How Great Entrepreneurs Think

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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 founderof 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.

Do the doable, then push itSarasvathy 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 surveyof Inc. 500 CEOs found that 60 percent had not written business plans before

launching their companies. Just 12 percent had done market research.)

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."

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

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March 16, 2012 at 6:40amFantastic stuff...

LIKE REPLYDecember 19, 2011 at 5:11pmNot sure this r esearch 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 REPLYAugust 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 Extr aordinaire

Email: [email protected]

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

Skype name: olinkaru

ICQ: 212336628

M: +230-717-5790

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

LIKE REPLYJune 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 REPLYJune 28, 2011 at 6:25pm

Marketing research? I don't think it's effect ive 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 firs t,

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 c reated a new category to dominate across the world!


Brilliant! The article not just encourages, but also confirms one's thought process and belief is r ight. The

reactions is another form of r eassurance that indicate there are many who subscribe to similar thoughts

as you!

LIKE REPLYMay 2, 2011 at 4:53pm

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

LIKE REPLYApril 28, 2011 at 7:15pm

Good article. I s hared the print with other colleagues last week. Interesting, and thought provoking.

Brings back memories!


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

Ndumiso Mojalifa Ndlovu

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Olga Kovshanova, MBA, MA

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Jacqueline S

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Kamil Ali

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Laurie Head Atkinson


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LIKE REPLY

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

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Feb 1, 2011Leigh Buchanan | Inc. magazine

Topics > Leadership and Managing > Leadership >

How Great Entrepreneurs ThinkHere'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 spreadsheetsand all theirHarvard 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.

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

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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 coulddo but

doesn't tell you what you shoulddo." 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.

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."





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March 16, 2012 at 6:40amFantastic stuff...

LIKE REPLYDecember 19, 2011 at 5:11pmNot sure this r esearch was conclusive in any way . But good proof point builders that entreprenuers



LIKE REPLYAugust 4, 2011 at 4:14pm


Olga

Kovshanova, MBA, MA







ICQ: 212336628

M: +230-717-5790


LIKE REPLYJune 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.




What's every CEO's story ? They are interested in getting the facts right and spend a fortune onresearch. The opposite is true, marketers believe in their instinct and believe in creating category firs t,

and then brand.






as you!







|

|


|

Jacqueline S

|

Kamil Ali

|

Ashok Neelakanta

|

Lowering Springs

|

Mkinlow


8/40

World's Coolest Offices Inc. 5000 30 Under 30 The Immigrant Edge How I Did It



LIKE REPLY

April 28, 2011 at 6:35pm



LIKE REPLY

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

|


|

melthel

|


9/40

Feb 1, 2011Leigh Buchanan | Inc. magazine


How Great Entrepreneurs ThinkBy 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:

"At one time in our company, I ordered our people not to think

about competitors. Just do your job. Think only of your work.

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."

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:

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"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 whowouldn'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.

Read more:

Saras Sarasvathy's Full Case Study and Questions





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Devices that keep me connected. Work the way you want. Get the guide.March 16, 2012 at 6:40am

Fantastic stuff...

LIKE REPLY

December 19, 2011 at 5:11pmNot sure this researc h was conclusive in any way. But good proof point builders that entreprenuers



LIKE REPLY

August 4, 2011 at 4:14pm


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Olga

Kovshanova, MBA, MA







ICQ: 212336628

M: +230-717-5790


LIKE REPLY

June 30, 2011 at 5:51amInteresting read...It's cool to see science reinforcing a lot of observable qualities I've seen in other

people.




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 firs t,and then brand.






as you!










I'm definitely somewhere in the middle. I generally like to have as much information as possible beforeacting. However, I enjoy the buzz of winging it too.

LIKE REPLYVIEW MORE COMMENTS

|

Jacqueline S

|

Kamil Ali

|

Ashok Neelakanta

|

Lowering Springs

|

Mkinlow

|


|

melthel

|


12/40


13/40

Feb 1, 2011Inc. staff

Getty


Saras Sarasvathy's Full Case Studyand QuestionsThe following is a case study on the psychology of entrepreneurs conducted

by Saras Sarasvathy, a professor at the University of Virginias DardenSchool of Business. Subjects responded to questions that simulated theexperience of launching a start-up.

Introduction

In the following experiment, you will solve twodecision 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.

Although the product is imaginary, it is

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.

Before you start on the product description and the problems, I do needone 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.

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 learnnot 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 gofor, 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 isEntrepreneurship, Inc. The name of the product is Venturing.

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?

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 Estimated total size

Young adults between the ages of 15 and 25 20 Million

Adults over 25 who are curious about entrepreneurship 30 Million

Educators 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 ($) Young Adults (%) Adults (%) Educators (%)

50-100 45 26 52

100-150 32 38 30

150-200 15 22 16

200-250 8 9 2

250-300 0 5 0

Total 100 100 100

Survey #2: The prototype was demonstrated at two Barnes & Noble and

three Borders Bookstores in Pittsburgh.

Willing to pay ($) Young Adults (%) Adults (%) Educators (%)

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50-100 51 21 65

100-150 42 49 18

150-200 7 19 10

200-250 0 8 7

250-300 0 3 0

Total 100 100 100

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 inentrepreneurship 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 $20,000 upfront + $500 per month thereafter

Retailers$500,000 to 1 M upfront and support services and follow-up

thereafter

Mail order catalogsRelatively cheap, but ads and demos could cost $50,000

upfront

Direct selling to

schools

Involves recruiting and training sales representatives, except

locally

Competition

None of the following four possible competitors combine a simulation game with

substantial education materials. You are unique in this respect.

Company Product DescriptionPrice per

unit

Sales

($)

Maxis Sim City Urban planning

simulation

29.95 30 M

Microprose

simulation

Civilization

50.00Civilization building 20 M

Sierra On-Line CaesarCity building

simulation59.95 18 M

Future Endeavors

Treetop

Books

(New Co. < 1 yr.

old)

ScholasticCD-ROMs of

Scholasticn/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?


16/40

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

World's Coolest Offices Inc. 5000 30 Under 30 The Immigrant Edge How I Did It

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 c orporate thinking straight jacket of

the MBA.

LIKE REPLY

February 19, 2011 at 1:32amAwesome - 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 shak ing 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 sav e the day, y et it will bring

joyful living at this beautiful place, called EARTH, we inhered from our forefathers :-)

LIKE REPLY

February 13, 2011 at 9:58pm

I was as tonished 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 exec utives 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, mak ing themistakes, 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 c an for a poor

college student.

LIKE REPLY

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 pers ons we are dealing with when it comes to launching new ideas.

LIKE REPLY

VIEW MORE COMMENTS

Bob

|

Ralf Lippold

|

just a college guy

|

Reniles

|


17/40




18/40

What makes entrepreneurs entrepreneurial?

Saras D. Sarasvathy

Associate Professor

The Darden Graduate School of Business Administration

University of Virginia

[email protected]


19/40

2


Professionals who work closely with themand researchers who study them have oftenspeculated about what makes entrepreneurs

entrepreneurial. Of course, entrepreneurs alsolove to hold forth on this topic. But while thereare as many war stories and pet theories as thereare entrepreneurs and researchers, gatheringtogether a coherent theory of entrepreneurialexpertise has thus far eluded academics andpractitioners alike.

What are the characteristics, habits, andbehaviors of the species entrepreneur? Is therea learnable and teachable core toentrepreneurship? In other words, what cantodays entrepreneurs such as Rob Glaser and

Jeff Bezos learn from old stalwarts such asJosiah Wedgwood and Leonard Shoen? Or evenwithin the same period in history, what are thecommon elements that entrepreneurs across awide variety of industries share with each other?In sum, is there such a thing as entrepreneurialthinking that can be applied across space, timeand technology?

In 1997, I set out on a rather perilous butexhilarating journey to investigate this question.Traveling across 17 states in the US over severalmonths, I met with 30 founders of companies

ranging in size from $200 M to $6.5 B andspanning a variety of industries from steel andrailroad to teddy bears and semiconductors andbio-tech. The idea behind the study was notmerely to interview these founders, but to getbehind their stories and understand how theyreason about specific problems in transformingan idea into an enduring firm. The entrepreneursworked their way through a 17-page problem setover two hours, talking aloud continuously asthey each solved exactly the same ten decisionproblems to build a company starting with

exactly the same product idea. Rigorousanalyses of the transcribed tapes led to rathersurprising but eminently teachable principles.This set of principles, when put together, restedon a coherent logic that clearly established theexistence of a distinct form of rationality that wehave all long recognized intuitively asentrepreneurial. For reasons that will become

clear in the next section, I have termed this typeof rationality effectual reasoning.

Effectual reasoning: The problemThe word effectual is the inverse of

causal. In general, in MBA programs acrossthe world, students are taught causal orpredictive reasoning in every functional areaof business. Causal rationality begins with apre-determined goal and a given set of means,and seeks to identify the optimal fastest,cheapest, most efficient, etc. alternative toachieve the given goal. The make-vs.-buydecision in production, or choosing the targetmarket with the highest potential return in

marketing, or picking a portfolio with the lowestrisk in finance, or even hiring the best person forthe job in human resources management, are allexamples of problems of causal reasoning. Amore interesting variation of causal reasoninginvolves the creation of additional alternatives toachieve the given goal. This form of creativecausal reasoning is often used in strategicthinking.

Effectual reasoning, however, does notbegin with a specific goal. Instead, it begins witha given set of means and allows goals to emerge

contingently over time from the variedimagination and diverse aspirations of thefounders and the people they interact with.While causal thinkers are like great generalsseeking to conquer fertile lands (Genghis Khanconquering two thirds of the known world),effectual thinkers are like explorers setting outon voyages into uncharted waters (Columbusdiscovering the new world). It is important topoint out though that the same person can useboth causal and effectual reasoning at differenttimes depending on what the circumstances call

for. In fact, the best entrepreneurs are capable ofboth and do use both modes well. But theyprefer effectual reasoning over causal reasoningin the early stages of a new venture, andarguably, most entrepreneurs do not transitionwell into latter stages requiring more causalreasoning. Figure 1 graphically depicts thedifferent forms of reasoning discussed above.


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3

While causal reasoning may or may notinvolve creative thinking, effectual reasoning isinherently creative. The simple task of cookingdinner may be used to contrast the two types of

reasoning. A chef who is given a specific menuand has only to pick out his or her favoriterecipes for the items on the menu, shop foringredients and cook the meal in their own well-equipped kitchens is an example of causalreasoning. An example of effectual reasoningwould involve a chef who is not given a menu inadvance, and is escorted to a strange kitchenwhere he or she has to explore the cupboards for

unspecified ingredients and cook a meal withthem. While both causal and effectual reasoningcall for domain-specific skills and training,effectual reasoning demands something more imagination, spontaneity, risk-taking, andsalesmanship.

Effectual reasoning: The process

All entrepreneurs begin with threecategories of means: (1) Who they are theirtraits, tastes and abilities; (2) What they know their education, training, expertise, andexperience; and, (3) Whom they know theirsocial and professional networks. Using thesemeans, the entrepreneurs begin to imagine andimplement possible effects that can be createdwith them. Most often, they start very smallwith the means that are closest at hand, and

move almost directly into action withoutelaborate planning. Unlike causal reasoning thatcomes to life through careful planning andsubsequent execution, effectual reasoning livesand breathes execution. Plans are made andunmade and revised and recast through actionand interaction with others on a daily basis. Yetat any given moment, there is always ameaningful picture that keeps the team together,a compelling story that brings in morestakeholders and a continuing journey that mapsout uncharted territories. Through their actions,

the effectual entrepreneurs set of means andconsequently the set of possible effects changeand get reconfigured. Eventually, certain of theemerging effects coalesce into clearly achievableand desirable goals -- landmarks that point to adiscernible path beginning to emerge in thewilderness.

Yet, in our classrooms, we teach potentialentrepreneurs an extremely causal process thesequential progression from idea to marketresearch, to financial projections, to team, tobusiness plan, to financing, to prototype, to

market, to exit, with the caveat, of course, thatsurprises will happen along the way. Seasonedentrepreneurs, however, know that surprises arenot deviations from the path. Instead they arethe norm, the flora and fauna of the landscape,from which one learns to forge a path throughthe jungle. The unexpected is the stuff ofentrepreneurial experience and transforming the

Managerial Thinking -- Causal Reasoning

Distinguishing Characteristic:

Selecting between given means to achieve a pre-determined goal

Given

Goal

Given Means

M1

M2

M3

M4

M5

Figure 1

Given Means E1

E2

E3

E...

En

M1M2

M3

M4

M5

Imagined

Ends

Entrepreneurial Thinking -- Effectual Reasoning


Imagining possible new ends using a given set of means

Given

Goals

New means

are generated

M1

M2

M3

M4

M5

Strategic Thinking -- Creative Causal Reasoning


Generating new means to achieve pre-determined goals


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4

unpredictable into the utterly mundane is thespecial domain of the expert entrepreneur.

Let us consider how the two processesoperate in the simple case of building arestaurant. Imagine an entrepreneur who wantsto start an Indian restaurant. In the causal

process that we teach, she would start with somemarket research into the restaurant industry inthe city of her choice; select a location verycarefully based upon the market research;segment the market in a meaningful way; selecttarget segments based on estimates of potentialreturn; design a restaurant to appeal to her targetsegments; raise the required funding; bring herteam together; and finally, implement specificmarket strategies and manage daily operations tomake her restaurant a success.

In the effectual process, it would all dependon who our entrepreneur is, what she knows, andwhom she knows. For the sake of understandingthe process here, let us say she is a good Indianchef who is considering starting an independentbusiness. Assuming she has very little money ofher own, what are some of the ways she can

bring her idea to market? When used as a classexercise, students usually suggest courses ofaction such as partnering with an existingrestaurant, participating in ethnic food fairs,setting up a catering service and so on. Let ussay that the actual course of action she decides

to pursue is to persuade friends who workdowntown to allow her to bring lunch for theiroffice colleagues to sample. Let us further saythat some customers then sign up for a lunchservice and she begins preparing the food athome and delivering lunches personally.Eventually, she could save up enough money torent a location and start a restaurant.

But it could equally be plausible that thelunch business does not take off beyond the firstfew customers, but instead our entrepreneurdiscovers that the customers are actually

interested in her ethnic philosophy and lifeexperiences or Indian culture or other aspects ofher personality or expertise or contacts orinterests. She could then decide to go into anyone of several different businesses contingentupon the ensuing feedback. To cite but a fewpossibilities, her eventual successful enterprisecould turn out to be in any one or all of thefollowing industries -- education, entertainment,travel, manufacturing and packaging, retail,interior decoration, or even self-help andmotivation!

Figure 2 graphically depicts and contraststhe causal marketing process with the effectualone.1 Real life examples of effectual processesin entrepreneurship abound. In fact, the storiesof effectuation permeate and saturate the historyof entrepreneurship since at least as far back asthe eighteenth century: In the eighteenthcentury, a potter named Josiah Wedgwood,realized that pots can carry peoples aspirationsfor social mobility; in the twentieth, KingGillette began toying with the idea of creatingsomething that customers would want to

1 It is easy to see that the inverted causal triangle atthe top can be moved to the bottom below the uprighteffectual triangle and that would capture themarketing life cycle of most entrepreneurial firms.Once the market had been clearly identified anddefined, one can now apply the traditional causalmarketing process to capture market share and growthe company.

Figure 2

THE CUSTOMER

Classic Causation Model from Marketing Textbooks

Market Definition

Segmentation

Targeting(based on evaluation criteria

such as expected return)

Positioning(through marketing

strategies)

Toreach

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

Process of Effectuation Used by Expert Entrepreneurs

CustomerIdentification

(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


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5

repeatedly re-purchase and while shaving onemorning, hit upon disposable razors as apossibility; Tom Fatjo, a respectableprofessional in Houston, practically got daredinto founding the garbage giant BFI during asuburban subdivision meeting to solve the

communitys garbage disposal problems; andcloser to the twenty-first century, while trying tobuild an interactive cable channel withprogressive content, an ex-Microsoft executivenamed Rob Glaser fell in love with Mosaic, andset out to give voice to the mute Web in the formof RealNetworks; and so it goes.

Effectual reasoning: The principles

Does all this mean, though, that we are onceagain resorting to tales by the campfire? It turnsout that all these stories have some common

principles of reasoning that invert theircounterparts in causal reasoning. Moreover,these principles tie together into a coherent logicthat demonstrates that this is indeed aconvincing alternative to causal rationality:

While causal reasoning focuses on expectedreturn, effectual reasoning emphasizesaffordable loss;

While causal reasoning depends uponcompetitive analyses, effectual reasoning isbuilt upon strategic partnerships; and,

While causal reasoning urges the

exploitation of pre-existing knowledge andprediction, effectual reasoning stresses theleveraging of contingencies.

The affordable loss principleWhile managers are taught to analyze the

market and choose target segments with thehighest potential return, entrepreneurs tend tofind ways to reach the market with minimumexpenditure of resources such as time, effort,and money. In the extreme case, the affordableloss principle translates into the zero resources

to market principle. Several of the expertentrepreneurs I studied insisted that they wouldnot do any traditional market research, butwould take the product to the nearest possiblepotential customer even before it was built. Toquote but one of them, I think Id start by just...going... instead of asking all the questions Id goand say.. try and make some sale. Id makesome just judgments about where I was going

-- get me and my buddies -- or I would go outand start selling. Id learn a lot you know..which people.. what were the obstacles.. whatwere the questions.. which prices work betterand 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. Somy market research would actually be hands onactual selling. Hard work, but I think muchbetter than trying to do market research.

In finding the first customer within theirimmediate vicinity, whether within theirgeographic vicinity, within their social network,or within their area of professional expertise,entrepreneurs do not tie themselves to anytheorized or pre-conceived market or strategicuniverse for their idea. Instead, they openthemselves to surprises as to which market or

markets they will eventually end up buildingtheir business in or even which new marketsthey will end up creating. Starting with exactlythe same product, the entrepreneurs in the studyended up creating companies in 18 completelydisparate industries!

The strategic partnerships principleAnother key principle of effectual reasoning

is the focus on building partnerships rather thanon doing a systematic competitive analysis.Since entrepreneurs tend to start the process

without assuming the existence of a pre-determined market for their idea, detailedcompetitive analyses do not seem to make anysense to them at the startup phase. As one of thesubjects explained, At one time in ourcompany, I ordered people not to think aboutcompetitors. Just do your job. Think only ofyour work.2 Instead entrepreneurs focus onbuilding partnerships right from the start. Infact, the ideal beginning for a successful startupseemed to be the induction of customers intostrategic partnerships. Again, to hear it from the

2 He went on to add, Now that isnt entirelypossible, we do a lot of competitive research now.At the time of the study, his company was a 3 Billiondollar company. The evidence shows that as anentrepreneurial company grows beyond a criticalsize, effectual reasoning has to be supplemented withand even replaced at times by causal modes ofthinking.


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6

horses mouth, Traditional market researchsays, you do very broad based informationgathering, possibly using mailings. I wouldntdo that. I would literally, target, as I saidinitially, key companies who I would callflagship, do a frontal lobotomy on them. The

challenge then is really to pick your partners,and package yourself early on before you haveto put a lot of capital out

In fact, the strategic partnerships principledovetails very well with the affordable lossprinciple to bring the entrepreneurs idea tomarket at really low levels of capital outlay.Furthermore, obtaining pre-commitments fromkey stakeholders helps reduce uncertainty in theearly stages of creating an enterprise. Finally,since the entrepreneur is not wedded to anyparticular market for their idea, the expanding

network of strategic partnerships determines to agreat extent which market or markets thecompany will eventually end up in.

The leveraging contingencies principleThe third principle of effectual reasoning is

the heart of entrepreneurial expertise theability to turn the unexpected into the profitable.As one of the subjects in the study put it, Ialways live by the motto ofReady-fire-aim. Ithink if you spend too much time doing ready-aim-aim-aim-aim, youre never gonna see all the

good things that would happen if you actuallystart doing it and then aim. And find out whereyour target is.

Great entrepreneurial firms are products ofcontingencies. Their structure, culture, corecompetence, and endurance are all residuals ofparticular human beings striving to forge andfulfil particular aspirations through interactionswith the space, time and technologies they livein. For example, we could speculate whetherWedgwood pottery would have been possible ifthe potter Josiah Wedgwood had not met the

gentleman philosopher Thomas Bentley andwooed him into a partnership that created abrand and a great company that has lasted overtwo centuries. The key to the Wedgwoodfortune was the realization that people put theirmoney where their aspirations are and that potsand vases could become vehicles of socialmobility. Similarly, in our time, researchersspeculate what Microsoft would have been if

IBM had written a different type of a contract orif Gary Kildahl had not been out flying hisairplane the day IBM came calling. Yet, it is notthe contingencies themselves that shaped thecompanies in the foregoing examples. It is howthe entrepreneurs leveraged the contingencies

that came upon them that has to form the core ofmodels of effectual reasoning. The realizationthat not all surprises are bad and that surprises,whether good or bad, can be used as inputs intothe new venture creation process differentiateseffectual reasoning from causal reasoning whichtends to focus on the avoidance of surprises asfar as possible.

Effectual reasoning: The logic

Underlying all the principles of effectualreasoning is a coherent logic that rests on a

fundamentally different assumption about thefuture than causal reasoning. Causal reasoningis based on the logic, To the extent that we canpredict the future, we can control it. That iswhy both academics and practitioners inbusiness today spend enormous amounts ofbrainpower and resources on developingpredictive models. Effectual reasoning,however, is based on the logic, To the extent thatwe can control the future, we do not need to

predict it.How does one control an unpredictable

future? The answer to this question depends onour beliefs about where the future comes from.Is the future largely a continuation of the past?To what extent can human action actuallychange its course? While the future is alwaysuncertain, not all uncertainties are the same. Infact, the simplest way we can model thedifferent types of uncertainties is through theclassic statistical model of the future as an urncontaining different colored balls wherein thedrawing 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, theplayer can calculate the odds as an expectedreturn of $25 on every draw since there is a 50-50 chance of winning $50. This is the model ofa risky, but predictable, future. Entrepreneurs,as well as most human beings in the real world,however, usually have to operate without suchpredictability. The urn they have to deal withdoes not have a given number of balls of known


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7

colors. Instead it contains an unknown numberof balls of unknown colors, but the gameremains the same. In this case, the best strategyfor the player is to draw balls randomly severaltimes and to carefully note the result of eachdraw so that the distribution of balls in the urn

can be discoveredover time. This is a model ofan uncertain, but learnable future that becomespredictable 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, orunconsciously, they act as if they believe that thefuture is not out there to be discovered, butthat it gets created through the very strategies ofthe players. In other words, the entrepreneurusing effectual logic says: "Whatever the initial

distribution of balls in the urn, I will continue toacquire red balls and put them in the urn. I willlook for other people who own red balls andinduce them to become partners and add to thered balls in the urn. As time goes by, there willbe so many red balls in the urn that almost everydraw will obtain one. On the other hand, if I andmy acquaintances have only green balls, we willput 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 ratherthan realities, and many entrepreneurs in the real

world do fail. But the fact remains thatentrepreneurs use this logic to try and build newurns and devise new games all the time. In fact,several of the expert entrepreneurs I studiedexplicitly stated that being in a market that couldbe predicted was not such a good idea, sincethere would always be someone smarter andwith deeper pockets who would predict it betterthan they could. But being in an unpredictablemarket meant that the market could be shapedthrough their own decisions and actions workingin conjunction with pre-committed stakeholders

and customer-partners. Together they could usecontingencies along the way as part of the rawmaterials that constitute the very urn they areconstructing.

Expert entrepreneurs are not usually in theball counting business or the gaming business.Instead they are actually in the business ofcreating the future, which entails having to worktogether with a wide variety of people over long

periods of time. Sturdy urns of the future arefilled with enduring human relationships thatoutlive failures and create successes over time3.

Embodied in a network of such enduringrelationships, effectual logic is particularlyuseful and effective in domains such as the

introduction of new products in new markets, anarea often referred to as the suicide quadrant(See Figure 3), exactly the area where traditionalmarketing techniques are ineffective.

That is because effectual logic is peopledependent, unlike causal logic, which is effectdependent. In other words, when a particulareffect has already been chosen such as a target

segment within an existing market, the peoplewe hire and partner with will depend on theeffect we want to create or the market we wantto penetrate. Effectual logic, however, does notassume pre-existent markets and builds on theidea that the markets we create will bepredicated on the people we are able to bringtogether. In fact, in effectual reasoning, marketsare in essence stable configurations of criticalmasses of stakeholders who come together totransform the outputs of human imagination intothe forging and fulfillment of human aspirations

through economic means.

3 This is again a topic that is largely ignored in ourentrepreneurship curricula which tend to focus onmarket research, business planning, new venturefinancing and legal issues. As far as I know noentrepreneurship programs offer courses in creatingand managing lasting relationships or stablestakeholder networks, nor on failure management.

Figure 3

Existing

Market

New

Market

Existing

Product

New

product

Suicide

Quadrant


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8

Experienced professionals in theentrepreneurial arena, whether they are bankers,lawyers, VCs or other investors have alwaysagreed with successful entrepreneurs that findingand leading the right people is the key tocreating an enduring venture. These

entrepreneurs know that such right people arenot on the job market waiting for the jobs andincentives the entrepreneurs can offer them.Instead the right people need emotionalownership in the goals and objectives of theendeavor and can only be incentivized by thebelief that the effects they create will embodytheir deepest passions and aspirations whileenabling them to achieve their best potential.

But great entrepreneurs realize somethingmore about the central role of people in shapingthe urn. Using effectual logic, they understand

that they too cannot wait around to find theright people all the time. Besides continuallystriving to attract the right people, they learnalso to nurture and grow them in their ownbackyards. As Josiah Wedgwood wrote, Wehave to make artists of mere men. And morerecently, the founders of AES Corp., a multi-billion dollar electric power company withoperations in dozens of countries around theworld say, [AES] is fun because the peoplewho work here are fully engaged. They havetotal responsibility for decisions. They are

accountable for results. What they do every daymatters to the company, and it matters to thecommunities we operate in.

There is, however, a dark corollary to theuse of effectual logic in entrepreneurial activity.Since they do not assume specific pre-existentgoals or effects and let these effects emergethrough the process, in using effectual logic tocreate products and markets, entrepreneurs andtheir partners may also end up creating harmfuland problematic effects for the society they livein. The effects they create may reflect the

ignorance and cupidity as well as the will andaspirations of the people who participate in thecreation of new urns and games of the future.But our awareness of the existence of effectualreasoning should alert us more sharply to therole of entrepreneurs and the market system inshaping our future as a species, not merely ascontributors 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 effectualjourney that led to the creation of U-Haul. Bythe end of 1949, it was possible to rent a trailer

one-way from city to city throughout most of theUnited States. When we examine his journey,we find that this feat could not have beenaccomplished except through the use of effectualreasoning. When students today set out to writea business plan for this venture (using causalprocesses), they conclude that the plan isfinancially infeasible, or even psychologicallyinfeasible, since it requires a large and riskycapital outlay, most of which gets locked up inrelatively worthless assets such as trucks andlocation rental. Moreover, the logistics of

starting the business at a much smaller scale andgrowing it as fast as Shoen did overwhelms theanalytical prowess of the best of causal thinkers.The final nail in the coffin usually is thecomplete lack of any entry barriers to imitatorswith deep pockets after the concept is proved ona smaller scale.

Shoen, however, did not do elaborate marketresearch or detailed forecasting and fund-raisingin 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 thebusiness. In his own words, Since my fortunewas just about enough to make the downpayment on a home and furnish it, and knowingthat if I did this we would be sunk, we startedthe life of nomads by putting our belongings in atrailer and living between in-laws and parentsfor the next six months. I barbered part time andbought trailers of the kind I thought we neededto rent from anybody who happened to have oneat the price I thought was right. By the fall of1945, I was in so deep into the trailer rental deal

economically that it was either make it or losethe whole thing.

At that time he moved with his wife AnnaMary Carty Shoen and their young child to theCarty ranch in Ridgefield, Washington. There,with the help of the Carty family, the Shoensbuilt the first trailers in the fall of 1945, paintedin striking orange with the evocative name U-Haul on the sides, using the ranch's automobile


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9

garage (and milk house) as the firstmanufacturing plant. Shoen then practicallygave away the initial trailers to renters so theycould establish dealerships in cities they movedto. He would also purchase trailers and trucksand sell them to employees, family members,

friends, and investors who would then leasethem back to AMERCO, the parent company ofU-Haul. He contracted with national gas stationchains to utilize their unused space for parkingand to manage the paperwork. Together, thisvast network of stakeholders formed asubstantial entry barrier to any imitator whowould have to risk a large capital outlay tocompete. Advertising was entirely limited toYellow Pages and to the sudden and startlingsight of growing numbers of distinctivelypainted vans being driven along the freeways of

the country.At any given moment, U-Haul could have

failed, but the resulting financial fall-out wouldnot have been a disaster since the investmentswere spread across so many stakeholders. Thisbrings us to the key implication of effectualreasoning for the success or failure of

entrepreneurial ventures. Effectual reasoningmay not necessarily increase the probability ofsuccess of new enterprises, but it reduces thecosts of failure by enabling the failure to occurearlier and at lower levels of investment.

So, what makes entrepreneursentrepreneurial?

Entrepreneurs are entrepreneurial, asdifferentiated from managerial or strategic,because they think effectually; they believe in ayet-to-be-made future that can substantially beshaped by human action; and they realize that tothe extent that this human action can control thefuture, they need not expend energies trying topredict it. In fact, to the extent that the future isshaped by human action, it is not much usetrying to predict it it is much more useful to

understand and work with the people who areengaged in the decisions and actions that bring itinto existence.


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Saras D. Sarasvathy

Associate Professor

The Darden Graduate School of Business Administration

University of Virginia

[email protected]


28/40

2


Professionals who work closely with themand researchers who study them have oftenspeculated about what makes entrepreneurs

entrepreneurial. Of course, entrepreneurs alsolove to hold forth on this topic. But while thereare as many war stories and pet theories as thereare entrepreneurs and researchers, gatheringtogether a coherent theory of entrepreneurialexpertise has thus far eluded academics andpractitioners alike.

What are the characteristics, habits, andbehaviors of the species entrepreneur? Is therea learnable and teachable core toentrepreneurship? In other words, what cantodays entrepreneurs such as Rob Glaser and

Jeff Bezos learn from old stalwarts such asJosiah Wedgwood and Leonard Shoen? Or evenwithin the same period in history, what are thecommon elements that entrepreneurs across awide variety of industries share with each other?In sum, is there such a thing as entrepreneurialthinking that can be applied across space, timeand technology?

In 1997, I set out on a rather perilous butexhilarating journey to investigate this question.Traveling across 17 states in the US over severalmonths, I met with 30 founders of companies

ranging in size from $200 M to $6.5 B andspanning a variety of industries from steel andrailroad to teddy bears and semiconductors andbio-tech. The idea behind the study was notmerely to interview these founders, but to getbehind their stories and understand how theyreason about specific problems in transformingan idea into an enduring firm. The entrepreneursworked their way through a 17-page problem setover two hours, talking aloud continuously asthey each solved exactly the same ten decisionproblems to build a company starting with

exactly the same product idea. Rigorousanalyses of the transcribed tapes led to rathersurprising but eminently teachable principles.This set of principles, when put together, restedon a coherent logic that clearly established theexistence of a distinct form of rationality that wehave all long recognized intuitively asentrepreneurial. For reasons that will become

clear in the next section, I have termed this typeof rationality effectual reasoning.

Effectual reasoning: The problemThe word effectual is the inverse of

causal. In general, in MBA programs acrossthe world, students are taught causal orpredictive reasoning in every functional areaof business. Causal rationality begins with apre-determined goal and a given set of means,and seeks to identify the optimal fastest,cheapest, most efficient, etc. alternative toachieve the given goal. The make-vs.-buydecision in production, or choosing the targetmarket with the highest potential return in

marketing, or picking a portfolio with the lowestrisk in finance, or even hiring the best person forthe job in human resources management, are allexamples of problems of causal reasoning. Amore interesting variation of causal reasoninginvolves the creation of additional alternatives toachieve the given goal. This form of creativecausal reasoning is often used in strategicthinking.

Effectual reasoning, however, does notbegin with a specific goal. Instead, it begins witha given set of means and allows goals to emerge

contingently over time from the variedimagination and diverse aspirations of thefounders and the people they interact with.While causal thinkers are like great generalsseeking to conquer fertile lands (Genghis Khanconquering two thirds of the known world),effectual thinkers are like explorers setting outon voyages into uncharted waters (Columbusdiscovering the new world). It is important topoint out though that the same person can useboth causal and effectual reasoning at differenttimes depending on what the circumstances call

for. In fact, the best entrepreneurs are capable ofboth and do use both modes well. But theyprefer effectual reasoning over causal reasoningin the early stages of a new venture, andarguably, most entrepreneurs do not transitionwell into latter stages requiring more causalreasoning. Figure 1 graphically depicts thedifferent forms of reasoning discussed above.


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While causal reasoning may or may notinvolve creative thinking, effectual reasoning isinherently creative. The simple task of cookingdinner may be used to contrast the two types of

reasoning. A chef who is given a specific menuand has only to pick out his or her favoriterecipes for the items on the menu, shop foringredients and cook the meal in their own well-equipped kitchens is an example of causalreasoning. An example of effectual reasoningwould involve a chef who is not given a menu inadvance, and is escorted to a strange kitchenwhere he or she has to explore the cupboards for

unspecified ingredients and cook a meal withthem. While both causal and effectual reasoningcall for domain-specific skills and training,effectual reasoning demands something more imagination, spontaneity, risk-taking, andsalesmanship.

Effectual reasoning: The process

All entrepreneurs begin with threecategories of means: (1) Who they are theirtraits, tastes and abilities; (2) What they know their education, training, expertise, andexperience; and, (3) Whom they know theirsocial and professional networks. Using thesemeans, the entrepreneurs begin to imagine andimplement possible effects that can be createdwith them. Most often, they start very smallwith the means that are closest at hand, and

move almost directly into action withoutelaborate planning. Unlike causal reasoning thatcomes to life through careful planning andsubsequent execution, effectual reasoning livesand breathes execution. Plans are made andunmade and revised and recast through actionand interaction with others on a daily basis. Yetat any given moment, there is always ameaningful picture that keeps the team together,a compelling story that brings in morestakeholders and a continuing journey that mapsout uncharted territories. Through their actions,

the effectual entrepreneurs set of means andconsequently the set of possible effects changeand get reconfigured. Eventually, certain of theemerging effects coalesce into clearly achievableand desirable goals -- landmarks that point to adiscernible path beginning to emerge in thewilderness.

Yet, in our classrooms, we teach potentialentrepreneurs an extremely causal process thesequential progression from idea to marketresearch, to financial projections, to team, tobusiness plan, to financing, to prototype, to

market, to exit, with the caveat, of course, thatsurprises will happen along the way. Seasonedentrepreneurs, however, know that surprises arenot deviations from the path. Instead they arethe norm, the flora and fauna of the landscape,from which one learns to forge a path throughthe jungle. The unexpected is the stuff ofentrepreneurial experience and transforming the

Managerial Thinking -- Causal Reasoning


Selecting between given means to achieve a pre-determined goal

Given

Goal

Given Means

M1

M2

M3

M4

M5

Figure 1

Given Means E1

E2

E3

E...

En

M1M2

M3

M4

M5

Imagined

Ends

Entrepreneurial Thinking -- Effectual Reasoning


Imagining possible new ends using a given set of means

Given

Goals

New means

are generated

M1

M2

M3

M4

M5

Strategic Thinking -- Creative Causal Reasoning


Generating new means to achieve pre-determined goals


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unpredictable into the utterly mundane is thespecial domain of the expert entrepreneur.

Let us consider how the two processesoperate in the simple case of building arestaurant. Imagine an entrepreneur who wantsto start an Indian restaurant. In the causal

process that we teach, she would start with somemarket research into th

Documents

How Great Entrepreneurs Think