Long read: What makes entrepreneurs entrepreneurial?

Several business schools offer courses in entrepreneurship. Yet, none of the best entrepreneurs the world has known, seem to have undergone anything remotely scholastic a training to get there. Hence, the general belief that entrepreneurs are born and very rarely made, at least not from any formal training. However, can we work backwards and figure out from the success stories, what makes entrepreneurs entrepreneurial? This two-decade old research paper attempts to do exactly that. As a bonus, the link to this paper comes with annotations from Vinod Khosla, a tech entrepreneur who co-founded Sun Microsystems and then went on to become a venture capitalist. Whether you are a VC or a public market investor like us, the paper gives us a handy framework to assess the entrepreneurs we are betting on.

Indeed, Saras D. Sarasvathy, a professor at University of Washington and the author of the research paper in question reckons the key trait that makes entrepreneurs – ‘effectual reasoning’ is exactly the opposite of what business schools train their students on – ‘causal rationality’. What does she mean by these?

“Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal – fastest, cheapest, most efficient, etc. – alternative to achieve the given goal. The make-vs.-buy decision in production, or choosing the target market with the highest potential return in marketing, or picking a portfolio with the lowest risk in finance, or even hiring the best person for the job in human resources management, are all examples of problems of causal reasoning. A more interesting variation of causal reasoning involves the creation of additional alternatives to achieve the given goal. This form of creative causal reasoning is often used in strategic thinking. Effectual reasoning, however, does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with. While causal thinkers are like great generals seeking to conquer fertile lands (Genghis Khan conquering two thirds of the known world), effectual thinkers are like explorers setting out on voyages into uncharted waters (Columbus discovering the new world).”

So what are the means available to the entrepreneur?

“All entrepreneurs begin with three categories of means: (1) Who they are – their traits, tastes and abilities; (2) What they know – their education, training, expertise, and experience; and, (3) Whom they know – their social and professional networks. Using these means, the entrepreneurs begin to imagine and implement possible effects that can be created with them. Most often, they start very small with the means that are closest at hand, and move almost directly into action without elaborate planning. Unlike causal reasoning that comes to life through careful planning and subsequent execution, effectual reasoning lives and breathes execution. Plans are made and unmade and revised and recast through action and interaction with others on a daily basis. Yet at any given moment, there is always a meaningful picture that keeps the team together, a compelling story that brings in more stakeholders and a continuing journey that maps out uncharted territories. Through their actions, the effectual entrepreneurs’ set of means and consequently the set of possible effects change and get reconfigured. Eventually, certain of the emerging effects coalesce into clearly achievable and desirable goals — landmarks that point to a discernible path beginning to emerge in the wilderness….

…Seasoned entrepreneurs, however, know that surprises are not deviations from the path. Instead they are the norm, the flora and fauna of the landscape, from which one learns to forge a path through the jungle. The unexpected is the stuff of entrepreneurial experience and transforming the unpredictable into the utterly mundane is the special domain of the expert entrepreneur.”

The author lays out three principles for effectual rationality:

She sums up with the following logic for effectual reasoning:

“Causal reasoning is based on the logic, To the extent that we can predict the future, we can control it. That is why both academics and practitioners in business today spend enormous amounts of brainpower and resources on developing predictive models. Effectual reasoning, however, is based on the logic, To the extent that we can control the future, we do not need to predict it.

…Consciously, or unconsciously, they act as if they believe that the future is not “out there” to be discovered, but that it gets created through the very strategies of the players.

…In fact, several of the expert entrepreneurs I studied explicitly stated that being in a market that could be predicted was not such a good idea, since there would always be someone smarter and with deeper pockets who would predict it better than they could. But being in an unpredictable market meant that the market could be shaped through their own decisions and actions working in conjunction with pre-committed stakeholders and customer-partners.

….Entrepreneurs are entrepreneurial, as differentiated from managerial or strategic, because they think effectually; they believe in a yet-to-be-made future that can substantially be shaped by human action;”