News & Blogs
- 23-Feb - how to make money
- 16-Feb - link building service
- 16-Feb - stop ringing in ears
- 13-Feb - womens apparel
- 13-Feb - SonicPrint.com provides full color printing, affordable direct mail
- 23-Jan - Choice have rated Effectual Entrepreneurship as Highly Recommended
- 22-Nov - Its not the entrepreneurs job to predict the future, its their job to make it happen.
- 17-Nov - Enterprise In Action
- 8-Jul - L'effectuation: la méthode entrepreneuriale
- 22-Jun - Social Entrepreneur and Bird-in-the-hand princple
External Blog Posts
- http://blogs.babson.edu/facultyblog/2010/03/01/are-entrepreneurs-risk-takers-predators-or-iron-chefs/
Other Effectuation Blogs
- http://intersubjective.effectuation.org/blog/
Check out TechCrunch today - the article by Peter Sims talks about making "little bets" ...
http://techcrunch.com/2011/03/19/little-bets/
About effectuation in the article -
Just as Twitter went from a small bet to a big one, small bets are affordable and achievable ways to learn about problems and opportunities, while big bets are for capitalizing upon them.
Saras Sarasvathy, a professor at the Darden Graduate School of Business at the University of Virginia, is one of the leading researchers to study how entrepreneurs tend to make decisions. (One of her studies, titled, “What Makes Entrepreneurs Entrepreneurial,” started to ripple through Silicon Valley after Vinod Khosla posted a copy of the article on the Khosla Ventures website along with the note, “First good paper I’ve seen.”)
Sarasvathy points to the value of what she calls “affordable losses.” Seasoned entrepreneurs, she emphasizes, will tend to determine in advance what they are willing to lose, rather than calculating expected gains. They don’t teach this in business school; just the opposite, in fact. But the next new billion-dollar idea is virtually impossible to predict, even for a visionary like Mark Zuckerberg for much of Facebook’s early history.
Also included are Lean Startup (Eric Ries), the Customer Development model (Steve Blank), and Dave McClure of 500 Startups. Cool!
"90% of all start-up companies fail." That's written in stone, right? Well, at least that's the conventional wisdom of failure pervades the entrepreneurial (and general) press.
And that statistic inhibits many people from going out there and "doing the doable" and starting businesses. A 10% chance of success just doesn't appeal to most folks.
But it's not true. 90% of ventures actually don't "fail" - it's more like between 15-20%. But that requires us to "define" failure and who's doing the talking.
Stuart Read of IMD (SEA co-founder) says there are two big myths about failure. The first is statistical (the one we're going to deal with here). You have to take a look at who is defining "failure" before you interpret that number.
If you address the question from the angle of a venture capitalist, yes, most of your investments won't IPO. In your view, that's a failure. It is so because you're not getting the returns you require to satisfy your fund's investors. It's actually worse that even they say it - in fact, 99% of all businesses don't IPO. So - if you're looking at entrepreneurship from the lens of making a huge liquidation event in the public markets, the success rate is actually 1%, not 10%. Even worse! Yay!
But if you're NOT a venture capitalist ... if you're starting or running a business that doesn't have aspirations to go public, the chance of failure is much less - only 15-20% of companies are shut down at a loss (and into bankruptcy). This is straight from Read's research. Yours truly has started a business in that 80% of non-failures that don't IPO - our software firm provided jobs for 5.5 years and we closed it because it wasn't any fun any more (long story). But it wasn't a "failure" except to people who thought we should have sold the business for $100M.
Further ... failure isn't really failure if you have the right lens. Failure can be done intelligently (fail cheap, fail young, and fail with other people - the subject of another blog post) and used to create more bonafide successes. That's what Effectuators know and the exciting promise of starting smart using the effectual principles.
So - don't be seduced into thinking that the odds are stacked too high against yourself or other entrepreneurs ... get the real facts - straight from Stuart:
http://www.mydigitalfc.com/video/stuart-read-imd-557
Much more on this at Effectuation.org.
"The best way to predict the future is to invent it." -- Alan Kay (20th Annual Stanford Computer forum, 1989)
You've got to love Gmail. The above quote was at the top of my messages this morning ... randomly, but they seemed to know my interests! As Effectuators, we're taught to leverage surprise to our benefit ... thus, this blog post.
Focus on controlling your future vs. trying to predict the future is at the heart of Effectuation. Effectuators usually have been burned by years of trying to predict how markets, people, and products will act or perform, and start to rely on something else - the "worm's eye view" (to quote Muhammed Yunus) of what's right in front of them and what they can control. By focusing on control, they can use their means, their contacts, and their world-view to create businesses for less capital, less risk, and by getting others to help them co-create the business with them.
This is obviously in contrast to the prevailing managerial attitude of using decision analysis, forecasts, and probabiiities to plan for a future that is predicted to occur. You see this is the vast use of spreadsheets, aligning to a goal, and harnessing the resources to meet that goal (MBA 101). '
We can also see it in the frustrations of Alan Kay, a famed computer scientist (pioneer of both the windowing graphical user interface and object-oriented computing) in dealing with his executive bosses at the Xerox PARC lab in Palo Alto, CA. Here he is describing a meeting with visiting executives from Xerox corporate (in from Stamford, CT):
We used to have visits from the Xerox executives--usually in January and February--and when we could get them off the tennis courts they would come into the building at PARC. Mainly they were worried about the future, and they would badger us about what's going to happen to us. Finally, I said: 'Look, the best way to predict the future is to invent it.'"
That sums it up pretty nicely. And the executives reponse.
"It was a surprise to them and it worried them."
When managers have to actually make things and leave some of the outcome to chance and the abilities of their team rather than be backed up by spreadsheets, market research, and vast amounts of data, they get nervous.
Expert entrepreneurs are the exact opposite - they know that no matter how many models you make, reality has a way of being unpredictable - and that they only way to accel is to look at your means, your affordable loss, and focus those on what Saras Sarasvathy calls "doing the doable" - the stuff you can control right in front of you.
Add Richard Branson to the long and growing list of Effectuators.
At a breakfast interview with the WSJ's Alan Murray in late 2009 Richard Branson discussed a key event in the founding of Virgin Airways - buying his first plane. Here's his recap of the negotiation process:
"When we started the airline 25 years ago, I went to Boeing and said 'Hello, this is Richard Branson - I'm wondering if you could sell me a second hand 747." They asked "Whats the name of your business?" "Virgin." "What do you do?" "We have a record company, and we've got great bands like the Sex Pistols and the Rolling Stones". There was a long pause. And instead of putting the phone down, the man said "Well, we will send a salesman over, and as long as your airline goes further than your name suggests, we will let you have a plane. But the key point there was that we said to Boeing look, we dont know whether this is going to work out. We realize that its risky. We think that there is a gap in the market. We think that people want a quality airline. We want to be able to hand the plane back at the end of the first 12 months if it doesnt work out. And that was the element of protecting the downside and thats the critical thing in any new venture."
This "focus on the downside" is what Effectuators call "The Affordable Loss Principle" - only risk what you can afford to lose. This is critical to keeping your losses small (if things don't work out) and, as SEA co-founder Stuart Read says, part of "fail cheap, fail fast, and fail with other people."
Thus, the question that Murray started out with ("You seem to be drawing a link between your personal love of adventure and challenges and the way you operate in business ...") was countered by Branson with the story above detailing his aversion to risk. Interestingly, the short description of the video even highlights the "risk seeker" side of Branson (... "equates Branson's love of risk to the way he operates in business.") but Branson's clearly not describing a "love of risk" - just the opposite!
This short exchange highlights the general public's view of entrepreneurial risk and the media's role in promoting that view. As SEA members know, most great entrepreneurs have learned that the truly risky strategies (large, prediction-based bets placed on long-trem strategies in unknowable circumstances) just don't work. Expert entrepreneurs seek to avoid large losses, focus on control strategies (rather than prediction) in markets that they themselves create.
So, the myth of the brash, risk-seeking entrepreneur lives on - even in face of direct refutation!
Video below. The above snippets are from the beginning of the video to 01:35.
- Effectuation is not irrational. Effectuation is systematic.
- Effectuation is not trial and error. Effectuation is doing the doable.
- Effectuation is not adaptation. Effectuation is shaping the future.
- Effectuation is not NOT planning. Effectuation is about acting to take advantage of surprise.
- Effectuation is not all or nothing. Effectuation depends.
- Effectuation is not a contradiction (controlling & giving up control). Effectuation isn't about selling, it's about buy-in.
- Effectuation is not just for small/start-up firms. Effectuation is a method to create value from new things.
- Effectuation is not a personality trait. Effectuation is learnable and teachable.
- Effectuation is not the be-all-end-all. Effectuation is a component of entrepreneurial expertise.
(from Bloomberg BusinessWeek)
By Sommer Saadi
At the beginning of each semester at the University of Virginia, Darden School of Business (Darden Full-Time MBA Profile) professor Saras Sarasvathy tells her Starting New Ventures class the same thing: "The next seven weeks will be the first seven weeks of your life as an entrepreneur," she says. "It doesn't matter if that is the only seven weeks, but get started on something doable and worth doing." When Sarasvathy gave the familiar lecture in the spring of 2009, Brett Nicol and Nathan Tan were listening.
-
At the time, the two were in the midst of on-campus job interviews. After each interview it was common courtesy to send the interviewer a note thanking him or her for the interview opportunity. As they met with more and more potential employers, the list of required thank-you notes grew. "My first thought was 'Mom would be so disappointed in me,' " Nicol says of having a stack of half-written notes on his desk at home. "My second thought was 'There must be a better way.' "
Using Sarasvathy's "seven weeks" lecture as a pep talk, Nicol and Tan started developing an idea for a high-end line of stationery tailor-made for men. They designed a set of cards, found a local printer, and ordered the first round of 50 sets. To ensure the stationery would be masculine enough, they drove to every cigar store in Charlottesville, Washington, and Baltimore, and bought the stores' leftover wooden cigar boxes to use as holders. They called their venture Forgetful Gentleman.
JUST START SELLING
According to Sarasvathy, whose research of expert entrepreneurs inspired her hands-on teaching style, the best way to start a business is to just start selling. So Nicol and Tan set up a table in the main hallway at Darden and sold to classmates and faculty. Later they sold the sets at the Charlottesville Farmer's Market on Saturday mornings.
Sarasvathy was an early supporter of Forgetful Gentleman. "I truly loved the idea because it was so doable," she says. "I knew from the first moment they walked in with the product that it would work."
In spring 2009, the two applied to the Center for Entrepreneurial Leadership/Batten Institute at Darden and by that summer they were part of the 10-week incubator program. The incubator provided office space and equipment, and that summer Forgetful Gentleman officially formed as an LLC.
Darden also provides companies in the incubator with grants to help start the business. Nicol and Tan received a $1,700-per-month stipend for three months and an $8,100 expense budget. With that funding, the company was able to expand nationally, and in November 2009 the e-commerce store officially launched.
QUALITY SUPPLIERS
The biggest challenge, according to the co-founders, has been finding quality suppliers that meet their expectations for the product. A Forgetful Gentleman stationery set—ranging in price from $35 to $75—includes 12 letterpress-printed cards made out of 100 percent cotton paper, 12 envelopes on paper from the same 15th century Italian paper mill used by Napoleon and Picasso, and four pre-stamped envelopes, all encased in a heat-branded hardwood box with a velvet interior that is modeled after authentic cigar boxes.
Additionally, each set comes with access to an online personal reminder system with customizable text-message and e-mail reminders, and a copy of A Forgetful Gentleman's Guide to Articulate Writing. The book uses a fill-in-the-blank format to make writing notes as easy as possible.
Neiman Marcus began carrying the line in May and the set was selected as a "Top Gift for Him" for the 2010 holiday season. The Forgetful Gentleman stationery is sold in 62 stores, both department stores and specialty boutiques, across 22 states.
In 2010, the first full year of operation, Forgetful Gentleman—still a two-man operation—expects to earn $100,000 in revenue. Nicol and Tan are planning to expand the brand to include men's clothing, accessories, video tutorials, a gift-giving service, and an e-magazine. They have also started writing a book. Needless to say, they have great expectations for the company. Says Tan: "We envision Forgetful Gentleman eventually providing a product, service, or educational tool to help bridge the gap between good intentions and action in any area of a man's life.
Saadi is a reporter for Bloomberg Businessweek in New York.
http://www.businessweek.com/bschools/content/nov2010/bs2010119_047200.htm
This is a few months old ... but still relevant! Enjoy - SEA.
In a piece in The New Yorker titled “The Sure Thing: How Entrepreneurs Really Succeed,” Malcolm Gladwell lists a series of clever deals that allowed entrepreneurs such as Ted Turner to get into profitable ventures without having to make substantial investments of their own money. Writing in an engaging and provocative way leads Gladwell into “buying” a thesis by French scholars Michel Villette and Catherine Vuillermot that successful entrepreneurs are “predators.”
Of course, predators sometimes become successful entrepreneurs. But the issue of predation is a troubling one. Predator entails prey. Which means we are back to the old idea that one person’s profit necessarily has to equal another person’s loss. Is it really possible to create the kind of viable and enduring ventures such as CNN without a lot of people becoming millionaires in the process, not to mention the creation of jobs and innovations that form the basis of robust economies? Conflating the story of Wall Street speculator John Paulson with stories of entrepreneurs such as Turner further muddies the waters of the thesis.
Gladwell is correct in summarizing research that shows that entrepreneurs in general are not risk takers, whether measured in terms of psychological propensities or in terms of own resources invested. But does that automatically make them predators? Entrepreneurs clearly are not speculators, they do not make “bets” on things outside their control. They do exactly what Ted Turner did. They put together deals that often cost them nothing. But most of the time, the deals cost others nothing as well. They find new uses for unused or slack resources other people have; or even waste that people want to get rid of. Sometimes, as in the case of WJRJ, the television station Ted Turner purchased for a song, they allow other people to get out of bad deals they want to get out of anyway, without having to incur more severe losses than if they made the deal with the entrepreneur. Does this make them prey? Or are these deals what most deals are — a matter of mutual convenience and differing preferences?
Research that my collaborators and I have conducted over almost a decade spells out how expert entrepreneurs think about investments in new ventures. They do not try to predict the future and then make bets – whether using their own or other people’s money. Their preference is to design new opportunities, not merely make bets on preexistent ones. They like control and the chance they value the most is the chance to shape the future in ways that leverage who they are, what they know and whom they know. The interesting question therefore is not whether they could “see” the sure thing ahead of time and exploit other people to win it; but whether the so-called sure thing would even exist if they had not put together the low-cost or no-cost deal in the first place.
Conventional wisdom not only spouts the myth that entrepreneurs are risk takers, but also portrays them as visionaries who can see things other people cannot. Truth is, each one of us has a unique viewpoint and a unique set of resources that no one else has. We can all be visionaries in that sense. But unlike most of us, entrepreneurs actually act on these to create value for themselves and those who are willing to co-create it with them. In doing so, they are less like gamblers and more like an “Iron Chef” who has the skills to bring together readily available ingredients, whether mundane or exotic, in delicious ways that make us want to pay more for a taste of the end product.
Our research into entrepreneurial expertise shows that in making investments, experienced entrepreneurs use a heuristic that we call “Affordable Loss.” Instead of trying to calculate the odds of making lots of money and then risking the outlay needed to place the bet, they tend to look for deals that would allow them to achieve some type of positive return even if they lose what they are willing to invest. This might seem like a paradox until you realize that resources invested need not consist of money and positive returns need not necessarily come from the first deal. Instead the return you seek could simply be to position yourself in line to open up and achieve much better opportunities down the road. In fact, asking yourself up front whether you would do the deal even if you lost what you are investing in it, forces you to (a) invest a lot less than you might if you are blindly focused on the upside and (b) choose venture ideas that have non-economic upsides that matter to you in special ways. Of course expert entrepreneurs take this logic to its extreme by understanding that if you can get the deal done with close to zero resources invested, you literally have nothing to lose. On the one hand, this allows you to fail and experiment and learn along the way. And on the other hand, when you do succeed, it appears like a sure thing – after the fact.
Does all this mean that entrepreneurship is altogether without risk? Of course not. As Gladwell points out, sometimes what one risks is reputation, at other times it may be time, energy, emotion, even peace of mind. But the real issues come up after you pull off the deal that gets you in the game in the first place. For once you have bought that television station or the car factory through clever deals that don’t need enormous amounts of speculative investments, you have to get up day after day and deliver on the operational details that ultimately create the bottom line. Experienced entrepreneurs will tell you that what keeps them awake at night is next week’s payroll; and the possibility that the car your factory produces might inexplicably accelerate; the thousand and one things and people that need your attention and (sometimes) tender loving care on a daily basis – maybe for years before you can see any positive cash flow, let alone a positive bottom line that actually endures over time.
Realistic stories of entrepreneurship are not about risks, they are about responsibilities. And the latter, for sure, constitute the only sure thing about entrepreneurship.
(first posted at Blog.Babson.edu)
On Tuesday Jan 25, 2011, we will officially announce the release of "Effectual Entrepreneurship". Aside from any obligatory congratulations, one of the obvious questions you might ask is "Why"? With so much great literature on the topic of entrepreneurship, why write another textbook? When we sat down to think about it, we had at least three reasons why we took the time to create this project.
1. Breaking Barriers. When we walk into the classroom, one of the first questions we ask is why people are there instead of out in the wild, starting a venture. Consistently, the reasons we get are:
> I don’t have a good idea
> I don’t have enough money
> I don’t know how to take the plunge
> I’m afraid of failing
We wanted to be able to address these barriers to entrepreneurship directly with data and cases that could illustrate to people how they could manage these issues.
2. Building Perspective. Effectuation provides a theoretical foundation...a perspective grounded in more than 30 peer-reviewed academic articles. That perspective provides readers with the logic of expert entrepreneurs. Heuristic learned in the uncertain context of creating new ventures, and (we think) teachable in this book.
3. Illustrating Color. We have accumulated more than 70 entrepreneur stories across time, industry and geography and share these stories in "Effectual Entrepreneurship".
We have tried to make this all accessible with clear takeaways, actions and materials for the entrepreneurship instructor to bring these elements to life in the reading and in the entrepreneurship classroom. We hope you agree.
Stuart, for the Effectual Entrepreneurship team
http://campusentrepreneurship.wordpress.com/2010/12/16/effectuation-saras-sarasvathy/
From Campus Entrepreneurship:
"Am I late to the party on Effectuation and Saras Sarasvathy at the University of Virginia (found it through some of the Babson folks and their new book, Action Trumps Everything)?"
Effectuation is an idea with a sense of purpose – a desire to improve the state of the world and the lives of individuals by enabling the creation of firms, products, markets, services, and ideas.
Effectuation is a logic of entrepreneurial expertise, developed from a cognitive science based study of 27 founders of companies ranging in size from $200M to $6.5B. Effectuation articulates a dynamic and iterative process of creating new artifacts in the world. Effectual reasoning is a type of human problem solving that takes the future as fundamentally unpredictable, yet controllable through human action; the environment as constructible through choice; and goal as negotiated residuals of stakeholder commitments rather than as pre-existent preference orderings.
Hi Effectuators!
As you can see, we're holding off on a new logo for the site. We want you, the effectuation community, to create a logo for us - you're the experts and practitioners here. We'll be picking the winner of a logo-design contest January 31, 2011. The winner will get access to the teaching materials, our undying affection, a free copy of the new textbook (Effectual Entrepreneurship) signed by Stuart Read and Saras Sarasvathy, and a $250 iTunes gift card. Send entries to info@effectuation.org. We'll process them and get back to you with questions/suggestions ASAP. Onward effectually!
Tips To Win:
1. You are making the logo for "SEA - The Society of Effectual Action". This is the organization that will be the global home of Effectuation research.
2. Use of Effectual concepts (Knight's urn, crazy quilt, pen-world) is a bonus!
3. Make it unique - we're trying to revolutionize entrepreneurship ... and our logo needs to show it!
4. Make it simple - use "The Society for Effectual Action" as you may, but we'd like something bold to put on just about everything effectuation-related.
Good luck!
The SEA Team
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