Effectuation: Elements of Entrepreneurial Expertise Saras Sarasvathy With inputs from: Nicholas Dew Edward Freeman Brent Goldfarb Graciela Kuechle Jeanne Liedtka Anil Menon Stuart Read Herbert Simon S. Venkataraman Robert Wiltbank

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, 2008 (Effectuation: Elements of Entrepreneurial Expertise) Results: Over 63% of the subjects used an EFFECTUAL logic more than 75% of the time

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. (JBV 2009; JM 2009) –Experts used 11 types of transformation techniques – not merely new combinations (JEE 2009) Comparisons with experienced corporate managers (ASQ WP) 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. (JBV 2009) Comparisons across countries, doctoral dissertations, teaching

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

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)

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

Logics and Their Uses Causal Logic: –To the extent we can predict the future, we can control it Useful when: –The future is uncertain, but knowable –Goals are clear, but ways to achieve them are not so –The environment is reasonably well-structured, but largely outside our control Effectual Logic: –To the extent we can work with things within our control, we don’t need to predict the future Useful when: –The future is not only uncertain, but also unknowable Knightian Uncertainty –Goals are ambiguous, but means are clear and limited Goal ambiguity –The environment is unstructured, but subject to shaping by human action Isotropy

What is effectual logic? (SMJ 2006) How do you control a future you cannot predict? Effectual Logic Causal Logic Visionary Logic Adaptive Logic Low High LowHigh PREDICTION CONTROL = Non-predictive control

Principles of Effectuation (AMR 2001) 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)

Dynamics of the effectual network (JEE 2005) Who I am What I know Whom I know What can I do? Effectual stakeholder commitments Interactions with other people (Affordable loss)

What is effectual logic? (SMJ 2006) How do you control a future you cannot predict? Through EFFECTUAL Co-creation Effectual Logic Co-create Causal Logic Plan Visionary Logic Persist Adaptive Logic Adapt Low High LowHigh PREDICTION CONTROL = Non-predictive control

Dynamics of the effectual network (JEE 2005) Who I am What I know Whom I know What can I do? Effectual stakeholder commitments Interactions with other people New means New goals NEW MARKETS AND NEW FIRMS Expanding cycle of resources Actual Means Converging cycle of constraints Actual courses of Action possible (Affordable loss) Who We are What We know Whom We know What can We do?

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

Claus Meyer, Meyer Group – at CBS, Denmark

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?

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.

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)

Markets and Opportunities: Made, as well as found Not just a jigsaw puzzle More like a crazy quilt EFFECTUATION E l e m e n t s o f E n t r e p r e n e u r i a l E x p e r t i s e N e w H o r i z o n s i n E n t r e p r e n e u r s h i p SARAS D. SARASVATHY