How Expert Entrepreneurs Do It
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0 to 60mph: How Expert Entrepreneurs Do It Saras Sarasvathy The Darden School
The Puzzle
What they seem to be good at – Opportunity recognition – Resource acquisition – Visionary leadership
Think about what they did . . . Real Networks Sears Starbucks eBay
Staples Even Microsoft . . .
Logics of Decisions and Actions Question: What kind of logic do expert entrepreneurs use to make decisions and take action in the 0-60mph phase? Subjects:
27 expert entrepreneurs
Method:
Protocol analysis
(Founders of companies from $200M to $6.5B)
(80 hours of tape; 1500 pages of data)
Theory:
Sarasvathy, 2005
(Effectuation: Elements of Entrepreneurial Expertise)
Results: Over 63% of the subjects used an EFFECTUAL (as opposed to causal) logic more than 75% of the time
Conventional Wisdom: Causal Logic
Causal Logic is predictive To the extent you can predict the future, you can control it
Control of outcomes achieved through
accurate predictions, clear goals, and avoiding or protecting oneself against the unexpected
What is effectual logic?
High
Rational
Power
Adaptive
Effectual
logic
logic
PREDICTION
logic
logic
Low Low
= Non-predictive control
High CONTROL
How do you control a future you cannot predict?
Examples of Effectual Logic
From cooking a meal . . .
. . . To building a restaurant
Or something else . . .
Principles of Effectuation
• Bird-in-hand principle: Start with Who you are, What you know, & Whom you know
(Not with the opportunity)
• Affordable loss principle: Invest what you can afford to lose – extreme case $0
(Not expected return)
• Patchwork Quilt principle: Build a network of self-selected stakeholders
(Not competitive analysis)
• Lemonade principle: Leverage contingencies
(Not avoid them)
• Pilot-in-the-plane principle: The future comes from what people do
(Not inevitable trends)
Dynamics of the effectual network Expanding cycle of resources
Actual courses of Action possible
Who I am What I know Whom I know
What can I do?
New means Interactions with other people
Effectual stakeholder commitments New goals
Actual Means
Converging cycle of constraints
NEW MARKETS AND NEW FIRMS
Issues in Relationship to Performance Obvious hypothesis:
Effectuation increases the probability of success….. NOT SO FAST!! • “Success/failure” not easy to define – What is “success” varies across entrepreneurs – Measures of “performance” vary across firms, industries, and time
• Skills for a successful startup ≠ skills for successful growth • Failure of the firm does not equal failure of the entrepreneur
Higher Probability of Success ? Causal Large Firm
High
R e s o u r c e s
Novice Entrepreneur
Tethered to goals and predictive
Expert entrepreneurs do not always manage to bridge this gap
Low
Effectual Tethered to means and non-predictive
Startup Firm
Expert Entrepreneur Time
Lower Costs of Failure Level of Investment External Shock Possibility 1
High
External Shock Possibility 2 Investment based on
Expected Return Actual investment required (Ex-post) Prediction Gap: Over/under commitment of investment
Control Gap: Necessity of Effectual partnerships
Investment based on
Expected Return Investment based on
Affordable Loss
Low Low
Timeline
High
Efficacy of Prediction
Some thoughts on probability of success/failure
Assuming small successes are expertise-dependent, but large homeruns are drawn from a random distribution:
You get to explore more opportunities: •
Effectuation gives you more shots at the jackpot – a larger temporal portfolio
•
You survive longer so you can win the marathons (you may lose some sprints along the way)
You get to explore better opportunities for you: •
You fully reap the benefits of cumulative learning effects
How Expert Entrepreneurs Build New Markets
Not a jigsaw puzzle
More like a patchwork quilt
The Puzzle
What they seem to be good at – Opportunity recognition – Resource acquisition – Visionary leadership
Think about what they did . . . Real Networks Sears Starbucks eBay
Staples Even Microsoft . . .
Logics of Decisions and Actions Question: What kind of logic do expert entrepreneurs use to make decisions and take action in the 0-60mph phase? Subjects:
27 expert entrepreneurs
Method:
Protocol analysis
(Founders of companies from $200M to $6.5B)
(80 hours of tape; 1500 pages of data)
Theory:
Sarasvathy, 2005
(Effectuation: Elements of Entrepreneurial Expertise)
Results: Over 63% of the subjects used an EFFECTUAL (as opposed to causal) logic more than 75% of the time
Conventional Wisdom: Causal Logic
Causal Logic is predictive To the extent you can predict the future, you can control it
Control of outcomes achieved through
accurate predictions, clear goals, and avoiding or protecting oneself against the unexpected
What is effectual logic?
High
Rational
Power
Adaptive
Effectual
logic
logic
PREDICTION
logic
logic
Low Low
= Non-predictive control
High CONTROL
How do you control a future you cannot predict?
Examples of Effectual Logic
From cooking a meal . . .
. . . To building a restaurant
Or something else . . .
Principles of Effectuation
• Bird-in-hand principle: Start with Who you are, What you know, & Whom you know
(Not with the opportunity)
• Affordable loss principle: Invest what you can afford to lose – extreme case $0
(Not expected return)
• Patchwork Quilt principle: Build a network of self-selected stakeholders
(Not competitive analysis)
• Lemonade principle: Leverage contingencies
(Not avoid them)
• Pilot-in-the-plane principle: The future comes from what people do
(Not inevitable trends)
Dynamics of the effectual network Expanding cycle of resources
Actual courses of Action possible
Who I am What I know Whom I know
What can I do?
New means Interactions with other people
Effectual stakeholder commitments New goals
Actual Means
Converging cycle of constraints
NEW MARKETS AND NEW FIRMS
Issues in Relationship to Performance Obvious hypothesis:
Effectuation increases the probability of success….. NOT SO FAST!! • “Success/failure” not easy to define – What is “success” varies across entrepreneurs – Measures of “performance” vary across firms, industries, and time
• Skills for a successful startup ≠ skills for successful growth • Failure of the firm does not equal failure of the entrepreneur
Higher Probability of Success ? Causal Large Firm
High
R e s o u r c e s
Novice Entrepreneur
Tethered to goals and predictive
Expert entrepreneurs do not always manage to bridge this gap
Low
Effectual Tethered to means and non-predictive
Startup Firm
Expert Entrepreneur Time
Lower Costs of Failure Level of Investment External Shock Possibility 1
High
External Shock Possibility 2 Investment based on
Expected Return Actual investment required (Ex-post) Prediction Gap: Over/under commitment of investment
Control Gap: Necessity of Effectual partnerships
Investment based on
Expected Return Investment based on
Affordable Loss
Low Low
Timeline
High
Efficacy of Prediction
Some thoughts on probability of success/failure
Assuming small successes are expertise-dependent, but large homeruns are drawn from a random distribution:
You get to explore more opportunities: •
Effectuation gives you more shots at the jackpot – a larger temporal portfolio
•
You survive longer so you can win the marathons (you may lose some sprints along the way)
You get to explore better opportunities for you: •
You fully reap the benefits of cumulative learning effects
How Expert Entrepreneurs Build New Markets
Not a jigsaw puzzle
More like a patchwork quilt
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