1. Effectuation: Elements of Entrepreneurial Expertise
Saras Sarasvathy
With inputs from:
Nicholas Dew
Dietmar Grichnik
Graciela Kuchle
Anil Menon
Stuart Read
Herbert Simon
S. Venkataraman
Robert Wiltbank

2. The First Empirical Journey
Question:
What are the teachable and learnable elements of entrepreneurial expertise?
Subjects: 27 expert entrepreneurs (Founders of companies from $200M to $6.5B)
Method: Protocol analysis
(80 hours of tape; 1500 pages of data)
Theory: Sarasvathy, (Effectuation: Elements of Entrepreneurial Expertise)
Results:
Over 63% of the subjects used an EFFECTUAL logic more than 75% of the time

3. Empirical Journey Continued
Comparisons with novices
89% of experts used effectual more frequently than causal logic, while novices demonstrated a noticeably opposing preference, with 81% using causal more than effectual.
Comparisons with corporate managers and organic growth leaders
Development of a survey instrument
Comparing angels and venture capitalists
emphasizing prediction has no impact on investor success or failure, while an emphasis on control reduces investment failure without reducing success rates.
Comparisons across countries

4. Cognitive Distribution of Managerial and Entrepreneurial Thinking
Effectual
High
Organic
Growth
Leaders
Expert
Entrepreneurs
Angels
Entrepreneurial
Large Firms
Experienced
VCs
Small Business
Managers
Entrepreneurs
Novice
Novice
VCs
Corporate
Managers
Low
Causal
Low
High

5. Quotes from Expert Entrepreneurs
“I don’t believe in market research actually, I’d just go sell it.” (E1)
“Traditional market research says, you do very broad based information gathering, possibly using mailings. I wouldn’t do that. I would literally target, as I said initially, key companies who I would call flagship, do a frontal lobotomy on them.” (E26)
“I think you have to be right in there -- eyeball into the reality of what does the customer look like..” (E3)
“I believe very much in the sort of Studs Terkel approach.” (E7)

6. Preliminary Results Expert entrepreneurs hate market research
underweight or eschew predictive information
prefer to work with things within their control
prefer changing goals to chasing means they do not have
open to surprises
keen on shaping or making opportunities than on finding them

7. 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

8. What is effectual logic?
High
Causal
Logic
Predict
Visionary
Logic
Persist
PREDICTION
Effectual
Logic
Co-create
Adaptive
Logic
Adapt
= Non-predictive control
Low
Low
High
CONTROL
How do you control a future you cannot predict?

9. Principles of Effectuation
Bird-in-hand principle:
Start with Who you are, What you know, & Whom you know (Not with pre-set goals)
Affordable loss principle:
Invest what you can afford to lose – extreme case $0 (Not expected return)
Crazy Quilt principle:
Build a network of self-selected stakeholders (Not competitive analysis)
Lemonade principle:
Embrace and Leverage surprises (Not avoid them)
Pilot-in-the-plane principle:
The future comes from what people do (Not inevitable trends)

10. Dynamics of the effectual network
Expanding cycle of resources
Actual Means
New means
Converging cycle of constraints
Actual courses of
Action possible
Who I am
What I know
Whom I know
Who We are
What We know
Whom We know
What can
I do?
Interactions with other people
Effectual stakeholder commitments
New goals
(Affordable loss)
NEW MARKETS
AND NEW FIRMS

11. Examples of Effectual Logic
From cooking a meal . . .
To building a restaurant
Or something else . . .

12. Claus Meyer, Meyer Group – at CBS, Denmark

13. Startup Histories of Real Companies
Were the markets already there or were they “made”?
Did the opportunities make entrepreneurs ?
Or did the entrepreneurs make these opportunities?

14. Pierre Omidyar on eBay
Almost every industry analyst and business reporter I talk to observes that eBay's strength is that its system is self-sustaining -- able to adapt to user needs, without any heavy intervention from a central authority of some sort. So people often say to me - "when you built the system, you must have known that making it self-sustainable was the only way eBay could grow to serve 40 million users a day."
Well… nope. I made the system self-sustaining for one reason: Back when I launched eBay on Labor Day 1995, eBay wasn't my business - it was my hobby. I had to build a system that was self-sustaining… …Because I had a real job to go to every morning. I was working as a software engineer from 10 to 7, and I wanted to have a life on the weekends. So I built a system that could keep working - catching complaints and capturing feedback -- even when Pam and I were out mountain-biking, and the only one home was our cat.

15. If I had had a blank check from a big VC, and a big staff running around - things might have gone much worse. I would have probably put together a very complex, elaborate system - something that justified all the investment. But because I had to operate on a tight budget - tight in terms of money and tight in terms of time - necessity focused me on simplicity: So I built a system simple enough to sustain itself.
By building a simple system, with just a few guiding principles, eBay was open to organic growth - it could achieve a certain degree of self-organization. So I guess what I'm trying to tell you is: Whatever future you're building… Don't try to program everything. 5 Year Plans never worked for the Soviet Union - in fact, if anything, central planning contributed to its fall. Chances are, central planning won't work any better for any of us.
Build a platform - prepare for the unexpected... …And you'll know you're successful when the platform you've built serves you in unexpected ways. That's certainly true of the lessons I've learned in the process of building eBay. Because in the deepest sense, eBay wasn't a hobby. And it wasn't a business. It was - and is - a community: An organic, evolving, self-organizing web of individual relationships, formed around shared interests. (Omidyar, 2002)

16. Markets and Opportunities: Made, as well as found
More like a crazy quilt
Not just a jigsaw puzzle

17. 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

18. Higher Probability of Success ?
Causal
Tethered to goals
and predictive
Effectual
Tethered to means
and non-predictive
Time
Expert
Entrepreneur
Large
Firm
Novice Entrepreneur
Resources
Low
High
Expert entrepreneurs do not always manage to bridge this gap
Startup
Firm

19. Effectual Logic and Entrepreneurial Performance
Low
High
Investment Levels / Failure Costs
Timeline
External Shock
Investment based on Expected Return
Prediction Gap:
Investments
in accuracy
Actual investment required (Ex-post)
Control Gap:
Use of Effectual logic
Investment based on Affordable Loss

20. 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

21. in Fact, Fiction, and Forecast:
“We have come to think of the actual as one among many possible worlds. We need to repaint that picture. All possible worlds lie within the actual one.”
Nelson Goodman,
in Fact, Fiction, and Forecast: