0 to 60mph: How Expert Entrepreneurs Do It

Saras Sarasvathy
The Darden School
 The Puzzle

What they seem to be good at

– Opportunity recognition
– Resource acquisition
– Visionary leadership

Think about what they did . . .

Real Networks
Sears
Starbucks
eBay

Staples
Even Microsoft . . .
 Logics of Decisions and Actions

Question:
What kind of logic do expert entrepreneurs use to
make decisions and take action in the 0-60mph phase?

Subjects: 27 expert entrepreneurs

(Founders of companies from $200M to $6.5B)

Method: Protocol analysis

(80 hours of tape; 1500 pages of data)

Theory: Sarasvathy, 2005

(Effectuation: Elements of Entrepreneurial Expertise)

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

Causal Logic is predictive

To the extent you can predict the future, you can control it

Control of outcomes achieved through

accurate predictions,
clear goals,
and avoiding or protecting oneself against the unexpected
 What is effectual logic?

High
Rational Power
logic logic

PREDICTION

Adaptive Effectual = Non-predictive

logic logic control
Low

Low High
CONTROL

How do you control a future you cannot predict?

 Examples of Effectual Logic

From cooking a meal . . .

. . . To building a restaurant

Or something else . . .
 Principles of Effectuation

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

• Affordable loss principle:

Invest what you can afford to lose – extreme case $0 (Not expected return)

• Patchwork Quilt principle:

Build a network of self-selected stakeholders (Not competitive analysis)

• Lemonade principle:
Leverage contingencies (Not avoid them)

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

Expanding cycle of resources

Actual courses of
Action possible New
means

Who I am Interactions Effectual

What I know What can stakeholder
I do? with other
Whom I know people commitments

New
Actual Means goals

Converging cycle of constraints

NEW MARKETS
AND NEW FIRMS
 Issues in Relationship to Performance

Obvious hypothesis:
Effectuation increases the probability of success…..

NOT SO FAST!!

• “Success/failure” not easy to define

– What is “success” varies across entrepreneurs
– Measures of “performance” vary across firms, industries, and time

• Skills for a successful startup ≠ skills for successful growth

• Failure of the firm does not equal failure of the entrepreneur

 Higher Probability of Success ?

Causal
Tethered to goals Large
and predictive High Firm

Novice Entrepreneur
R
e
s
o Expert
u entrepreneurs
r do not always
c manage to
e bridge this gap
s

Low

Startup Expert
Effectual Firm Entrepreneur
Tethered to means
and non-predictive Time
 Lower Costs of Failure
Level of Investment

High External Shock External Shock

Possibility 1 Possibility 2
Investment based on
Expected Return
Actual investment
required (Ex-post)

Prediction Gap: Control Gap:

Over/under Investment based on
Necessity of
commitment of Expected Return
Effectual
investment partnerships
Investment based on
Affordable Loss

Low

Low Timeline High Efficacy of Prediction

 Some thoughts on probability of success/failure

Assuming small successes are expertise-dependent,

but large homeruns are drawn from a random distribution:

You get to explore more opportunities:

• Effectuation gives you more shots at the jackpot –
a larger temporal portfolio

• You survive longer so you can win the marathons

(you may lose some sprints along the way)

You get to explore better opportunities for you:

• You fully reap the benefits of cumulative learning effects
How Expert Entrepreneurs Build New Markets

Not a jigsaw puzzle

More like a patchwork quilt