0 to 60mph: How Expert Entrepreneurs Do It

Saras Sarasvathy The Darden School

The Puzzle

What they seem to be good at
– Opportunity recognition – Resource acquisition – Visionary leadership

Think about what they did . . .
Real Networks Sears Starbucks eBay

Staples Even Microsoft . . .

Logics of Decisions and Actions
Question: What kind of logic do expert entrepreneurs use to make decisions and take action in the 0-60mph phase?
Subjects: Method: Theory:
(Founders of companies from $200M to $6.5B)

27 expert entrepreneurs Protocol analysis

(80 hours of tape; 1500 pages of data)

(Effectuation: Elements of Entrepreneurial Expertise)

Sarasvathy, 2005

Results: Over 63% of the subjects used an EFFECTUAL (as opposed to causal) logic more than 75% of the time

Conventional Wisdom: Causal Logic

Causal Logic is predictive To the extent you can predict the future, you can control it

Control of outcomes achieved through

accurate predictions, clear goals, and avoiding or protecting oneself against the unexpected

What is effectual logic?

High

Rational
logic PREDICTION

Power
logic

Adaptive
logic Low Low

Effectual
logic

= Non-predictive control

High CONTROL

How do you control a future you cannot predict?

Examples of Effectual Logic

From cooking a meal . . .

. . . To building a restaurant

Or something else . . .

Principles of Effectuation

• Bird-in-hand principle:
Start with Who you are, What you know, & Whom you know (Not with the opportunity)

• Affordable loss principle:
Invest what you can afford to lose – extreme case $0 (Not expected return)

• Patchwork Quilt principle:
Build a network of self-selected stakeholders (Not competitive analysis)

• Lemonade principle:
Leverage contingencies (Not avoid them)

• Pilot-in-the-plane principle:
The future comes from what people do (Not inevitable trends)

Dynamics of the effectual network
Expanding cycle of resources

Actual courses of Action possible

New means Interactions with other people Effectual stakeholder commitments New goals Converging cycle of constraints

Who I am What I know Whom I know
Actual Means

What can I do?

NEW MARKETS AND NEW FIRMS

Issues in Relationship to Performance
Obvious hypothesis:

Effectuation increases the probability of success…..
NOT SO FAST!! • “Success/failure” not easy to define
– What is “success” varies across entrepreneurs – Measures of “performance” vary across firms, industries, and time

• Skills for a successful startup ≠ skills for successful growth • Failure of the firm does not equal failure of the entrepreneur

Higher Probability of Success ?
Causal
Tethered to goals and predictive High

Large Firm Novice Entrepreneur

R e s o u r c e s

Expert entrepreneurs do not always manage to bridge this gap

Low

Effectual
Tethered to means and non-predictive

Startup Firm

Expert Entrepreneur Time

Lower Costs of Failure
Level of Investment High
External Shock Possibility 1 External Shock Possibility 2
Investment based on

Expected Return Actual investment required (Ex-post) Prediction Gap: Over/under commitment of investment Control Gap: Necessity of Effectual partnerships
Investment based on

Expected Return
Investment based on

Affordable Loss

Low Low Timeline High Efficacy of Prediction

Some thoughts on probability of success/failure

Assuming small successes are expertise-dependent, but large homeruns are drawn from a random distribution:

You get to explore more opportunities:
• • Effectuation gives you more shots at the jackpot – a larger temporal portfolio You survive longer so you can win the marathons (you may lose some sprints along the way)

You get to explore better opportunities for you:
• You fully reap the benefits of cumulative learning effects

How Expert Entrepreneurs Build New Markets

Not a jigsaw puzzle

More like a patchwork quilt

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