There’s a way of thinking about entrepreneurship that strips away most of the mythology and gets to something uncomfortably close to the truth: entrepreneurs are people who rent capital from capitalists, deploy it, and keep a share of whatever excess returns they generate.
This framing comes from Austrian economics, particularly the work of Ludwig von Mises and Israel Kirzner, though you don’t need to buy into any particular school to find it useful. The core insight is that “entrepreneur” and “capitalist” are conceptually distinct roles that happen to overlap in practice. The capitalist owns resources and seeks a return on them, bearing the financial downside if things go wrong. The entrepreneur identifies opportunities and coordinates resources to pursue a venture, accepting asymmetric exposure: limited downside (they lose time, not capital) but substantial upside (they keep a share of the gains). Crucially, the entrepreneur doesn’t need to own those resources. They can rent them.
Capital has a price, and venture capital is expensive.
A typical VC fund needs to return 3x to their LPs to be considered successful. This hurdle exists because LPs expect a premium for locking up their money for a decade in an illiquid vehicle, and because VCs need to beat public market alternatives to justify their existence. If the S&P 500 returns 10% annually, compounding over a ten-year fund life gets you to roughly 2.6x. VCs need to clear that bar with room to spare, or their LPs would be better off in index funds.
The 3x fund target creates brutal math at the individual investment level. Most startups fail entirely, returning zero. Of the ones that survive, most return something disappointing: the company limps along, gets acqui-hired, or sells for a modest sum that barely covers the investors’ liquidation preferences. If half your investments return nothing and another third return 1x, the remaining winners need to return 10x or more to drag the portfolio to 3x overall.
This is the price of rented capital. When a VC invests $10 million in your company, they’re not hoping to get $10 million back, or even $20 million. They need you to be one of the investments that returns 10x and covers the losses elsewhere in their portfolio. Anything less and you’re a disappointment, even if you built a real company that employs people and turns a profit.
If the entrepreneur’s job is to generate 10x returns for their investors, where does their own compensation come from?
The answer is the equity they retain. Consider a founder who raises $10 million at a $40 million post-money valuation, selling 25% of the company to investors. If they grow the company to a $400 million exit, the investors’ 25% is worth $100 million, a 10x return on their $10 million. The founder’s 75% is worth $300 million.
The founder’s $300 million isn’t a fee anyone explicitly agreed to pay. It’s what’s left over after the investors get their share of a pie the founder made bigger. The entrepreneur’s compensation is the spread between the value they create and the value they give away to capital.
This framing transforms what “entrepreneurship” means. The job isn’t “building a company” in any romantic sense. It’s convincing capital to flow to you and then generating returns that exceed capital’s (very high) opportunity cost. Fundraising isn’t a distraction from the real work; it is half the job. The entrepreneur is essentially a fund manager running a single concentrated position, and their returns depend on both their ability to raise money and their ability to deploy it.
The asymmetry that favours entrepreneurs only kicks in when they clear the bar. Below it, the structure turns against them quickly.
Liquidation preferences are the first mechanism. VCs typically have 1x non-participating preferences, meaning they get their money back before common shareholders see anything, but must choose between taking that preference or converting to common stock. If investors put in $50 million for 25% and the company sells for $50 million, the VCs take their $50 million preference and the founder gets zero. At a $100 million exit, investors still take their $50 million preference (since 25% of $100 million is only $25 million), and the founder gets the remaining $50 million. The founder participates in value above the preference, but doesn’t get their full pro-rata ownership until exits are large enough that investors prefer to convert.
Down rounds are worse. If the company needs more capital but isn’t hitting its numbers, the next investors demand a lower valuation and better terms. Existing investors often have anti-dilution protection that shifts the pain to common shareholders. A founder with 40% ownership can find themselves with 8% after a brutal down round. The equity they thought they had gets repriced to reflect the company’s diminished prospects.
Control shifts too. Board seats, protective provisions, and voting rights mean VCs can push for a sale the founder doesn’t want, or block one they do want. A company that’s underperforming its investors’ expectations is a company where the founder’s preferences matter less and less.
So what does the entrepreneur actually risk? Not cash, since they typically don’t write a cheque. Their equity goes from “potentially worth something” to “worth nothing”, but that’s not the same as losing money you had. What they lose is opportunity cost (years they could have spent elsewhere), reputation (though less than you might think), and psychological wellbeing (which is real but hard to quantify). It’s still a better deal than the capitalist who put in $50 million and might get back nothing. But the entrepreneur’s upside can get completely zeroed in mediocre outcomes, even when the company survives.
This decomposition reveals that entrepreneurship requires two distinct skills, and you need both to win.
The first is attracting capital. This is fundamentally a game of legibility and persuasion. You need a thesis that sounds plausible to people who control money. You need to signal competence, commitment, and trustworthiness. You need to fit the pattern of what capitalists think winners look like, or at least subvert that pattern in ways they find intriguing rather than disqualifying. You need to be in networks where capital is accessible in the first place. None of this requires actually being right about the opportunity. Plenty of people attract capital for ventures that go nowhere. This skill is about navigating a social and institutional landscape, about knowing what story to tell, to whom, in what format.
The second is generating returns. This is a game played against reality rather than against other people’s perceptions. Once you have the capital, can you actually deploy it in ways that produce the 10x outcomes your investors need? This requires genuine insight into some market or technology, operational ability to execute, judgment about countless decisions under uncertainty, and some irreducible amount of luck.
Here’s the uncomfortable part: these two skills are not the same, and they’re not strongly correlated. Some founders are exceptional at attracting capital but mediocre at deploying it. They keep raising rounds while the underlying business sputters, buying time with narrative while the metrics refuse to cooperate. Others might have genuine insight into a market but can’t get a meeting because they don’t fit the pattern, because they’re not from the right school or the right previous company or the right demographic.
Something interesting happens when a company starts to succeed. At founding, the separation between entrepreneur and capitalist is clean. The entrepreneur contributes judgment and effort, the capitalists contribute money. The entrepreneur’s equity stake is a claim on future value they hope to create.
As the company grows, the entrepreneur becomes a capitalist almost by accident. Their equity is now worth real money, money they could extract and deploy elsewhere. If they choose to keep it in the company, they’re making a capital allocation decision, the same decision any investor makes when choosing to hold rather than sell. A founder with $50 million in stock isn’t really “renting” capital anymore. Every day they don’t liquidate is an implicit decision to keep their own capital concentrated in this single venture rather than diversifying into index funds or treasury bonds or real estate.
This transition can be psychologically disorienting. The identity of “entrepreneur building something” slides into “person managing their largest asset”, and these are different mindsets that reward different behaviours. The founder who resists a reasonable acquisition offer might be displaying admirable conviction, or they might be making a bad capital allocation decision dressed up in the language of vision.
If entrepreneurship is capital arbitrage, then certain patterns in the startup world start to make more sense.
The dominance of certain backgrounds and networks isn’t necessarily because Stanford computer science produces better operators. It might be because Stanford computer science produces people who are legible to the capital allocators, people who fit the pattern, who speak the language, who can get the meeting. The skill of attracting capital has path dependencies that compound over time.
The obsession with fundraising metrics, with round sizes and valuations, isn’t purely vanity. If half the job is attracting capital, then being good at attracting capital is genuinely important, not just a proxy for being good at the other half.
Consider two founders with equally promising businesses who both need $100 million to reach scale. Founder A raises it all upfront at a $500 million valuation, taking 20% dilution and keeping 80%. Founder B raises $10 million at a $50 million valuation, also 20% dilution, also keeping 80%. Identical so far.
Founder B needs to raise again. Each round dilutes further: $20 million at $150 million takes them to 69%, then $30 million at $300 million takes them to 62%, then $40 million at $600 million takes them to 58%. By the time they’ve raised the same $100 million total, Founder B owns 58% to Founder A’s 80%. If both companies exit at $2 billion, that’s $1.6 billion versus $1.16 billion. The ability to raise more capital earlier, at valuations the market will bear, is directly convertible into ownership at exit.
The existence of “serial entrepreneurs” who keep getting funded despite mixed track records makes sense too. They’ve demonstrated the capital-attraction skill, which is hard to acquire and valuable independent of any particular venture. Investors are making a rational bet that this skill will eventually pair with a good opportunity, even if it hasn’t yet.
I don’t want to push this too far. Reducing entrepreneurship to capital arbitrage loses something real. There are founders who genuinely don’t care about the money, who are trying to build something that matters to them independent of financial returns. There are companies that couldn’t exist without a founder’s specific vision, companies where the “excess return” comes precisely from the founder’s refusal to think in terms of excess returns.
The framing also struggles with bootstrapped companies, where the entrepreneur never rents external capital at all. These founders are playing a different game, one where the constraint isn’t “attract capital” but “generate enough cash flow to survive until you generate more cash flow”. It’s arguably a purer form of entrepreneurship, though it’s constrained to opportunities that don’t require much capital to pursue.
Still, for the median venture-backed startup, the framing holds. You are renting capital. Your job is to generate returns that justify the rent. Your compensation is the spread. Everything else is commentary.