Effectual Reasoning: What Makes Entrepreneurs Entrepreneurial

Saras Sarasvathy at the University of Washington has written one of the clearest, most original academic papers on entrepreneurship I've read. It is a stellar breakdown of the characteristics of the entrepreneurial mind. I highly recommend it for anyone in the ecosystem.

Her phrase to describe the entrepreneurial reasoning process is "effectual." Effectual is the inverse of "causal."

Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal…alternative to achieve the given goal….

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.

Effectual thinkers are like explorers setting out on voyages into uncharted waters….

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
  3. Whom they know – their social and professional networks.

Sean Murphy, a wise man in Silicon Valley whose post elaborates on the paper, summarizes another part that lays out key differences between effectual reasoning and traditional start-up management models:

  • Risk taking
    • Traditional: expected return, work the plan to deliver results to your investors (“Ready Aim Fire” can become “Aim–not big enough–Aim–not big-enough–Aim…”).
    • Effectual: affordable loss, make many small mistakes as early and cheaply as possible to speed learning (“Ready Fire Steer“)

  • Focus:
    • Traditional: competition
    • Effectual: strategic partnership (especially with early customers)

  • Value Creation
    • Traditional: rely on pre-existing knowledge to aim for a known market you can dominate and exploit
    • Effectual: leverage contingencies; create opportunities as you map a new market

Read the whole thing.

9 comments on “Effectual Reasoning: What Makes Entrepreneurs Entrepreneurial
  • Ben – I have been following Saras Sarasvathy’s work for some time and I am a fan. However, what I find most interesting is the point of transition when a company/culture must begin blending Causal Reasoning with Effectual Reasoning. Assuming success, a point will be reached when planning and process do matter. Conventional thinking is that this is the time to replace the “entrepreneurial founder” with “professional management.” I am not convinced this is always the best answer –one needs to look no further than Apple and Steve Jobs.

  • I’ve been in business meetings where one member of the leadership team would insist “we need a goal/target for X” where X might be revenue for the year, or some improvement in conversion as a result of A/B testing.

    I often found that troubling – in most cases the goal is arbitrary. Perhaps setting one is a way to apply pressure to the team, make possible a satisfying simple conclusion (“we hit our goal”).

    In some cases, there is a clear precedent (“others in our industry achieve X”) which can inform goals. But setting arbitrary goals in unprecedented circumstances seems the wrong way to approach the problem. Better to decide what resources we want to devote, and ensure they are working hard and prioritizing smartly. Thoughts?

  • Totally agree, David. Assuming there's innate motivation to be all you can
    be, allowing some goals to emerge seems like the way to go.

    I think similarly in a personal context. I don't set lots of ambitious
    personal goals.

    Good to hear from you!

  • In the financial literacy space we have “allies” not “competitors” which greatly facilitate strategic partnerships.
    When you’re a tiny player its all about finding your comparative advantage and holding relentlessly as the ship charters new water.

    Another awesome post, Ben!

  • Over the years, however, Horne grew disillusioned by the film industry, and how she was used in films. In addition, she was blacklisted by Hollywood during the 1950’s because of her involvement in the civil rights movement, and because of her associations with civil rights activists such as Paul Robeson. She eventually went back to her roots, performing again in nightclubs, and focusing on her recording career.

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