Effectual entrepreneurship is a concept that describes the process of starting and growing a business through a series of iterative and flexible steps, rather than following a pre-determined plan. The approach is rooted in the idea that entrepreneurship is not just about predicting and managing risks, but about creating new opportunities by leveraging the resources available and engaging in a collaborative process with others.
Effectual entrepreneurs start by focusing on their personal skills, knowledge, and social network, and then use these resources to create a vision for their business marketing. They then engage in a process of experimentation, where they try out different approaches and solutions, adapt to new situations, and learn from their failures and successes.
This approach to entrepreneurship is in contrast to a more traditional approach, known as causal reasoning, which emphasizes the development of a business plan, market analysis, and other pre-planned steps to achieve a specific outcome.
Effectual entrepreneurship was first introduced by Saras D. Sarasvathy, a professor of Business Administration at the University of Virginia, in her research paper titled “What Makes Entrepreneurs Entrepreneurial” published in 2001. In her research, Sarasvathy studied a group of successful entrepreneurs and found that they did not use traditional predictive models or business plans to start their ventures, but rather relied on a process of experimentation, adaptation, and collaboration to create new opportunities.
Sarasvathy developed the concept of effectuation to describe this approach, which emphasizes the use of personal skills and resources, as well as the creation of partnerships and collaboration with others, to create new ventures. She argued that this approach was more suited to the uncertainty and complexity of entrepreneurship and that it enabled entrepreneurs to leverage their existing resources to create new value. There are five key principles of effectuation, as outlined by Saras Sarasvathy in her research:
Bird-in-Hand Principle:
Effectual entrepreneurs start with what they have, rather than waiting for external resources or opportunities to come to them. They focus on their existing strengths, resources, financial and connections to identify and create opportunities.
Affordable Loss Principle:
Effectual entrepreneurs limit their downside risk by only investing what they can afford to lose. They view each venture as an experiment and are prepared to pivot or change direction if necessary.
Crazy-Quilt Principle:
Effectual entrepreneurs build partnerships and networks based on personal relationships, rather than relying on formal contracts or legal agreements. They use their existing social connections to build trust and leverage resources.
Lemonade Principle:
Effectual entrepreneurs view obstacles and challenges as opportunities, rather than setbacks. They use unexpected events and situations to create new opportunities and solutions.
Pilot-in-the-Plane Principle:
Effectual entrepreneurs take an active, hands-on approach to building their ventures, rather than waiting for outside guidance or direction. They embrace uncertainty and ambiguity and view the future as something they can actively shape and influence.
One example of effectual entrepreneurship is the story of the startup company, Airbnb. When the founders, Brian Chesky and Joe Gebbia, started the company in 2007, they did not have a fully developed business plan or a clear path to success. Instead, they used an effectual approach to build their business.
The founders started with the resources they had at hand: a few air mattresses and an empty apartment. They decided to rent out their apartment to travelers who were in town for a design conference, offering them a place to stay when hotels were sold out. The idea proved successful, and they began renting out air mattresses in their living room to other conference-goers.
From there, the founders experimented with different approaches, such as creating a website to allow others to list their spare rooms, and eventually expanding to include entire homes. They also built partnerships with local hosts and invested in customer service and user experience to create a differentiated offering.
Throughout the process, the founders were willing to pivot and adapt their approach based on what they learned from their experiments. They used their existing resources and personal connections to create value, rather than relying on external funding or preconceived plans. This effectual approach enabled them to create a successful and innovative business that disrupted the hotel industry and transformed the way people travel.
Conclusion
Overall, effectual entrepreneurship has gained attention in recent years for its ability to foster innovation, creativity, and collaboration in the startup community. By emphasizing the importance of personal resources, networking, and a willingness to experiment and learn, it has helped many entrepreneurs to build successful and sustainable businesses.
