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Special Report Feb 1, 2011

Leigh Buchanan | Inc. magazine

How Great Entrepreneurs Think


Think inside the (restless, curious, eager) minds of highly accomplished company builders.

Richard Branson: Knight of Big Ideas


A video interview with Sir Audacity himself: "Set impossible challenges. Then catch up with them."

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What distinguishes great entrepreneurs? Discussions of entrepreneurial psychology typically focus on creativity, tolerance for risk, and the desire for achievementenviable traits that, unfortunately, are not very teachable. So Saras Sarasvathy, a professor at the University of Virginia's Darden School of Business, set out to determine how expert entrepreneurs think, with the goal of transferring that knowledge to aspiring founders. While still a graduate student at Carnegie Mellon, Sarasvathywith the guidance of her thesis supervisor, the Nobel laureate Herbert Simonembarked on an audacious project: to eavesdrop on the thinking of the country's most successful entrepreneurs as they grappled with business problems. She required that her subjects have at least 15 years of entrepreneurial experience, have started multiple companiesboth successes and failures and have taken at least one company public.

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Sarasvathy identified 245 U.S. entrepreneurs who met her criteria, and 45 of them agreed to participate. (Responses from 27 appeared in her conclusions; the rest were reserved for subsequent studies. Thirty more helped shape the questionnaire.) Revenue at the subjects' companiesall run by the founders at that timeranged from $200 million to $6.5 billion, in industries as diverse as toys and railroads. Sarasvathy met personally with all of her subjects, including such luminaries as Dennis Bakke, founder of energy giant AES; Earl Bakken of Medtronic; and T.J. Rodgers of Cypress Semiconductor. She presented each with a case study about a hypothetical start-up and 10 decisions that the founder of such a company would have to make in building the venture. Then she switched on a tape recorder and let the entrepreneur talk through the problems for two hours. Sarasvathy later collaborated with Stuart Read, of the IMD business school in Switzerland, to conduct the same experiment with professional managers at large corporationsthe likes of Nestl, Philip Morris, and Shell. Sarasvathy and her colleagues are now extending their research to novice entrepreneurs and both novice and experienced professional investors. Sarasvathy concluded that master entrepreneurs rely on what she calls effectual reasoning. Brilliant improvisers, the entrepreneurs don't start out with concrete goals. Instead, they constantly assess how to use their personal strengths and whatever resources they have at hand to develop goals on the fly, while creatively reacting to contingencies. By contrast, corporate executivesthose in the study group were also

enormously successful in their chosen fielduse causal reasoning. They set a goal and diligently seek the best ways to achieve it. Early indications suggest the rookie company founders are spread all across the effectual-to-causal scale. But those who grew up around family businesses will more likely swing effectual, while those with M.B.A.'s display a causal bent. Not surprisingly, angels and seasoned VCs think much more like expert entrepreneurs than do novice investors. The following is a summary of some of the study's conclusions, illustrated with excerpts from the interviews. Understanding the entrepreneurs' comments requires familiarity with what they were evaluating. The case study and questions are too long to reproduce here. But briefly: Subjects were asked to imagine themselves as the founder of a start-up that had developed a computer game simulating the experience of launching a company. The game and ancillary materials were described as tools for teaching entrepreneurship. Subjects responded to questions about potential customers, competitors, pricing, marketing strategies, growth opportunities, and related issues. (The full case study and questions can be found here.) Quotes have been edited for length, though we wish we had room to run them in their entirety. Sarasvathy remained almost silent throughout, forcing the founders to answer their own questions and externalize their thinking in the process. The transcripts, riddled with "ums" and "ers," doublings-back on assumptions, and references to personal rules of thumb, read like verbal MRIs of the entrepreneurial brain in action.

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Do the doable, then push it


Sarasvathy likes to compare expert entrepreneurs to Iron Chefs: at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest. Corporate leaders, by contrast, decide they are going to make Swedish meatballs. They then proceed to shop, measure, mix, and cook Swedish meatballs in the most efficient, cost-effective manner possible. That is not to say entrepreneurs don't have goals, only that those goals are broad and like luggagemay shift during flight. Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle Sarasvathy calls affordable loss. Repeatedly, the entrepreneurs in her study expressed impatience with anything that smacked of extensive planning, particularly traditional market research. (Inc.'s own research backs this up. One survey of Inc. 500 CEOs found that 60 percent had not written business plans before launching their companies. Just 12 percent had done market research.)
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When asked what kind of market research they would conduct for their hypothetical start-up, most of Sarasvathy's subjects responded with variations on the following: "OK, I need to know which of their various groups of students, trainees, and individuals would be most interested so I can target the audience a little bit more. What other information...I've never done consumer marketing, so I don't really know. I think probably...I think mostly I'd just try to...I would...I wouldn't do all this, actually. I'd just go sell it. I don't believe in market research. Somebody once told me the only thing you need is a customer. Instead of asking all the questions, I'd try and make some sales. I'd learn a lot, you know: which people, what were the obstacles, what were the questions, which prices work better. Even before I started production. So my market research would actually be hands-on actual selling." 1 | 2 | 3 NEXT

Select Services Buy one Motorola Admiral for your business, get one free. From Sprint. Hertz Business Rewards Save up to 25%. Earn free days for you and your company. Enroll Now. Smarty Pants Maryland #1 in Innovation & Entrepreneurship Try Carbonite free Automatic & secure online backup for your small business for $229/yr Google Apps for Business Custom email, shared calendars, and documents for teams. 30 day free trial Insperity Recruiting Services Let us help you get back to what you do best running your business. Newly promoted? Successfully transition from Bud to Boss a free book summary. Free GMATPrep Tomorrow's decision makers are taking the GMAT exam today My secret weapon? Devices that keep me connected. Work the way you want. Get the guide.

Leigh Buchanan is an editor at large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture. @LeighEBuchanan

Ndumiso Mojalifa Ndlovu March 16, 2012 at 6:40am


Fantastic stuff...
LIKE | REPLY

December 19, 2011 at 5:11pm


Not sure this research was conclusive in any way. But good proof point builders that entreprenuers infact do have different brain chemistry, not just "think differently". I hope that it doesn't become something that VCs test for in the future though!
LIKE | REPLY

Olga Kovshanova, MBA, MA August 4, 2011 at 4:14pm


Seems only like basic logic! Olga Kovshanova, MBA, MA Sales and Guest Relations Manager CIS

The Grand Mauritian Resort & Spa

Hotel Professional Extraordinaire

Email: olinka@olinka.info

Homepage: http://www.olinka.info/

Skype name: olinkaru

ICQ: 212336628

M: +230-717-5790

LinkedIn Profile: http://www.linkedin.com/in/kov...

LIKE | REPLY

Jacqueline S June 30, 2011 at 5:51am


Interesting read...It's cool to see science reinforcing a lot of observable qualities I've seen in other people.
LIKE | REPLY

Kamil Ali June 28, 2011 at 6:25pm


Marketing research? I don't think it's effective when we want to know "What consumer WILL do?" Yes, it's effective when we want to know what happened in past "What consumer HAVE done" What's every CEO's story? They are interested in getting the facts right and spend a fortune on research. The opposite is true, marketers believe in their instinct and believe in creating category first, and then brand. Take Red bull, it was tested in marketplace. People hated the name, taste and packaging. Even then Dietrich Mateschitz launched it! In fact, he created a new category to dominate across the world!
LIKE | REPLY

Ashok Neelakanta June 7, 2011 at 6:05pm


Brilliant! The article not just encourages, but also confirms one's thought process and belief is right. The reactions is another form of reassurance that indicate there are many who subscribe to similar thoughts as you!
LIKE | REPLY

Lowering Springs May 2, 2011 at 4:53pm


This is a great article. Need to read it a few more times to sink in.
LIKE | REPLY

Mkinlow April 28, 2011 at 7:15pm


Good article. I shared the print with other colleagues last week. Interesting, and thought provoking. Brings back memories!
LIKE | REPLY

Laurie Head Atkinson April 28, 2011 at 6:35pm


Fascinating study. Thanks for a great read! My husband and I are entrepreneurs and I recognize the thought process here. - Laurie Head, AIS Network, http://www.aisn.net

LIKE | REPLY

melthel April 16, 2011 at 8:04pm


I'm definitely somewhere in the middle. I generally like to have as much information as possible before acting. However, I enjoy the buzz of winging it too.
LIKE | REPLY VIEW MORE COMMENTS

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Topics > Leadership and Managing > Leadership >

Special Report Feb 1, 2011

Leigh Buchanan | Inc. magazine

How Great Entrepreneurs Think


Here's another: "Ultimately, the best test of any product is to go to your target market and pretend like it's a real business. You'll find out soon enough if it is or not. You have to take some risks. You can sit and analyze these different markets forever and ever and ever, and you'd get all these wonderful answers, and they still may be wrong. The problem with the businessman type is they spend a lot of time with all their great wisdom and all their spreadsheets and all their Harvard Business Review people, and they'd either become convinced that there's no market at all or that they have the market nailed. And they'd go out there big time, with a lot of expensive advertising and upfront costs, because they're gonna overwhelm the market, and the business would go under." The corporate executives were much more likely to want a quantitative analysis of market size: "If I had a budget, I could ask a specialist in the field of education to go through data and give me ideas of how many universities, how many media, how many large companies I will have to contact to have an idea of the work that has to be done." Sarasvathy explains that entrepreneurs' aversion to market research is symptomatic of a larger lesson they have learned: They do not believe in prediction of any kind. "If you give them data that has to do with the future, they just dismiss it," she says. "They don't believe the future is predictable...or they don't want to be in a space that is very predictable." That attitude is a bit like Voltaire's assertion that the perfect is the enemy of the good. In this case, the careful forecast is the enemy of the fortuitous surprise: "I always live by the motto of 'Ready, fire, aim.' I think if you spend too much time doing 'Ready, aim, aim, aim,' you're never going to see all the good things that would happen if you actually started doing it. I think business plans are interesting, but they have no real meaning, because you can't put in all the positive things that will occur...If you know intrinsically that this is possible, you just have to find out how to make it possible, which you can't do ahead of time." That said, Sarasvathy points out that her entrepreneurs did adopt more formal research and planning practices over time. Their ability to do soto become causal as well as effectual thinkershelped this enduring group grow with their companies.
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Richard Branson: Knight of Big Ideas


A video interview with Sir Audacity himself: "Set impossible challenges. Then catch up with them."

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5 Reasons People Fail (& What to Do Instead) World's Simplest Management Secret Guy Kawasaki: 'Why I'd Love to Pay More Taxes' 9 People You Must Remove From Your Inner Circle 3 Characteristics of Amazing Presentations 10 Leadership Practices to Stop Today Win Important Customers & Keep Them 9 Daily Habits That Will Make You Happier 8 Things Remarkably Successful People Do Firing & Layoffs: 'I Just Wish I Would've Done It Sooner' Top Lists How Zumba Fitness Turned Pirates Into a Street Marketing Team 15 Perfect Sales Conversation Starters Become a Master Networker: 5 Quick Tips 5 Technology Trends to Watch 5 Ways to Get People to Actually Listen to You 6 Books for the Well-Rounded Entrepreneur 5 Ideas That Will Blow Your Mind A Husband-Wife Team, the Holiday Shopping Season & the Birth of a Second Child 3 Tools That Make Busywork Suck Less

Woo partners first


Entrepreneurs' preference for doing the doable and taking it from there is manifest in their approach to partnerships. While corporate executives know exactly where they are going and follow a prescribed path to get there, entrepreneurs allow whomever they encounter on the journeysuppliers, advisers, customersto shape their businesses. "I would literally target...key companies who I would call flagship: do a frontal lobotomy on them. There are probably a dozen of those I would pick. Some entrepreneurial operations that would probably be smaller but have a global presence where I'm dealing with the challenges of

international sales...Building rapport with partners, with joint-venture colleagues as well as with ultimate users....The challenge then is really to pick your partners and package yourself early on before you have to put a lot of capital out." Chief among those influential partners are first customers. The entrepreneurs anticipated customer help on product design, sales, and identifying suppliers. Some even saw their first customer as their best investor. "People chase investors, but your best investor is your first real customer. And your customers are also your best salesmen." Sarasvathy says expert entrepreneurs have learned the hard way that "having even one real customer on board with you is better than knowing in a hands-off way 10 things about a thousand customers." Merely gathering information from a large number of potential customers, she says, "increases all the different things you could do but doesn't tell you what you should do." Toward that end, many of her subjects described their preference for an almost anthropological approach to customer interaction: observing a few customers as they work or actually working alongside them. "You can't go out and survey customers and say, 'OK, what kinda car do you really want?' I believe very much in living it. If you're gonna write a book about stevedores, go work as a stevedore for a period of time. My company was going to design and sell products for physical therapy, so I worked in rehab medicine for two years." Corporate executives, by contrast, generally envisioned more traditional vendor- customer interactions, such as focus groups. "I would like to get from them...by meeting with them or getting their input on what they think of the limitation of existing programs....just kind of sit and listen to them telling me...what new features they'd like. And I'd just listen to them talk, talk, talk and then be thinking and develop something between what they want and what's possible technically." Sarasvathy says executives rely less on firsthand insights, because they can afford to place bets on multiple segments and product versions. "Entrepreneurs don't have that luxury," she says.

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Sweat competitors later


The study's corporate subjects focused intently on potential competitors, as eager for information about other vendors as about customers. "The corporate guys are like hunter-gatherers," says Sarasvathy. "They are hired to win market share, so they concentrate fiercely on who is in the marketplace. The first thing they do is map out the lay of the land." "What information do I want about my competition? I want to see what kinds of resources they have. Do they have computer programmers? Do they have educational experts? Do they have teachers and trainers who can roll out this product? Do they have a support structure in place? Geographically, where are they situated? Have they got one center or lots of centers? Are they doing this just in English, or do they have different languages? I'd be wanting to look at the finances of these companies....I'd probably be looking at their track record to see what kind of approach they take to marketing and advertising so I know what to expect. I might look and see what people they hire, see if I can hire away someone who might have experience." PREV 1 | 2 | 3 NEXT
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Buy one Motorola Admiral for your business, get one free. From Sprint. Hertz Business Rewards Save up to 25%. Earn free days for you and your company. Enroll Now. Smarty Pants Maryland #1 in Innovation & Entrepreneurship Try Carbonite free Automatic & secure online backup for your small business for $229/yr Google Apps for Business Custom email, shared calendars, and documents for teams. 30 day free trial Insperity Recruiting Services Let us help you get back to what you do best running your business. Newly promoted? Successfully transition from Bud to Boss a free book summary. Free GMATPrep Tomorrow's decision makers are taking the GMAT exam today My secret weapon? Devices that keep me connected. Work the way you want. Get the guide.

Leigh Buchanan is an editor at large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture. @LeighEBuchanan

Ndumiso Mojalifa Ndlovu March 16, 2012 at 6:40am


Fantastic stuff...
LIKE | REPLY

December 19, 2011 at 5:11pm


Not sure this research was conclusive in any way. But good proof point builders that entreprenuers infact do have different brain chemistry, not just "think differently". I hope that it doesn't become something that VCs test for in the future though!
LIKE | REPLY

Olga Kovshanova, MBA, MA August 4, 2011 at 4:14pm


Seems only like basic logic! Olga Kovshanova, MBA, MA Sales and Guest Relations Manager CIS

The Grand Mauritian Resort & Spa

Hotel Professional Extraordinaire

Email: olinka@olinka.info

Homepage: http://www.olinka.info/

Skype name: olinkaru

ICQ: 212336628

M: +230-717-5790

LinkedIn Profile: http://www.linkedin.com/in/kov...

LIKE | REPLY

Jacqueline S June 30, 2011 at 5:51am


Interesting read...It's cool to see science reinforcing a lot of observable qualities I've seen in other people.
LIKE | REPLY

Kamil Ali June 28, 2011 at 6:25pm


Marketing research? I don't think it's effective when we want to know "What consumer WILL do?" Yes, it's effective when we want to know what happened in past "What consumer HAVE done" What's every CEO's story? They are interested in getting the facts right and spend a fortune on research. The opposite is true, marketers believe in their instinct and believe in creating category first, and then brand. Take Red bull, it was tested in marketplace. People hated the name, taste and packaging. Even then Dietrich Mateschitz launched it! In fact, he created a new category to dominate across the world!
LIKE | REPLY

Ashok Neelakanta June 7, 2011 at 6:05pm


Brilliant! The article not just encourages, but also confirms one's thought process and belief is right. The reactions is another form of reassurance that indicate there are many who subscribe to similar thoughts as you!
LIKE | REPLY

Lowering Springs May 2, 2011 at 4:53pm


This is a great article. Need to read it a few more times to sink in.
LIKE | REPLY

Mkinlow April 28, 2011 at 7:15pm


Good article. I shared the print with other colleagues last week. Interesting, and thought provoking. Brings back memories!

LIKE | REPLY

Laurie Head Atkinson April 28, 2011 at 6:35pm


Fascinating study. Thanks for a great read! My husband and I are entrepreneurs and I recognize the thought process here. - Laurie Head, AIS Network, http://www.aisn.net
LIKE | REPLY

melthel April 16, 2011 at 8:04pm


I'm definitely somewhere in the middle. I generally like to have as much information as possible before acting. However, I enjoy the buzz of winging it too.
LIKE | REPLY VIEW MORE COMMENTS

More On Inc.com
World's Coolest Offices

Inc. 5000

30 Under 30

The Immigrant Edge

How I Did It

The exclusive 2012 list of America's fastest-growing private companies.


Read more

Today on Inc.com

3 Signs It's Time to Quit Your Day Job

5 Tips for Highly Effective Pinterest Boards

How to Bulletproof Your Company Culture

3 Things Every Great Leader Gets Wrong

4 Tips for Pitching Your Business in 2 Minutes

HOME

MAGAZINE

CONTACT US

ABOUT US

ADVERTISE

EVENTS

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SUBSCRIBE

BUSINESS OWNERS COUNCIL

Copyright 2012 Mansueto Ventures LLC. All rights reserved.

FOLLOW INC. ON:

Login or signup Search Inc.com

Topics > Leadership and Managing > Leadership >

Special Report Feb 1, 2011

Leigh Buchanan | Inc. magazine

How Great Entrepreneurs Think


By the time entrepreneurs start seeking investment, of course, they should be as far inside competitors' heads as they can get. But the study subjects generally expressed little concern about the competition at launch. "Your competition is a secondary factor. I think you are putting the cart before the horse...Analyze whether you think you can be successful or not before you worry about the competitors." And:
Like

Richard Branson: Knight of Big Ideas


A video interview with Sir Audacity himself: "Set impossible challenges. Then catch up with them."

4,065
Share

5,902
Tweet

5.6k

"At one time in our company, I ordered our people not to think Send about competitors. Just do your job. Think only of your work. 74 Now that isn't entirely possible. Now, in fact, competitive information is very valuable. But I wanted to be sure that we didn't worry about competitors. And to that end, I gave the annual plan to every employee. And they said, 'Well, aren't you afraid your competitors are gonna get this information and get an advantage?' I said, 'It's much riskier to not have your employees know what you need to do than it is to run the risk of competitors finding out. Cause they'll find out somehow anyway. But if one of your employees doesn't know why they're doing their job, then you're really losing out.'" Entrepreneurs fret less about competitors, Sarasvathy explains, because they see themselves not in the thick of a market but on the fringe of one, or as creating a new market entirely. "They are like farmers, planting a seed and nurturing it," she says. "What they care about is their own little patch of ground."

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Most Viewed

5 Reasons People Fail (& What to Do Instead) World's Simplest Management Secret Guy Kawasaki: 'Why I'd Love to Pay More Taxes' 9 People You Must Remove From Your Inner Circle 3 Characteristics of Amazing Presentations 10 Leadership Practices to Stop Today Win Important Customers & Keep Them 9 Daily Habits That Will Make You Happier 8 Things Remarkably Successful People Do Firing & Layoffs: 'I Just Wish I Would've Done It Sooner' Top Lists How Zumba Fitness Turned Pirates Into a Street Marketing Team 15 Perfect Sales Conversation Starters Become a Master Networker: 5 Quick Tips 5 Technology Trends to Watch 5 Ways to Get People to Actually Listen to You 6 Books for the Well-Rounded Entrepreneur 5 Ideas That Will Blow Your Mind A Husband-Wife Team, the Holiday Shopping Season & the Birth of a Second Child 3 Tools That Make Busywork Suck Less

Don't limit yourself


Corporate managers believe that to the extent they can predict the future, they can control it. Entrepreneurs believe that to the extent they can control the future, they don't need to predict it. That may sound like monumental hubris, but Sarasvathy sees it differently, as an expression of entrepreneurs' confidence in their ability to recognize, respond to, and reshape opportunities as they develop. Entrepreneurs thrive on contingency. The best ones improvise their way to an outcome that in retrospect feels ordained. So although many corporate managers in Sarasvathy's study wanted more information about the product and market landscape, some entrepreneurs pushed back on the small amount of information provided as being too limiting. For example, the description of the product as a computer game for entrepreneurship: "I would cast it not as a product but as a family of products, which might perform a broader function like helping people make career decisions. I always look for broad market opportunities." And: "I wanna use this product as a platform to attract other products literally to build a market-share play. I see this as a missionary product, an entre into some of the best users and buyers." The most fascinating part of the study relates to the product's potential. Asked about growth opportunities, the corporate managers mostly restricted their comments to the game as described:

"It depends on how it's marketed. I'm a little bit skeptical....I'm not certain entrepreneurs would go for that. Maybe they think they already know everything. But in terms of simulations for business schools or in further education, they seem to be very popular. And entrepreneurship degrees seem to be very popular as well. So, yeah, it could well be a lot of growth." Here is where the entrepreneurs really let loose. Starting with the same information as one another and as the executives, they collectively spun out opportunities in 18 marketsnot just academic institutions but also venture capital firms, consultancies, government agencies, and the military. As much as the ability to concoct new products, it is this tendency to riff off whatever ideas or materials are handy that defines entrepreneurs as a creative breed. Reading the transcripts, you can almost hear the enthusiasm mounting in their voices as the possibilities unfold: "This company could make a few people rich, but I don't think it could ever be huge...You might have a successful second product about how to succeed and get promoted within a large company....That would give you a market of everybody with aspirations at IBM, AT&T, Exxon, etc....You could make another product for students. How do I graduate in the top 10 percent of my class at Stanford or Harvard or Yale?...A lot about how to be a good student is teachable. Now you've got a product you can sell to every student in the country. Next there is negotiation. You could practice being a good negotiator. There's not a salesman in the United States who wouldn't buy one of those. Then you could genericize the thing to any situation which requires some sort of technical knowledge. Or learning situations within companies where you are trying to get people to understand that company's methods or objectives. So maybe I'm gonna change my opinion about the growth potential. It's easy to see how within an hour you could name 10 products that would each address huge markets, like all employees in Fortune 500 companies, who are rich enough to pay $100 for it. It could be a hit on the scale of the Lotus spreadsheet. You can see a several-hundred-million-dollar company coming from it." You might also glean from the preceding that entrepreneurs are eternal optimists. But you don't need an academic study to tell you that. Leigh Buchanan is an editor-at-large for Inc. PREV 1 | 2 | 3 Read more: Saras Sarasvathy's Full Case Study and Questions
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Buy one Motorola Admiral for your business, get one free. From Sprint. Hertz Business Rewards Save up to 25%. Earn free days for you and your company. Enroll Now. Smarty Pants Maryland #1 in Innovation & Entrepreneurship Try Carbonite free Automatic & secure online backup for your small business for $229/yr Google Apps for Business Custom email, shared calendars, and documents for teams. 30 day free trial

Leigh Buchanan is an editor at large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture. @LeighEBuchanan

Insperity Recruiting Services Let us help you get back to what you do best running your business. Newly promoted? Successfully transition from Bud to Boss a free book summary. Free GMATPrep Tomorrow's decision makers are taking the GMAT exam today

Ndumiso Mojalifa Ndlovu March 16, 2012 at 6:40am


Fantastic stuff...
LIKE | REPLY

My secret weapon? Devices that keep me connected. Work the way you want. Get the guide.

December 19, 2011 at 5:11pm


Not sure this research was conclusive in any way. But good proof point builders that entreprenuers infact do have different brain chemistry, not just "think differently". I hope that it doesn't become something that VCs test for in the future though!
LIKE | REPLY

Olga Kovshanova, MBA, MA August 4, 2011 at 4:14pm

Seems only like basic logic! Olga Kovshanova, MBA, MA Sales and Guest Relations Manager CIS

The Grand Mauritian Resort & Spa

Hotel Professional Extraordinaire

Email: olinka@olinka.info

Homepage: http://www.olinka.info/

Skype name: olinkaru

ICQ: 212336628

M: +230-717-5790

LinkedIn Profile: http://www.linkedin.com/in/kov...

LIKE | REPLY

Jacqueline S June 30, 2011 at 5:51am


Interesting read...It's cool to see science reinforcing a lot of observable qualities I've seen in other people.
LIKE | REPLY

Kamil Ali June 28, 2011 at 6:25pm


Marketing research? I don't think it's effective when we want to know "What consumer WILL do?" Yes, it's effective when we want to know what happened in past "What consumer HAVE done" What's every CEO's story? They are interested in getting the facts right and spend a fortune on research. The opposite is true, marketers believe in their instinct and believe in creating category first, and then brand. Take Red bull, it was tested in marketplace. People hated the name, taste and packaging. Even then Dietrich Mateschitz launched it! In fact, he created a new category to dominate across the world!
LIKE | REPLY

Ashok Neelakanta June 7, 2011 at 6:05pm


Brilliant! The article not just encourages, but also confirms one's thought process and belief is right. The reactions is another form of reassurance that indicate there are many who subscribe to similar thoughts as you!
LIKE | REPLY

Lowering Springs May 2, 2011 at 4:53pm


This is a great article. Need to read it a few more times to sink in.
LIKE | REPLY

Mkinlow April 28, 2011 at 7:15pm


Good article. I shared the print with other colleagues last week. Interesting, and thought provoking. Brings back memories!
LIKE | REPLY

Laurie Head Atkinson April 28, 2011 at 6:35pm


Fascinating study. Thanks for a great read! My husband and I are entrepreneurs and I recognize the thought process here. - Laurie Head, AIS Network, http://www.aisn.net
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melthel April 16, 2011 at 8:04pm


I'm definitely somewhere in the middle. I generally like to have as much information as possible before acting. However, I enjoy the buzz of winging it too.
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Special Report Feb 1, 2011

Inc. staff

Saras Sarasvathy's Full Case Study and Questions


The following is a case study on the psychology of entrepreneurs conducted by Saras Sarasvathy, a professor at the University of Virginias Darden School of Business. Subjects responded to questions that simulated the experience of launching a start-up.

Richard Branson: Knight of Big Ideas


A video interview with Sir Audacity himself: "Set impossible challenges. Then catch up with them."

Introduction
In the following experiment, you will solve two decision problems. These problems arise in the context of building a new company for an imaginary product. A detailed description of the product follows this introduction.

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Although the product is imaginary, it is Getty technically feasible and financially viable. The data for the problems have been obtained through realistic market researchthe kind of market research used in developing a real world business plan. So far, the entrepreneurs who participated in this study found the project both interesting and feasible.

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Before you start on the product description and the problems, I do need one act of creative imagination on your part. I request you to put yourself in the role of the lead entrepreneur in building this companyi.e., you have very little money of your own to start this company, and the experience you describe above.

5 Reasons People Fail (& What to Do Instead) World's Simplest Management Secret Guy Kawasaki: 'Why I'd Love to Pay More Taxes' 9 People You Must Remove From Your Inner Circle 3 Characteristics of Amazing Presentations 10 Leadership Practices to Stop Today Win Important Customers & Keep Them 9 Daily Habits That Will Make You Happier 8 Things Remarkably Successful People Do Firing & Layoffs: 'I Just Wish I Would've Done It Sooner' Top Lists How Zumba Fitness Turned Pirates Into a Street Marketing Team 15 Perfect Sales Conversation Starters Become a Master Networker: 5 Quick Tips 5 Technology Trends to Watch 5 Ways to Get People to Actually Listen to You 6 Books for the Well-Rounded Entrepreneur 5 Ideas That Will Blow Your Mind A Husband-Wife Team, the Holiday Shopping Season & the Birth of a Second Child 3 Tools That Make Busywork Suck Less

Description of the product:


You have created a computer game of entrepreneurship. You believe you can combine this game with some educational material and profiles of successful entrepreneurs to make an excellent teaching tool for entrepreneurship. Your inspiration for the product came from several reports in the newspapers and magazines about increasing demand for entrepreneurship education; and the fact that a curriculum involving entrepreneurship even at the junior high or high school level induces students to learn not only business-related topics but math and science and communication skills, as well. The game part of the product consists of a simulated environment for starting and running a company. There are separate sub-simulations of markets, competitors, regulators, macroeconomic factors and a random factor for "luck." The game has a sophisticated multi-media interfacefor example, a 3D office where phones ring with messages from the market, a TV that will provide macroeconomic information when switched on, and simulated managerial staff with whom the player (CEO) can consult in making decisions. At the beginning of the game, the player can choose from a variety of businesses the type of business he/she wants to start (For example: manufacturing, personal services, software, etc.) and has to make decisions such as which market segment to sell to, how many people to hire, what type of financing to go for, etc. During the game, the player has to make production decisions, such as how much to produce, whether to build new warehouses or negotiate with trucking companies, etc.; marketing decisions, such as which channels of distribution to use, which media to advertise in, and so on; management decisions involving hiring, training, promoting, and firing of employees, and so on. There is an accounting

subroutine that tracks and computes the implications of the various decisions for the bottom line. The simulation's responses to the player's decisions permit a range of possible final outcomesfrom bankruptcy to a "hockey stick." You have taken all possible precautions regarding intellectual property. The name of your company is Entrepreneurship, Inc. The name of the product is Venturing.

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Problem 1: Identifying the market


Before we look at some market research data, please answer the following questions, one at a time: 1. Who could be your potential customers for this product? 2. Who could be your potential competitors for this product? 3. What information would you seek about potential customers and competitorslist questions you would want answered. 4. How will you find out this informationwhat kind of market research would you do? 5. What do you think are the growth possibilities for this company? Control your ATS through MS Outlook PCRecruiter Portal combines ATS, CRM & your email client. Get a demo right now. www.PCRecruiter.net Need Search Engine Marketing Experts? Drive Sales! Save Time & Money on PPC Ads with our Search Marketing Experts now! ZeroCompany.com/Top-Search- Experts Buy a Link Now

Problem 2: Defining the market


In this problem you have to make some marketing decisions. Based on secondary market research (published sources, etc.), you estimate that there are three major segments who are interested in the product: Segment Estimated total size Segment Young adults between the ages of 15 and 25 Adults over 25 who are curious about entrepreneurship Educators Estimated total size 20 Million 30 Million 200,000 institutions

The estimated dollar value of the instructional technology market is $1.7 billion. The estimated dollar value of the interactive simulation game market is $800 million. Both are expected to grow at a minimum rate of 20% p.a. for the next 5 years.
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The following are the results of the primary (direct) market research that you have completed. Survey #1: Internet users were allowed to download a scaled down version (Game stops after 15 minutes of playing) of the prototype and were asked to fill out a questionnaire. You get 600 hits per day. 300 of them actually download the product. You have 500 filled out questionnaires so far. Willing to pay ($) 50-100 100-150 150-200 200-250 250-300 Total Young Adults (%) 45 32 15 8 0 100 Adults (%) 26 38 22 9 5 100 Educators (%) 52 30 16 2 0 100

Select Services Buy one Motorola Admiral for your business, get one free. From Sprint. Hertz Business Rewards Save up to 25%. Earn free days for you and your company. Enroll Now. Smarty Pants Maryland #1 in Innovation & Entrepreneurship Try Carbonite free Automatic & secure online backup for your small business for $229/yr Google Apps for Business Custom email, shared calendars, and documents for teams. 30 day free trial Insperity Recruiting Services Let us help you get back to what you do best running your business. Newly promoted? Successfully transition from Bud to Boss a free book summary. Free GMATPrep Tomorrow's decision makers are taking the GMAT exam today My secret weapon? Devices that keep me connected. Work the way you want. Get the guide.

Survey #2: The prototype was demonstrated at two Barnes & Noble and three Borders Bookstores in Pittsburgh. Willing to pay ($) Young Adults (%) Adults (%) Educators (%)

50-100 100-150 150-200 200-250 250-300 Total

51 42 7 0 0 100

21 49 19 8 3 100

65 18 10 7 0 100

Survey #3: Focus Group of educators (high school and community college teachers and administrators) The educators who participated in the focus group find the product exciting and usefulbut want several additions and modifications made before they would be willing to pay a price of over $150 for it. As it is, they would be willing to pay $50-80 and would demand a discount on that for site licenses or bulk orders. Both at the bookstore demo and the focus group, participants are very positive and enthusiastic about the product. They provide you good feedback on specific features and also extend suggestions for improvement. But the educators are particularly keen on going beyond the "game" aspect; they make it clear that much more development and support would be required in trying to market the product to them. They also indicate that there are non-profit foundations and other funding sources interested in entrepreneurship that might be willing to promote the product and fund its purchase by educational institutions. Based on all your market research, you arrive at the following cost estimates for marketing your product. Internet Retailers $20,000 upfront + $500 per month thereafter $500,000 to 1 M upfront and support services and follow-up thereafter Relatively cheap, but ads and demos could cost $50,000 upfront Involves recruiting and training sales representatives, except locally

Mail order catalogs Direct selling to schools

Competition
None of the following four possible competitors combine a simulation game with substantial education materials. You are unique in this respect. Price per unit 29.95 Sales ($) 30 M

Company

Product

Description Urban planning simulation Civilization building City building simulation

Maxis Microprose simulation Sierra On-Line Future Endeavors Treetop Books (New Co. < 1 yr. old)

Sim City Civilization 50.00 Caesar

20 M

59.95

18 M

Scholastic

CD-ROMs of Scholastic

n/a

1 M

The game companies are making a net return of 25% on sales. At this point, please take your time and make the following decisions: (Please continue thinking aloud as you arrive at your decisions.) Which market segment/segments will you sell your product to?

How will you price your product? How will you sell to your selected market segment/segments? Learn more at effectuation.org. Read more: How Great Entrepreneurs Think

Bob March 31, 2011 at 5:28pm


This case provides more evidence that getting a MBA might be detrimental to becoming an entrepreneur. Hopefully , aspiring indiiduals will not succumb to the corporate thinking straight jacket of the MBA.
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Ralf Lippold February 19, 2011 at 1:32am


Awesome - this is gaming which I like :-) Bringing system dynamics and lean thinking to the table and cocreate the future game of entrepreneurism for all those countries that are shaking up right now. Learning together, even if we are not really talking together today, christs and moslem, Israelis and Palestinians, Arabs and Jews, engineers and dancers, digital natives and generation X, .... this will not just save the day, yet it will bring joyful living at this beautiful place, called EARTH, we inhered from our forefathers :-)

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just a college guy February 13, 2011 at 9:58pm


I was astonished at the vastly different mindsets between the master entrepreneur and the corporate MBA's. I am a undergraduate business student and much of how the corporate executives thinks is exactly what they teach in class. I feel that we as students should be exposed much more to this run and gun type plan, as this is how this country became as it is today. Taking the chance, making the mistakes, and learning from them. Besides all that planning is just time spent spinning your wheels. Furthermore, this is the first ever Inc. magazine I have ever read, thanks to my professor for recommending we all subscribe to it, and I will definitely be investing in this as often as I can for a poor college student.
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Reniles January 26, 2011 at 9:17pm


I loved the magazine article. It gave us a view that we don't often get...what's going on inside the master entrepreneur's mind. I particularly liked the distinction between the "effectual reasoning" of the master entrepreneur versus the "causal reasoning" of corporate MBAs. It's a very helpful distinction to have in understanding the types of persons we are dealing with when it comes to launching new ideas.
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What makes entrepreneurs entrepreneurial?

Saras D. Sarasvathy
Associate Professor The Darden Graduate School of Business Administration University of Virginia

sarasvathys@darden.virginia.edu

What makes entrepreneurs entrepreneurial?

Professionals who work closely with them and researchers who study them have often speculated about what makes entrepreneurs entrepreneurial. Of course, entrepreneurs also love to hold forth on this topic. But while there are as many war stories and pet theories as there are entrepreneurs and researchers, gathering together a coherent theory of entrepreneurial expertise has thus far eluded academics and practitioners alike. What are the characteristics, habits, and behaviors of the species entrepreneur? Is there a learnable and teachable core to entrepreneurship? In other words, what can todays entrepreneurs such as Rob Glaser and Jeff Bezos learn from old stalwarts such as Josiah Wedgwood and Leonard Shoen? Or even within the same period in history, what are the common elements that entrepreneurs across a wide variety of industries share with each other? In sum, is there such a thing as entrepreneurial thinking that can be applied across space, time and technology? In 1997, I set out on a rather perilous but exhilarating journey to investigate this question. Traveling across 17 states in the US over several months, I met with 30 founders of companies ranging in size from $200 M to $6.5 B and spanning a variety of industries from steel and railroad to teddy bears and semiconductors and bio-tech. The idea behind the study was not merely to interview these founders, but to get behind their stories and understand how they reason about specific problems in transforming an idea into an enduring firm. The entrepreneurs worked their way through a 17-page problem set over two hours, talking aloud continuously as they each solved exactly the same ten decision problems to build a company starting with exactly the same product idea. Rigorous analyses of the transcribed tapes led to rather surprising but eminently teachable principles. This set of principles, when put together, rested on a coherent logic that clearly established the existence of a distinct form of rationality that we have all long recognized intuitively as entrepreneurial. For reasons that will become

clear in the next section, I have termed this type of rationality effectual reasoning. Effectual reasoning: The problem The word effectual is the inverse of causal. In general, in MBA programs across the world, students are taught causal or predictive reasoning in every functional area of business. Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal fastest, cheapest, most efficient, etc. alternative to achieve the given goal. The make-vs.-buy decision in production, or choosing the target market with the highest potential return in marketing, or picking a portfolio with the lowest risk in finance, or even hiring the best person for the job in human resources management, are all examples of problems of causal reasoning. A more interesting variation of causal reasoning involves the creation of additional alternatives to achieve the given goal. This form of creative causal reasoning is often used in strategic thinking. Effectual reasoning, however, does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with. While causal thinkers are like great generals seeking to conquer fertile lands (Genghis Khan conquering two thirds of the known world), effectual thinkers are like explorers setting out on voyages into uncharted waters (Columbus discovering the new world). It is important to point out though that the same person can use both causal and effectual reasoning at different times depending on what the circumstances call for. In fact, the best entrepreneurs are capable of both and do use both modes well. But they prefer effectual reasoning over causal reasoning in the early stages of a new venture, and arguably, most entrepreneurs do not transition well into latter stages requiring more causal reasoning. Figure 1 graphically depicts the different forms of reasoning discussed above.

Figure 1
Managerial Thinking -- Causal Reasoning
Distinguishing Characteristic: Selecting between given means to achieve a pre-determined goal

M1 M2 M3 M4 M5

unspecified ingredients and cook a meal with them. While both causal and effectual reasoning call for domain-specific skills and training, effectual reasoning demands something more imagination, spontaneity, risk-taking, and salesmanship. Effectual reasoning: The process All entrepreneurs begin with three categories of means: (1) Who they are their traits, tastes and abilities; (2) What they know their education, training, expertise, and experience; and, (3) Whom they know their social and professional networks. Using these means, the entrepreneurs begin to imagine and implement possible effects that can be created with them. Most often, they start very small with the means that are closest at hand, and move almost directly into action without elaborate planning. Unlike causal reasoning that comes to life through careful planning and subsequent execution, effectual reasoning lives and breathes execution. Plans are made and unmade and revised and recast through action and interaction with others on a daily basis. Yet at any given moment, there is always a meaningful picture that keeps the team together, a compelling story that brings in more stakeholders and a continuing journey that maps out uncharted territories. Through their actions, the effectual entrepreneurs set of means and consequently the set of possible effects change and get reconfigured. Eventually, certain of the emerging effects coalesce into clearly achievable and desirable goals -- landmarks that point to a discernible path beginning to emerge in the wilderness. Yet, in our classrooms, we teach potential entrepreneurs an extremely causal process the sequential progression from idea to market research, to financial projections, to team, to business plan, to financing, to prototype, to market, to exit, with the caveat, of course, that surprises will happen along the way. Seasoned entrepreneurs, however, know that surprises are not deviations from the path. Instead they are the norm, the flora and fauna of the landscape, from which one learns to forge a path through the jungle. The unexpected is the stuff of entrepreneurial experience and transforming the

Given Goal

Given Means

Strategic Thinking -- Creative Causal Reasoning


Distinguishing Characteristic: Generating new means to achieve pre-determined goals M1

M2 Given Goals

M3 M4 New means are generated

M5

Entrepreneurial Thinking -- Effectual Reasoning


Distinguishing Characteristic: Imagining possible new ends using a given set of means Imagined Ends Given Means E1

M1 M3

M2 M5

E2 E3 E... En

M4

While causal reasoning may or may not involve creative thinking, effectual reasoning is inherently creative. The simple task of cooking dinner may be used to contrast the two types of reasoning. A chef who is given a specific menu and has only to pick out his or her favorite recipes for the items on the menu, shop for ingredients and cook the meal in their own wellequipped kitchens is an example of causal reasoning. An example of effectual reasoning would involve a chef who is not given a menu in advance, and is escorted to a strange kitchen where he or she has to explore the cupboards for

unpredictable into the utterly mundane is the special domain of the expert entrepreneur. Let us consider how the two processes operate in the simple case of building a restaurant. Imagine an entrepreneur who wants to start an Indian restaurant. In the causal process that we teach, she would start with some market research into the restaurant industry in the city of her choice; select a location very carefully based upon the market research; segment the market in a meaningful way; select target segments based on estimates of potential return; design a restaurant to appeal to her target segments; raise the required funding; bring her team together; and finally, implement specific market strategies and manage daily operations to make her restaurant a success.
Figure 2

Classic Causation Model from Marketing Textbooks Market Definition Segmentation


(using relevant variables such as age, income, etc.)

Targeting
(based on evaluation criteria such as expected return)

Positioning
(through marketing strategies)

To reach

THE CUSTOMER

Customer Identification
(through Who am I? What do I know? Whom do I know?)

Customer Definition
(through strategic partnerships & selling)

Adding Segments/Strategic Partners Definition of one of several possible markets

Process of Effectuation Used by Expert Entrepreneurs

bring her idea to market? When used as a class exercise, students usually suggest courses of action such as partnering with an existing restaurant, participating in ethnic food fairs, setting up a catering service and so on. Let us say that the actual course of action she decides to pursue is to persuade friends who work downtown to allow her to bring lunch for their office colleagues to sample. Let us further say that some customers then sign up for a lunch service and she begins preparing the food at home and delivering lunches personally. Eventually, she could save up enough money to rent a location and start a restaurant. But it could equally be plausible that the lunch business does not take off beyond the first few customers, but instead our entrepreneur discovers that the customers are actually interested in her ethnic philosophy and life experiences or Indian culture or other aspects of her personality or expertise or contacts or interests. She could then decide to go into any one of several different businesses contingent upon the ensuing feedback. To cite but a few possibilities, her eventual successful enterprise could turn out to be in any one or all of the following industries -- education, entertainment, travel, manufacturing and packaging, retail, interior decoration, or even self-help and motivation! Figure 2 graphically depicts and contrasts the causal marketing process with the effectual one.1 Real life examples of effectual processes in entrepreneurship abound. In fact, the stories of effectuation permeate and saturate the history of entrepreneurship since at least as far back as the eighteenth century: In the eighteenth century, a potter named Josiah Wedgwood, realized that pots can carry peoples aspirations for social mobility; in the twentieth, King Gillette began toying with the idea of creating something that customers would want to
It is easy to see that the inverted causal triangle at the top can be moved to the bottom below the upright effectual triangle and that would capture the marketing life cycle of most entrepreneurial firms. Once the market had been clearly identified and defined, one can now apply the traditional causal marketing process to capture market share and grow the company.
1

In the effectual process, it would all depend on who our entrepreneur is, what she knows, and whom she knows. For the sake of understanding the process here, let us say she is a good Indian chef who is considering starting an independent business. Assuming she has very little money of her own, what are some of the ways she can

repeatedly re-purchase and while shaving one morning, hit upon disposable razors as a possibility; Tom Fatjo, a respectable professional in Houston, practically got dared into founding the garbage giant BFI during a suburban subdivision meeting to solve the communitys garbage disposal problems; and closer to the twenty-first century, while trying to build an interactive cable channel with progressive content, an ex-Microsoft executive named Rob Glaser fell in love with Mosaic, and set out to give voice to the mute Web in the form of RealNetworks; and so it goes. Effectual reasoning: The principles Does all this mean, though, that we are once again resorting to tales by the campfire? It turns out that all these stories have some common principles of reasoning that invert their counterparts in causal reasoning. Moreover, these principles tie together into a coherent logic that demonstrates that this is indeed a convincing alternative to causal rationality: While causal reasoning focuses on expected return, effectual reasoning emphasizes affordable loss; While causal reasoning depends upon competitive analyses, effectual reasoning is built upon strategic partnerships; and, While causal reasoning urges the exploitation of pre-existing knowledge and prediction, effectual reasoning stresses the leveraging of contingencies. The affordable loss principle While managers are taught to analyze the market and choose target segments with the highest potential return, entrepreneurs tend to find ways to reach the market with minimum expenditure of resources such as time, effort, and money. In the extreme case, the affordable loss principle translates into the zero resources to market principle. Several of the expert entrepreneurs I studied insisted that they would not do any traditional market research, but would take the product to the nearest possible potential customer even before it was built. To quote but one of them, I think Id start by just... going... instead of asking all the questions Id go and say.. try and make some sale. Id make some just judgments about where I was going

-- get me and my buddies -- or I would go out and start selling. Id learn a lot you know.. which people.. what were the obstacles.. what were the questions.. which prices work better and just DO it. Just try to take it out and sell it. Even before I have the machine. Id just go try to sell it. Even before I started production. So my market research would actually be hands on actual selling. Hard work, but I think much better than trying to do market research. In finding the first customer within their immediate vicinity, whether within their geographic vicinity, within their social network, or within their area of professional expertise, entrepreneurs do not tie themselves to any theorized or pre-conceived market or strategic universe for their idea. Instead, they open themselves to surprises as to which market or markets they will eventually end up building their business in or even which new markets they will end up creating. Starting with exactly the same product, the entrepreneurs in the study ended up creating companies in 18 completely disparate industries! The strategic partnerships principle Another key principle of effectual reasoning is the focus on building partnerships rather than on doing a systematic competitive analysis. Since entrepreneurs tend to start the process without assuming the existence of a predetermined market for their idea, detailed competitive analyses do not seem to make any sense to them at the startup phase. As one of the subjects explained, At one time in our company, I ordered people not to think about competitors. Just do your job. Think only of your work.2 Instead entrepreneurs focus on building partnerships right from the start. In fact, the ideal beginning for a successful startup seemed to be the induction of customers into strategic partnerships. Again, to hear it from the
He went on to add, Now that isnt entirely possible, we do a lot of competitive research now. At the time of the study, his company was a 3 Billion dollar company. The evidence shows that as an entrepreneurial company grows beyond a critical size, effectual reasoning has to be supplemented with and even replaced at times by causal modes of thinking.
2

horses mouth, Traditional market research says, you do very broad based information gathering, possibly using mailings. I wouldnt do that. I would literally, target, as I said initially, key companies who I would call flagship, do a frontal lobotomy on them. The challenge then is really to pick your partners, and package yourself early on before you have to put a lot of capital out In fact, the strategic partnerships principle dovetails very well with the affordable loss principle to bring the entrepreneurs idea to market at really low levels of capital outlay. Furthermore, obtaining pre-commitments from key stakeholders helps reduce uncertainty in the early stages of creating an enterprise. Finally, since the entrepreneur is not wedded to any particular market for their idea, the expanding network of strategic partnerships determines to a great extent which market or markets the company will eventually end up in. The leveraging contingencies principle The third principle of effectual reasoning is the heart of entrepreneurial expertise the ability to turn the unexpected into the profitable. As one of the subjects in the study put it, I always live by the motto of Ready-fire-aim. I think if you spend too much time doing readyaim-aim-aim-aim, youre never gonna see all the good things that would happen if you actually start doing it and then aim. And find out where your target is. Great entrepreneurial firms are products of contingencies. Their structure, culture, core competence, and endurance are all residuals of particular human beings striving to forge and fulfil particular aspirations through interactions with the space, time and technologies they live in. For example, we could speculate whether Wedgwood pottery would have been possible if the potter Josiah Wedgwood had not met the gentleman philosopher Thomas Bentley and wooed him into a partnership that created a brand and a great company that has lasted over two centuries. The key to the Wedgwood fortune was the realization that people put their money where their aspirations are and that pots and vases could become vehicles of social mobility. Similarly, in our time, researchers speculate what Microsoft would have been if

IBM had written a different type of a contract or if Gary Kildahl had not been out flying his airplane the day IBM came calling. Yet, it is not the contingencies themselves that shaped the companies in the foregoing examples. It is how the entrepreneurs leveraged the contingencies that came upon them that has to form the core of models of effectual reasoning. The realization that not all surprises are bad and that surprises, whether good or bad, can be used as inputs into the new venture creation process differentiates effectual reasoning from causal reasoning which tends to focus on the avoidance of surprises as far as possible. Effectual reasoning: The logic Underlying all the principles of effectual reasoning is a coherent logic that rests on a fundamentally different assumption about the future than causal reasoning. Causal reasoning is based on the logic, To the extent that we can predict the future, we can control it. That is why both academics and practitioners in business today spend enormous amounts of brainpower and resources on developing predictive models. Effectual reasoning, however, is based on the logic, To the extent that we can control the future, we do not need to predict it. How does one control an unpredictable future? The answer to this question depends on our beliefs about where the future comes from. Is the future largely a continuation of the past? To what extent can human action actually change its course? While the future is always uncertain, not all uncertainties are the same. In fact, the simplest way we can model the different types of uncertainties is through the classic statistical model of the future as an urn containing different colored balls wherein the drawing of (say) a red ball, results in a reward (of say, $50). Assume the first urn contains 10 red balls and 10 green balls. In this case, the player can calculate the odds as an expected return of $25 on every draw since there is a 5050 chance of winning $50. This is the model of a risky, but predictable, future. Entrepreneurs, as well as most human beings in the real world, however, usually have to operate without such predictability. The urn they have to deal with does not have a given number of balls of known

colors. Instead it contains an unknown number of balls of unknown colors, but the game remains the same. In this case, the best strategy for the player is to draw balls randomly several times and to carefully note the result of each draw so that the distribution of balls in the urn can be discovered over time. This is a model of an uncertain, but learnable future that becomes predictable over time. Using the causal logic -to the extent we can predict the future, we can control it makes sense in both these cases. But entrepreneurs choose to view the future through effectual logic. Consciously, or unconsciously, they act as if they believe that the future is not out there to be discovered, but that it gets created through the very strategies of the players. In other words, the entrepreneur using effectual logic says: "Whatever the initial distribution of balls in the urn, I will continue to acquire red balls and put them in the urn. I will look for other people who own red balls and induce them to become partners and add to the red balls in the urn. As time goes by, there will be so many red balls in the urn that almost every draw will obtain one. On the other hand, if I and my acquaintances have only green balls, we will put them in the urn, and when there are enough, will create a new game where green balls win." Of course, such a view may express hopes rather than realities, and many entrepreneurs in the real world do fail. But the fact remains that entrepreneurs use this logic to try and build new urns and devise new games all the time. In fact, several of the expert entrepreneurs I studied explicitly stated that being in a market that could be predicted was not such a good idea, since there would always be someone smarter and with deeper pockets who would predict it better than they could. But being in an unpredictable market meant that the market could be shaped through their own decisions and actions working in conjunction with pre-committed stakeholders and customer-partners. Together they could use contingencies along the way as part of the raw materials that constitute the very urn they are constructing. Expert entrepreneurs are not usually in the ball counting business or the gaming business. Instead they are actually in the business of creating the future, which entails having to work together with a wide variety of people over long

periods of time. Sturdy urns of the future are filled with enduring human relationships that outlive failures and create successes over time3. Embodied in a network of such enduring relationships, effectual logic is particularly useful and effective in domains such as the introduction of new products in new markets, an area often referred to as the suicide quadrant (See Figure 3), exactly the area where traditional marketing techniques are ineffective.
Figure 3
Existing Market New Market

Existing Product

New product

Suicide Quadrant

That is because effectual logic is people dependent, unlike causal logic, which is effect dependent. In other words, when a particular effect has already been chosen such as a target segment within an existing market, the people we hire and partner with will depend on the effect we want to create or the market we want to penetrate. Effectual logic, however, does not assume pre-existent markets and builds on the idea that the markets we create will be predicated on the people we are able to bring together. In fact, in effectual reasoning, markets are in essence stable configurations of critical masses of stakeholders who come together to transform the outputs of human imagination into the forging and fulfillment of human aspirations through economic means.
This is again a topic that is largely ignored in our entrepreneurship curricula which tend to focus on market research, business planning, new venture financing and legal issues. As far as I know no entrepreneurship programs offer courses in creating and managing lasting relationships or stable stakeholder networks, nor on failure management.
3

Experienced professionals in the entrepreneurial arena, whether they are bankers, lawyers, VCs or other investors have always agreed with successful entrepreneurs that finding and leading the right people is the key to creating an enduring venture. These entrepreneurs know that such right people are not on the job market waiting for the jobs and incentives the entrepreneurs can offer them. Instead the right people need emotional ownership in the goals and objectives of the endeavor and can only be incentivized by the belief that the effects they create will embody their deepest passions and aspirations while enabling them to achieve their best potential. But great entrepreneurs realize something more about the central role of people in shaping the urn. Using effectual logic, they understand that they too cannot wait around to find the right people all the time. Besides continually striving to attract the right people, they learn also to nurture and grow them in their own backyards. As Josiah Wedgwood wrote, We have to make artists of mere men. And more recently, the founders of AES Corp., a multibillion dollar electric power company with operations in dozens of countries around the world say, [AES] is fun because the people who work here are fully engaged. They have total responsibility for decisions. They are accountable for results. What they do every day matters to the company, and it matters to the communities we operate in. There is, however, a dark corollary to the use of effectual logic in entrepreneurial activity. Since they do not assume specific pre-existent goals or effects and let these effects emerge through the process, in using effectual logic to create products and markets, entrepreneurs and their partners may also end up creating harmful and problematic effects for the society they live in. The effects they create may reflect the ignorance and cupidity as well as the will and aspirations of the people who participate in the creation of new urns and games of the future. But our awareness of the existence of effectual reasoning should alert us more sharply to the role of entrepreneurs and the market system in shaping our future as a species, not merely as contributors to GDP.

The creation of U-Haul: An exemplar of effectual logic In 1945, newly married, and with barely $5,000, Leonard Shoen set out on his effectual journey that led to the creation of U-Haul. By the end of 1949, it was possible to rent a trailer one-way from city to city throughout most of the United States. When we examine his journey, we find that this feat could not have been accomplished except through the use of effectual reasoning. When students today set out to write a business plan for this venture (using causal processes), they conclude that the plan is financially infeasible, or even psychologically infeasible, since it requires a large and risky capital outlay, most of which gets locked up in relatively worthless assets such as trucks and location rental. Moreover, the logistics of starting the business at a much smaller scale and growing it as fast as Shoen did overwhelms the analytical prowess of the best of causal thinkers. The final nail in the coffin usually is the complete lack of any entry barriers to imitators with deep pockets after the concept is proved on a smaller scale. Shoen, however, did not do elaborate market research or detailed forecasting and fund-raising in the sense in which we use the terms today. Instead, using effectual means, (who he was, what he knew, and whom he knew), he plunged into action, creating the market as he grew the business. In his own words, Since my fortune was just about enough to make the down payment on a home and furnish it, and knowing that if I did this we would be sunk, we started the life of nomads by putting our belongings in a trailer and living between in-laws and parents for the next six months. I barbered part time and bought trailers of the kind I thought we needed to rent from anybody who happened to have one at the price I thought was right. By the fall of 1945, I was in so deep into the trailer rental deal economically that it was either make it or lose the whole thing. At that time he moved with his wife Anna Mary Carty Shoen and their young child to the Carty ranch in Ridgefield, Washington. There, with the help of the Carty family, the Shoens built the first trailers in the fall of 1945, painted in striking orange with the evocative name UHaul on the sides, using the ranch's automobile

garage (and milk house) as the first manufacturing plant. Shoen then practically gave away the initial trailers to renters so they could establish dealerships in cities they moved to. He would also purchase trailers and trucks and sell them to employees, family members, friends, and investors who would then lease them back to AMERCO, the parent company of U-Haul. He contracted with national gas station chains to utilize their unused space for parking and to manage the paperwork. Together, this vast network of stakeholders formed a substantial entry barrier to any imitator who would have to risk a large capital outlay to compete. Advertising was entirely limited to Yellow Pages and to the sudden and startling sight of growing numbers of distinctively painted vans being driven along the freeways of the country. At any given moment, U-Haul could have failed, but the resulting financial fall-out would not have been a disaster since the investments were spread across so many stakeholders. This brings us to the key implication of effectual reasoning for the success or failure of

entrepreneurial ventures. Effectual reasoning may not necessarily increase the probability of success of new enterprises, but it reduces the costs of failure by enabling the failure to occur earlier and at lower levels of investment. So, what makes entrepreneurs entrepreneurial? Entrepreneurs are entrepreneurial, as differentiated from managerial or strategic, because they think effectually; they believe in a yet-to-be-made future that can substantially be shaped by human action; and they realize that to the extent that this human action can control the future, they need not expend energies trying to predict it. In fact, to the extent that the future is shaped by human action, it is not much use trying to predict it it is much more useful to understand and work with the people who are engaged in the decisions and actions that bring it into existence.

What makes entrepreneurs entrepreneurial?

Saras D. Sarasvathy
Associate Professor The Darden Graduate School of Business Administration University of Virginia

sarasvathys@darden.virginia.edu

What makes entrepreneurs entrepreneurial?

Professionals who work closely with them and researchers who study them have often speculated about what makes entrepreneurs entrepreneurial. Of course, entrepreneurs also love to hold forth on this topic. But while there are as many war stories and pet theories as there are entrepreneurs and researchers, gathering together a coherent theory of entrepreneurial expertise has thus far eluded academics and practitioners alike. What are the characteristics, habits, and behaviors of the species entrepreneur? Is there a learnable and teachable core to entrepreneurship? In other words, what can todays entrepreneurs such as Rob Glaser and Jeff Bezos learn from old stalwarts such as Josiah Wedgwood and Leonard Shoen? Or even within the same period in history, what are the common elements that entrepreneurs across a wide variety of industries share with each other? In sum, is there such a thing as entrepreneurial thinking that can be applied across space, time and technology? In 1997, I set out on a rather perilous but exhilarating journey to investigate this question. Traveling across 17 states in the US over several months, I met with 30 founders of companies ranging in size from $200 M to $6.5 B and spanning a variety of industries from steel and railroad to teddy bears and semiconductors and bio-tech. The idea behind the study was not merely to interview these founders, but to get behind their stories and understand how they reason about specific problems in transforming an idea into an enduring firm. The entrepreneurs worked their way through a 17-page problem set over two hours, talking aloud continuously as they each solved exactly the same ten decision problems to build a company starting with exactly the same product idea. Rigorous analyses of the transcribed tapes led to rather surprising but eminently teachable principles. This set of principles, when put together, rested on a coherent logic that clearly established the existence of a distinct form of rationality that we have all long recognized intuitively as entrepreneurial. For reasons that will become

clear in the next section, I have termed this type of rationality effectual reasoning. Effectual reasoning: The problem The word effectual is the inverse of causal. In general, in MBA programs across the world, students are taught causal or predictive reasoning in every functional area of business. Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal fastest, cheapest, most efficient, etc. alternative to achieve the given goal. The make-vs.-buy decision in production, or choosing the target market with the highest potential return in marketing, or picking a portfolio with the lowest risk in finance, or even hiring the best person for the job in human resources management, are all examples of problems of causal reasoning. A more interesting variation of causal reasoning involves the creation of additional alternatives to achieve the given goal. This form of creative causal reasoning is often used in strategic thinking. Effectual reasoning, however, does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with. While causal thinkers are like great generals seeking to conquer fertile lands (Genghis Khan conquering two thirds of the known world), effectual thinkers are like explorers setting out on voyages into uncharted waters (Columbus discovering the new world). It is important to point out though that the same person can use both causal and effectual reasoning at different times depending on what the circumstances call for. In fact, the best entrepreneurs are capable of both and do use both modes well. But they prefer effectual reasoning over causal reasoning in the early stages of a new venture, and arguably, most entrepreneurs do not transition well into latter stages requiring more causal reasoning. Figure 1 graphically depicts the different forms of reasoning discussed above.

Figure 1
Managerial Thinking -- Causal Reasoning
Distinguishing Characteristic: Selecting between given means to achieve a pre-determined goal

M1 M2 M3 M4 M5

unspecified ingredients and cook a meal with them. While both causal and effectual reasoning call for domain-specific skills and training, effectual reasoning demands something more imagination, spontaneity, risk-taking, and salesmanship. Effectual reasoning: The process All entrepreneurs begin with three categories of means: (1) Who they are their traits, tastes and abilities; (2) What they know their education, training, expertise, and experience; and, (3) Whom they know their social and professional networks. Using these means, the entrepreneurs begin to imagine and implement possible effects that can be created with them. Most often, they start very small with the means that are closest at hand, and move almost directly into action without elaborate planning. Unlike causal reasoning that comes to life through careful planning and subsequent execution, effectual reasoning lives and breathes execution. Plans are made and unmade and revised and recast through action and interaction with others on a daily basis. Yet at any given moment, there is always a meaningful picture that keeps the team together, a compelling story that brings in more stakeholders and a continuing journey that maps out uncharted territories. Through their actions, the effectual entrepreneurs set of means and consequently the set of possible effects change and get reconfigured. Eventually, certain of the emerging effects coalesce into clearly achievable and desirable goals -- landmarks that point to a discernible path beginning to emerge in the wilderness. Yet, in our classrooms, we teach potential entrepreneurs an extremely causal process the sequential progression from idea to market research, to financial projections, to team, to business plan, to financing, to prototype, to market, to exit, with the caveat, of course, that surprises will happen along the way. Seasoned entrepreneurs, however, know that surprises are not deviations from the path. Instead they are the norm, the flora and fauna of the landscape, from which one learns to forge a path through the jungle. The unexpected is the stuff of entrepreneurial experience and transforming the

Given Goal

Given Means

Strategic Thinking -- Creative Causal Reasoning


Distinguishing Characteristic: Generating new means to achieve pre-determined goals M1

M2 Given Goals

M3 M4 New means are generated

M5

Entrepreneurial Thinking -- Effectual Reasoning


Distinguishing Characteristic: Imagining possible new ends using a given set of means Imagined Ends Given Means E1

M1 M3

M2 M5

E2 E3 E... En

M4

While causal reasoning may or may not involve creative thinking, effectual reasoning is inherently creative. The simple task of cooking dinner may be used to contrast the two types of reasoning. A chef who is given a specific menu and has only to pick out his or her favorite recipes for the items on the menu, shop for ingredients and cook the meal in their own wellequipped kitchens is an example of causal reasoning. An example of effectual reasoning would involve a chef who is not given a menu in advance, and is escorted to a strange kitchen where he or she has to explore the cupboards for

unpredictable into the utterly mundane is the special domain of the expert entrepreneur. Let us consider how the two processes operate in the simple case of building a restaurant. Imagine an entrepreneur who wants to start an Indian restaurant. In the causal process that we teach, she would start with some market research into the restaurant industry in the city of her choice; select a location very carefully based upon the market research; segment the market in a meaningful way; select target segments based on estimates of potential return; design a restaurant to appeal to her target segments; raise the required funding; bring her team together; and finally, implement specific market strategies and manage daily operations to make her restaurant a success.
Figure 2

Classic Causation Model from Marketing Textbooks Market Definition Segmentation


(using relevant variables such as age, income, etc.)

Targeting
(based on evaluation criteria such as expected return)

Positioning
(through marketing strategies)

To reach

THE CUSTOMER

Customer Identification
(through Who am I? What do I know? Whom do I know?)

Customer Definition
(through strategic partnerships & selling)

Adding Segments/Strategic Partners Definition of one of several possible markets

Process of Effectuation Used by Expert Entrepreneurs

bring her idea to market? When used as a class exercise, students usually suggest courses of action such as partnering with an existing restaurant, participating in ethnic food fairs, setting up a catering service and so on. Let us say that the actual course of action she decides to pursue is to persuade friends who work downtown to allow her to bring lunch for their office colleagues to sample. Let us further say that some customers then sign up for a lunch service and she begins preparing the food at home and delivering lunches personally. Eventually, she could save up enough money to rent a location and start a restaurant. But it could equally be plausible that the lunch business does not take off beyond the first few customers, but instead our entrepreneur discovers that the customers are actually interested in her ethnic philosophy and life experiences or Indian culture or other aspects of her personality or expertise or contacts or interests. She could then decide to go into any one of several different businesses contingent upon the ensuing feedback. To cite but a few possibilities, her eventual successful enterprise could turn out to be in any one or all of the following industries -- education, entertainment, travel, manufacturing and packaging, retail, interior decoration, or even self-help and motivation! Figure 2 graphically depicts and contrasts the causal marketing process with the effectual one.1 Real life examples of effectual processes in entrepreneurship abound. In fact, the stories of effectuation permeate and saturate the history of entrepreneurship since at least as far back as the eighteenth century: In the eighteenth century, a potter named Josiah Wedgwood, realized that pots can carry peoples aspirations for social mobility; in the twentieth, King Gillette began toying with the idea of creating something that customers would want to
It is easy to see that the inverted causal triangle at the top can be moved to the bottom below the upright effectual triangle and that would capture the marketing life cycle of most entrepreneurial firms. Once the market had been clearly identified and defined, one can now apply the traditional causal marketing process to capture market share and grow the company.
1

In the effectual process, it would all depend on who our entrepreneur is, what she knows, and whom she knows. For the sake of understanding the process here, let us say she is a good Indian chef who is considering starting an independent business. Assuming she has very little money of her own, what are some of the ways she can

repeatedly re-purchase and while shaving one morning, hit upon disposable razors as a possibility; Tom Fatjo, a respectable professional in Houston, practically got dared into founding the garbage giant BFI during a suburban subdivision meeting to solve the communitys garbage disposal problems; and closer to the twenty-first century, while trying to build an interactive cable channel with progressive content, an ex-Microsoft executive named Rob Glaser fell in love with Mosaic, and set out to give voice to the mute Web in the form of RealNetworks; and so it goes. Effectual reasoning: The principles Does all this mean, though, that we are once again resorting to tales by the campfire? It turns out that all these stories have some common principles of reasoning that invert their counterparts in causal reasoning. Moreover, these principles tie together into a coherent logic that demonstrates that this is indeed a convincing alternative to causal rationality: While causal reasoning focuses on expected return, effectual reasoning emphasizes affordable loss; While causal reasoning depends upon competitive analyses, effectual reasoning is built upon strategic partnerships; and, While causal reasoning urges the exploitation of pre-existing knowledge and prediction, effectual reasoning stresses the leveraging of contingencies. The affordable loss principle While managers are taught to analyze the market and choose target segments with the highest potential return, entrepreneurs tend to find ways to reach the market with minimum expenditure of resources such as time, effort, and money. In the extreme case, the affordable loss principle translates into the zero resources to market principle. Several of the expert entrepreneurs I studied insisted that they would not do any traditional market research, but would take the product to the nearest possible potential customer even before it was built. To quote but one of them, I think Id start by just... going... instead of asking all the questions Id go and say.. try and make some sale. Id make some just judgments about where I was going

-- get me and my buddies -- or I would go out and start selling. Id learn a lot you know.. which people.. what were the obstacles.. what were the questions.. which prices work better and just DO it. Just try to take it out and sell it. Even before I have the machine. Id just go try to sell it. Even before I started production. So my market research would actually be hands on actual selling. Hard work, but I think much better than trying to do market research. In finding the first customer within their immediate vicinity, whether within their geographic vicinity, within their social network, or within their area of professional expertise, entrepreneurs do not tie themselves to any theorized or pre-conceived market or strategic universe for their idea. Instead, they open themselves to surprises as to which market or markets they will eventually end up building their business in or even which new markets they will end up creating. Starting with exactly the same product, the entrepreneurs in the study ended up creating companies in 18 completely disparate industries! The strategic partnerships principle Another key principle of effectual reasoning is the focus on building partnerships rather than on doing a systematic competitive analysis. Since entrepreneurs tend to start the process without assuming the existence of a predetermined market for their idea, detailed competitive analyses do not seem to make any sense to them at the startup phase. As one of the subjects explained, At one time in our company, I ordered people not to think about competitors. Just do your job. Think only of your work.2 Instead entrepreneurs focus on building partnerships right from the start. In fact, the ideal beginning for a successful startup seemed to be the induction of customers into strategic partnerships. Again, to hear it from the
He went on to add, Now that isnt entirely possible, we do a lot of competitive research now. At the time of the study, his company was a 3 Billion dollar company. The evidence shows that as an entrepreneurial company grows beyond a critical size, effectual reasoning has to be supplemented with and even replaced at times by causal modes of thinking.
2

horses mouth, Traditional market research says, you do very broad based information gathering, possibly using mailings. I wouldnt do that. I would literally, target, as I said initially, key companies who I would call flagship, do a frontal lobotomy on them. The challenge then is really to pick your partners, and package yourself early on before you have to put a lot of capital out In fact, the strategic partnerships principle dovetails very well with the affordable loss principle to bring the entrepreneurs idea to market at really low levels of capital outlay. Furthermore, obtaining pre-commitments from key stakeholders helps reduce uncertainty in the early stages of creating an enterprise. Finally, since the entrepreneur is not wedded to any particular market for their idea, the expanding network of strategic partnerships determines to a great extent which market or markets the company will eventually end up in. The leveraging contingencies principle The third principle of effectual reasoning is the heart of entrepreneurial expertise the ability to turn the unexpected into the profitable. As one of the subjects in the study put it, I always live by the motto of Ready-fire-aim. I think if you spend too much time doing readyaim-aim-aim-aim, youre never gonna see all the good things that would happen if you actually start doing it and then aim. And find out where your target is. Great entrepreneurial firms are products of contingencies. Their structure, culture, core competence, and endurance are all residuals of particular human beings striving to forge and fulfil particular aspirations through interactions with the space, time and technologies they live in. For example, we could speculate whether Wedgwood pottery would have been possible if the potter Josiah Wedgwood had not met the gentleman philosopher Thomas Bentley and wooed him into a partnership that created a brand and a great company that has lasted over two centuries. The key to the Wedgwood fortune was the realization that people put their money where their aspirations are and that pots and vases could become vehicles of social mobility. Similarly, in our time, researchers speculate what Microsoft would have been if

IBM had written a different type of a contract or if Gary Kildahl had not been out flying his airplane the day IBM came calling. Yet, it is not the contingencies themselves that shaped the companies in the foregoing examples. It is how the entrepreneurs leveraged the contingencies that came upon them that has to form the core of models of effectual reasoning. The realization that not all surprises are bad and that surprises, whether good or bad, can be used as inputs into the new venture creation process differentiates effectual reasoning from causal reasoning which tends to focus on the avoidance of surprises as far as possible. Effectual reasoning: The logic Underlying all the principles of effectual reasoning is a coherent logic that rests on a fundamentally different assumption about the future than causal reasoning. Causal reasoning is based on the logic, To the extent that we can predict the future, we can control it. That is why both academics and practitioners in business today spend enormous amounts of brainpower and resources on developing predictive models. Effectual reasoning, however, is based on the logic, To the extent that we can control the future, we do not need to predict it. How does one control an unpredictable future? The answer to this question depends on our beliefs about where the future comes from. Is the future largely a continuation of the past? To what extent can human action actually change its course? While the future is always uncertain, not all uncertainties are the same. In fact, the simplest way we can model the different types of uncertainties is through the classic statistical model of the future as an urn containing different colored balls wherein the drawing of (say) a red ball, results in a reward (of say, $50). Assume the first urn contains 10 red balls and 10 green balls. In this case, the player can calculate the odds as an expected return of $25 on every draw since there is a 5050 chance of winning $50. This is the model of a risky, but predictable, future. Entrepreneurs, as well as most human beings in the real world, however, usually have to operate without such predictability. The urn they have to deal with does not have a given number of balls of known

colors. Instead it contains an unknown number of balls of unknown colors, but the game remains the same. In this case, the best strategy for the player is to draw balls randomly several times and to carefully note the result of each draw so that the distribution of balls in the urn can be discovered over time. This is a model of an uncertain, but learnable future that becomes predictable over time. Using the causal logic -to the extent we can predict the future, we can control it makes sense in both these cases. But entrepreneurs choose to view the future through effectual logic. Consciously, or unconsciously, they act as if they believe that the future is not out there to be discovered, but that it gets created through the very strategies of the players. In other words, the entrepreneur using effectual logic says: "Whatever the initial distribution of balls in the urn, I will continue to acquire red balls and put them in the urn. I will look for other people who own red balls and induce them to become partners and add to the red balls in the urn. As time goes by, there will be so many red balls in the urn that almost every draw will obtain one. On the other hand, if I and my acquaintances have only green balls, we will put them in the urn, and when there are enough, will create a new game where green balls win." Of course, such a view may express hopes rather than realities, and many entrepreneurs in the real world do fail. But the fact remains that entrepreneurs use this logic to try and build new urns and devise new games all the time. In fact, several of the expert entrepreneurs I studied explicitly stated that being in a market that could be predicted was not such a good idea, since there would always be someone smarter and with deeper pockets who would predict it better than they could. But being in an unpredictable market meant that the market could be shaped through their own decisions and actions working in conjunction with pre-committed stakeholders and customer-partners. Together they could use contingencies along the way as part of the raw materials that constitute the very urn they are constructing. Expert entrepreneurs are not usually in the ball counting business or the gaming business. Instead they are actually in the business of creating the future, which entails having to work together with a wide variety of people over long

periods of time. Sturdy urns of the future are filled with enduring human relationships that outlive failures and create successes over time3. Embodied in a network of such enduring relationships, effectual logic is particularly useful and effective in domains such as the introduction of new products in new markets, an area often referred to as the suicide quadrant (See Figure 3), exactly the area where traditional marketing techniques are ineffective.
Figure 3
Existing Market New Market

Existing Product

New product

Suicide Quadrant

That is because effectual logic is people dependent, unlike causal logic, which is effect dependent. In other words, when a particular effect has already been chosen such as a target segment within an existing market, the people we hire and partner with will depend on the effect we want to create or the market we want to penetrate. Effectual logic, however, does not assume pre-existent markets and builds on the idea that the markets we create will be predicated on the people we are able to bring together. In fact, in effectual reasoning, markets are in essence stable configurations of critical masses of stakeholders who come together to transform the outputs of human imagination into the forging and fulfillment of human aspirations through economic means.
This is again a topic that is largely ignored in our entrepreneurship curricula which tend to focus on market research, business planning, new venture financing and legal issues. As far as I know no entrepreneurship programs offer courses in creating and managing lasting relationships or stable stakeholder networks, nor on failure management.
3

Experienced professionals in the entrepreneurial arena, whether they are bankers, lawyers, VCs or other investors have always agreed with successful entrepreneurs that finding and leading the right people is the key to creating an enduring venture. These entrepreneurs know that such right people are not on the job market waiting for the jobs and incentives the entrepreneurs can offer them. Instead the right people need emotional ownership in the goals and objectives of the endeavor and can only be incentivized by the belief that the effects they create will embody their deepest passions and aspirations while enabling them to achieve their best potential. But great entrepreneurs realize something more about the central role of people in shaping the urn. Using effectual logic, they understand that they too cannot wait around to find the right people all the time. Besides continually striving to attract the right people, they learn also to nurture and grow them in their own backyards. As Josiah Wedgwood wrote, We have to make artists of mere men. And more recently, the founders of AES Corp., a multibillion dollar electric power company with operations in dozens of countries around the world say, [AES] is fun because the people who work here are fully engaged. They have total responsibility for decisions. They are accountable for results. What they do every day matters to the company, and it matters to the communities we operate in. There is, however, a dark corollary to the use of effectual logic in entrepreneurial activity. Since they do not assume specific pre-existent goals or effects and let these effects emerge through the process, in using effectual logic to create products and markets, entrepreneurs and their partners may also end up creating harmful and problematic effects for the society they live in. The effects they create may reflect the ignorance and cupidity as well as the will and aspirations of the people who participate in the creation of new urns and games of the future. But our awareness of the existence of effectual reasoning should alert us more sharply to the role of entrepreneurs and the market system in shaping our future as a species, not merely as contributors to GDP.

The creation of U-Haul: An exemplar of effectual logic In 1945, newly married, and with barely $5,000, Leonard Shoen set out on his effectual journey that led to the creation of U-Haul. By the end of 1949, it was possible to rent a trailer one-way from city to city throughout most of the United States. When we examine his journey, we find that this feat could not have been accomplished except through the use of effectual reasoning. When students today set out to write a business plan for this venture (using causal processes), they conclude that the plan is financially infeasible, or even psychologically infeasible, since it requires a large and risky capital outlay, most of which gets locked up in relatively worthless assets such as trucks and location rental. Moreover, the logistics of starting the business at a much smaller scale and growing it as fast as Shoen did overwhelms the analytical prowess of the best of causal thinkers. The final nail in the coffin usually is the complete lack of any entry barriers to imitators with deep pockets after the concept is proved on a smaller scale. Shoen, however, did not do elaborate market research or detailed forecasting and fund-raising in the sense in which we use the terms today. Instead, using effectual means, (who he was, what he knew, and whom he knew), he plunged into action, creating the market as he grew the business. In his own words, Since my fortune was just about enough to make the down payment on a home and furnish it, and knowing that if I did this we would be sunk, we started the life of nomads by putting our belongings in a trailer and living between in-laws and parents for the next six months. I barbered part time and bought trailers of the kind I thought we needed to rent from anybody who happened to have one at the price I thought was right. By the fall of 1945, I was in so deep into the trailer rental deal economically that it was either make it or lose the whole thing. At that time he moved with his wife Anna Mary Carty Shoen and their young child to the Carty ranch in Ridgefield, Washington. There, with the help of the Carty family, the Shoens built the first trailers in the fall of 1945, painted in striking orange with the evocative name UHaul on the sides, using the ranch's automobile

garage (and milk house) as the first manufacturing plant. Shoen then practically gave away the initial trailers to renters so they could establish dealerships in cities they moved to. He would also purchase trailers and trucks and sell them to employees, family members, friends, and investors who would then lease them back to AMERCO, the parent company of U-Haul. He contracted with national gas station chains to utilize their unused space for parking and to manage the paperwork. Together, this vast network of stakeholders formed a substantial entry barrier to any imitator who would have to risk a large capital outlay to compete. Advertising was entirely limited to Yellow Pages and to the sudden and startling sight of growing numbers of distinctively painted vans being driven along the freeways of the country. At any given moment, U-Haul could have failed, but the resulting financial fall-out would not have been a disaster since the investments were spread across so many stakeholders. This brings us to the key implication of effectual reasoning for the success or failure of

entrepreneurial ventures. Effectual reasoning may not necessarily increase the probability of success of new enterprises, but it reduces the costs of failure by enabling the failure to occur earlier and at lower levels of investment. So, what makes entrepreneurs entrepreneurial? Entrepreneurs are entrepreneurial, as differentiated from managerial or strategic, because they think effectually; they believe in a yet-to-be-made future that can substantially be shaped by human action; and they realize that to the extent that this human action can control the future, they need not expend energies trying to predict it. In fact, to the extent that the future is shaped by human action, it is not much use trying to predict it it is much more useful to understand and work with the people who are engaged in the decisions and actions that bring it into existence.

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Special Report Feb 1, 2011

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Saras Sarasvathy's Full Case Study and Questions


The following is a case study on the psychology of entrepreneurs conducted by Saras Sarasvathy, a professor at the University of Virginias Darden School of Business. Subjects responded to questions that simulated the experience of launching a start-up.

Richard Branson: Knight of Big Ideas


A video interview with Sir Audacity himself: "Set impossible challenges. Then catch up with them."

Introduction
In the following experiment, you will solve two decision problems. These problems arise in the context of building a new company for an imaginary product. A detailed description of the product follows this introduction.

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Although the product is imaginary, it is Getty technically feasible and financially viable. The data for the problems have been obtained through realistic market researchthe kind of market research used in developing a real world business plan. So far, the entrepreneurs who participated in this study found the project both interesting and feasible.

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Before you start on the product description and the problems, I do need one act of creative imagination on your part. I request you to put yourself in the role of the lead entrepreneur in building this companyi.e., you have very little money of your own to start this company, and the experience you describe above.

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Description of the product:


You have created a computer game of entrepreneurship. You believe you can combine this game with some educational material and profiles of successful entrepreneurs to make an excellent teaching tool for entrepreneurship. Your inspiration for the product came from several reports in the newspapers and magazines about increasing demand for entrepreneurship education; and the fact that a curriculum involving entrepreneurship even at the junior high or high school level induces students to learn not only business-related topics but math and science and communication skills, as well. The game part of the product consists of a simulated environment for starting and running a company. There are separate sub-simulations of markets, competitors, regulators, macroeconomic factors and a random factor for "luck." The game has a sophisticated multi-media interfacefor example, a 3D office where phones ring with messages from the market, a TV that will provide macroeconomic information when switched on, and simulated managerial staff with whom the player (CEO) can consult in making decisions. At the beginning of the game, the player can choose from a variety of businesses the type of business he/she wants to start (For example: manufacturing, personal services, software, etc.) and has to make decisions such as which market segment to sell to, how many people to hire, what type of financing to go for, etc. During the game, the player has to make production decisions, such as how much to produce, whether to build new warehouses or negotiate with trucking companies, etc.; marketing decisions, such as which channels of distribution to use, which media to advertise in, and so on; management decisions involving hiring, training, promoting, and firing of employees, and so on. There is an accounting

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subroutine that tracks and computes the implications of the various decisions for the bottom line. The simulation's responses to the player's decisions permit a range of possible final outcomesfrom bankruptcy to a "hockey stick." You have taken all possible precautions regarding intellectual property. The name of your company is Entrepreneurship, Inc. The name of the product is Venturing.

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Problem 1: Identifying the market


Before we look at some market research data, please answer the following questions, one at a time: 1. Who could be your potential customers for this product? 2. Who could be your potential competitors for this product? 3. What information would you seek about potential customers and competitorslist questions you would want answered. 4. How will you find out this informationwhat kind of market research would you do? 5. What do you think are the growth possibilities for this company? Hot Growth Stock-CTLE Why Americas Nano Labs Could Bring Returns of 500% to 1,000% by 2013. www.theamericansignal.com Need Search Engine Marketing Experts? Drive Sales! Save Time & Money on PPC Ads with our Search Marketing Experts now! ZeroCompany.com/Top-Search- Experts Buy a Link Now

Problem 2: Defining the market


In this problem you have to make some marketing decisions. Based on secondary market research (published sources, etc.), you estimate that there are three major segments who are interested in the product: Segment Estimated total size Segment Young adults between the ages of 15 and 25 Adults over 25 who are curious about entrepreneurship Educators Estimated total size 20 Million 30 Million 200,000 institutions

The estimated dollar value of the instructional technology market is $1.7 billion. The estimated dollar value of the interactive simulation game market is $800 million. Both are expected to grow at a minimum rate of 20% p.a. for the next 5 years. The following are the results of the primary (direct) market research that you have completed. Survey #1: Internet users were allowed to download a scaled down version (Game stops after 15 minutes of playing) of the prototype and were asked to fill out a questionnaire. You get 600 hits per day. 300 of them actually download the product. You have 500 filled out questionnaires so far. Willing to pay ($) 50-100 100-150 150-200 200-250 250-300 Total Young Adults (%) 45 32 15 8 0 100 Adults (%) 26 38 22 9 5 100 Educators (%) 52 30 16 2 0 100
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Survey #2: The prototype was demonstrated at two Barnes & Noble and three Borders Bookstores in Pittsburgh. Willing to pay ($) Young Adults (%) Adults (%) Educators (%)

50-100 100-150 150-200 200-250 250-300 Total

51 42 7 0 0 100

21 49 19 8 3 100

65 18 10 7 0 100

Survey #3: Focus Group of educators (high school and community college teachers and administrators) The educators who participated in the focus group find the product exciting and usefulbut want several additions and modifications made before they would be willing to pay a price of over $150 for it. As it is, they would be willing to pay $50-80 and would demand a discount on that for site licenses or bulk orders. Both at the bookstore demo and the focus group, participants are very positive and enthusiastic about the product. They provide you good feedback on specific features and also extend suggestions for improvement. But the educators are particularly keen on going beyond the "game" aspect; they make it clear that much more development and support would be required in trying to market the product to them. They also indicate that there are non-profit foundations and other funding sources interested in entrepreneurship that might be willing to promote the product and fund its purchase by educational institutions. Based on all your market research, you arrive at the following cost estimates for marketing your product. Internet Retailers $20,000 upfront + $500 per month thereafter $500,000 to 1 M upfront and support services and follow-up thereafter Relatively cheap, but ads and demos could cost $50,000 upfront Involves recruiting and training sales representatives, except locally

Mail order catalogs Direct selling to schools

Competition
None of the following four possible competitors combine a simulation game with substantial education materials. You are unique in this respect. Price per unit 29.95 Sales ($) 30 M

Company

Product

Description Urban planning simulation Civilization building City building simulation

Maxis Microprose simulation Sierra On-Line Future Endeavors Treetop Books (New Co. < 1 yr. old)

Sim City Civilization 50.00 Caesar

20 M

59.95

18 M

Scholastic

CD-ROMs of Scholastic

n/a

1 M

The game companies are making a net return of 25% on sales. At this point, please take your time and make the following decisions: (Please continue thinking aloud as you arrive at your decisions.) Which market segment/segments will you sell your product to?

How will you price your product? How will you sell to your selected market segment/segments? Learn more at effectuation.org. Read more: How Great Entrepreneurs Think

Bob March 31, 2011 at 5:28pm


This case provides more evidence that getting a MBA might be detrimental to becoming an entrepreneur. Hopefully , aspiring indiiduals will not succumb to the corporate thinking straight jacket of the MBA.
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Ralf Lippold February 19, 2011 at 1:32am


Awesome - this is gaming which I like :-) Bringing system dynamics and lean thinking to the table and cocreate the future game of entrepreneurism for all those countries that are shaking up right now. Learning together, even if we are not really talking together today, christs and moslem, Israelis and Palestinians, Arabs and Jews, engineers and dancers, digital natives and generation X, .... this will not just save the day, yet it will bring joyful living at this beautiful place, called EARTH, we inhered from our forefathers :-)

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just a college guy February 13, 2011 at 9:58pm


I was astonished at the vastly different mindsets between the master entrepreneur and the corporate MBA's. I am a undergraduate business student and much of how the corporate executives thinks is exactly what they teach in class. I feel that we as students should be exposed much more to this run and gun type plan, as this is how this country became as it is today. Taking the chance, making the mistakes, and learning from them. Besides all that planning is just time spent spinning your wheels. Furthermore, this is the first ever Inc. magazine I have ever read, thanks to my professor for recommending we all subscribe to it, and I will definitely be investing in this as often as I can for a poor college student.
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Reniles January 26, 2011 at 9:17pm


I loved the magazine article. It gave us a view that we don't often get...what's going on inside the master entrepreneur's mind. I particularly liked the distinction between the "effectual reasoning" of the master entrepreneur versus the "causal reasoning" of corporate MBAs. It's a very helpful distinction to have in understanding the types of persons we are dealing with when it comes to launching new ideas.
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