Investing comes with risks. The reason people remain employees their whole lives is because they are afraid to take risks. However, without the risks you do not stand a chance to reap the benefits.

Smart entrepreneurs and investors are ordinary people with extraordinary dreams. In order to realise their ambitions, they know it will take time. It is not about looking rich. Those who are truly rich do not need to flaunt it. They have peace of mind and can spend their time enjoying their life rather than fighting to survive. The path to financial success involves investing and reinvesting your money. Once you are financially free, you can afford the luxuries. Learn, save and invest to earn. We need more people in the B and I quadrants to fuel economic growth. Educate yourself, take the plunge and become one of them.

Related article:
The Best Investment You Can Make

Maja Dezulovic

1 comment:

  1. I enjoyed reading your article. Please make more interesting topics like this on.
    I'll come back for more :)

    From Japs a researcher from Always Open Commerce