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Effectual Reasoning

When I came across the paper "What makes entrepreneurs entrepreneurial?" by Saras D. Sarasvathy, it felt like many different ideas of mine on what sets founders apart from other people suddenly consolidated into a coherent picture of the entrepreneurial spirit.

I highly recommend reading the entire paper, but for those in a hurry, let me summarize its core idea in a nutshell and present it in the context of lean startups and the technology industry.

Two modes of reasoning

Entrepreneurs approach the future in a unique way which differentiates them from other people. Whereas most people—including managers and other business strategists—use causal reasoning as their primary mode of thinking, entrepreneurs prefer effectual reasoning.

  • Causal reasoning starts with a predefined goal and then, given the available means, seeks to identify the most effective way to reach that goal. It emphasizes the execution of a plan and while it does allow for creative exploration of the different ways to achieve the set goal, creativity is not an inherent part of the process.

  • Effectual reasoning instead does not start with a predefined goal, but with a given set of available means. It lets different goals emerge contingently over time. It does not ask, "How can I get there?", but rather, "What is the best thing I can do with what I have and what I know?" It is inherently creative and emphasizes imagination over execution.

The point is not that entrepreneurs do not use the causal line of reasoning. The most successful founders know well how to think in both modes. The point is that the entrepreneur prefers the effectual way of reasoning in the early stages of a venture, and that this is what defines him.

To understand the difference, imagine two different cooks. One cook is given a predefined meal and his job is to find the right recipe, buy the correct ingredients, and cook the meal in an optimal way. The other cook is not given a meal to cook. Instead, he is sent to a kitchen he has never seen before. His job is to explore the different corners of the kitchen, look for whatever he can find, and imagine what he can do with it. He might not even end up cooking a meal. He might do something entirely different.

The entrepreneurial mindset

Our resources as entrepreneurs are:

  • Who we are — our traits, tastes, and personality
  • What we know — our skills and our experience
  • Whom we know — our network and our partners

We then try to imagine the different futures we can create by leveraging these resources. We make plans and we unmake them on a daily basis. We know that surprises are not deviations from our path, but that they are indeed the norm. We prefer exploration over planning, imagination over execution. Our job is to create something out of nothing. We need to constantly push the boundary and achieve what is unimaginable to others.

Logic and principles of effectual reasoning

Effectual reasoning is not random. It simply follows a logic that is different from causal logic. Where causal reasoning says, "To the extent that we can predict the future, we can control it", effectual reasoning says, "To the extent that we can control the future, we can predict it".

Here's how to do that:

  • The affordable loss principle. While causal reasoning is concerned with expected returns, effectual reasoning emphasizes that there is nothing to lose. Causal thinkers plan while effectual thinkers do. Causal reasoning works top-down ("This is the market size, how do I get there?") while effectual reasoning works bottom-up ("Here's where I am, how should I take the next step?").

  • The strategic partnership principle. Causal thinkers do a competitive analysis: "There is a predetermined market, how can I segment it and target my preselected audience?" Effectual thinkers do not think about competitors, they build partnerships instead. They get out of the building and talk to people. They ask questions and create a movement. They try to expand the pie wherever possible.

  • The leveraging contingencies principle. Effectual thinkers live by the motto of Ready-fire-aim instead of Ready-aim-aim-aim-aim. The greatest startups are products of contingencies. Entrepreneurs leverage every opportunity in sight. Even if it means turning the entire business upside down. They do whatever looks most promising at the very moment—whether others call them crazy or not.

The entrepreneurial spirit is a methodology, it is a way of life. It defines the rules by which we choose, decide, and act. It is the path of a hacker and the path of an artist. It is in our nature, we must live by it, we cannot help it.

Effectual reasoning and the Lean Startup

In an uncertain world, effectual reasoning is the only reasoning that makes sense. Startup conditions are by definition conditions of extreme uncertainty—that is the starting point of the Lean Startup methodology. I believe that effectual reasoning and the Lean Startup are just two sides of the same coin.

Successful early-stage entrepreneurs build lean startups. Once companies grow and turn into larger organizations, clear goals emerge and causal reasoning becomes more important than effectual reasoning. That is when managers come into play and founders struggle. However, effectual reasoning will regain importance in the face of disruption.

So, we might see the Lean Startup methodology as a checklist to separate the wheat from the chaff, to identify true entrepreneurs amongst the masses, to separate founders from managers. It may also help us to discover who we truly are. Are we causal thinkers—or are we entrepreneurs?

Entrepreneurs and copycat companies

An interesting corollary to me is that copycat and clone companies are actually by definition not led by entrepreneurs. They are clearly led by managers: by people focusing on execution and causal reasoning. Their set goal is a successful copy of the original targeted company, and their only job is to leverage their means to build a copycat in the most effective way.

Entrepreneurs and technology

Finally, I believe that the effectual line of thinking becomes more important as technology progresses and as the levers become stronger and ever more powerful. Imagining the possible worlds of the future needs ever more creative thinking. There are so many things we can build from nothing today. Entrepreneurs are everywhere, and they are desperately needed.

Today's entrepreneurs should use effectual reasoning more than ever. What can you achieve with where you stand today? How can you envision the future? How can you partner up with others? How can you move quickly and learn something new every day?

Go ahead. The future is yours. You shape it.

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Reader Comments (1)

Interesting stand that is taken here and definitely a good article. The only thing that is not taken into account is that the personalities are not always as clear cut. But in general I totally agree.


February 15, 2012 | Unregistered CommenterThomas J.

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