EffectuationSachidananda B S

Presentation for LaunchpaddersNSRCEL-IIMB

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William Henry

Gates “Bill”

The Myth:

• Bill Gates was the visionary who saw the future that all PCs would run Windows

• Built Microsoft into the biggest software company in the world by himself because of his vision and talentThe Facts:

• Bill’s family was very wealthy, and Bill went to a gifted high school for children of rich families• Bill learnt how to program a computer in high school (in the late 1960s, computers were very rear)• Bill did not “drop out” of Harvard, but rather took a “leave of absence” and could come back any time• Bill’s mother introduced Bill’s new company, Micro-soft, to the CEO of IBM• A few weeks after the introduction, IBM signed a deal with Bill for MS-DOS, allowing Bill to retain the IP

Source: Leap, Rick Smith

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Elliot

Zuckerberg

Mark

The Myth:

•Mark was a visionary who saw online social networks as the future of online media

• Mark built facebook by himself from the beginning based on his vision and talent

•Through his strong vision and character, was able to raise millions of dollars easily for facebook

The Facts:

• Learned how to write computer programs since he was 10 years old• Worked on many “projects” including Facemash and The Facebook, many of which failed early, but he learned from them• Started The Facebook with just $2000• Had a strong core team who helped him grow facebook before getting external funding• Met Sean Parker who helped him raise money to grown business

Source: The Facebook Effect, David Kirkpatrick

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Charles Nicholas

Branson Richard

Could you guess how he started Virgin Atlantic?

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HOW DOES AN ENTREPRENEUR THINK?

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Causal Logic is predictive

Control of outcomes achieved throughaccurate predictions,

clear goals,and avoiding or protecting oneself against the

unexpected

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

Conventional Wisdom: Causal Logic

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Interpreting the outcomes...Scenario 1

Scenario 2

Scenario 3

Knightian Uncertainty

RiskPredictable

You know the distribution and can clearly predict the scenarios you could get into – very little risk if at all to operate in such a state

The distribution is unknown to begin with, but one could follow the draws to understand what could come next. You could then prepare for the outcomes

You do not know what is going to come next in spite of multiple attempts at the same thing. Outcome is highly uncertain!

It is this sort of uncertainty that we

deal with as entrepreneurs

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Through the study of several such Entrepreneurs….

…Some patterns emerge

The Effectual Principles

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How differently do entrepreneurs think?1. Bird in Hand Principle – Start with who you are, what you know and whom you know, and not necessarily with a predetermined goal or a pre-envisioned opportunity2. Affordable Loss – Invest only what you can afford to loose3. Crazy Quilt – Create an expanding network of self-selected stakeholders, each of whom commits only what he or she can afford to loose. Focus on partnerships rather than on competitors.4. Lemonade – Be open to surprises and leverage them. Treat them as useful inputs rather than hindrances to be avoided.5. Pilot in the Plane – Co-create the future with things within your control and with self-selected partners

If you use these principles you can shape your future and transform your environment in ways that matter to you and your stakeholders.

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How is this different from how Managers think?

Effectual Causal

Start with your means

Focus on your downside risk

Leverage Contingenci

es

Form Partnerships

Control Vs Predict

Pre-set goals and

opportunitiesExpected Returns

Avoiding Surprises

Competitive analysis

Inevitable trends

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Classic Causation Model from Marketing Textbooks

Process of Effectuation Used by Expert Entrepreneurs

SINGLE CUSTOMER

Segment Definition

Market DefinitionSegmentation

Targeting

Positioning

UnderstandCustomer

Adding Segments/PartnersDef of one of many possible markets

Marketing Process Inversion

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Who I am?What I know?

Whom I know?

What Can I Do?

Interaction with others

Effectual Stakeholder Commitment

s

Who we are?What we know?

Whom we know?

New mean

s

Expanding cycle of resources

What can we do?

(Affordable loss)

New Goals

Actual course of

action possible

Converging cycle of constraints

New Markets and New

Firms

The process!

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How is this different from how Managers think?

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Having said that:Effectuation

is Not an invention or thought of a great mind

is not a Recipe guaranteeing success

does offer Control in an unpredictable Business Environment

does offer Insights how expert entrepreneurs cope with uncertainty

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Firm Life-Cycle and Entrepreneur’s Career

CausalTethered to goals

and predictive

EffectualTethered to meansand non-predictive Time

Expert entrepreneurs do not always manage to bridge this gap

ExpertEntrepreneur

StartupFirm

LargeFirm

Novi

ce E

ntre

pren

eur

Resources

Low

High

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Before we wind up – here is a Summary of our discussion thus far!

The 10 Myths of Entrepreneurship

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QUESTIONSTHANK YOU