Nature, nurture or act? What defines entrepreneurs?

While the principles of nature and nurture are based on effectuation (determining course of action based on resources at one’s disposal), entrepreneurship as an act is one of causation (determining course of action based on goals to achieve).  While effectuation assumes the future is too uncertain to be shaped, causation assumes it can be.

Saras Sarasvathy’s ongoing research on effectuation was groundbreaking in the academic and world, altering the perspective of how successful outcomes are defined in entrepreneurship and how entrepreneurs arrive at these outcomes.

“It is the task of entrepreneurship to discover and forge through economic means the vision of the future composed of the diverse aspirations of millions of people to create the society we want to live in from the society we have to live in.” (Sarasvathy, 2001, p. 16).

Effectuation is the ability to use one’s resources to define and shape the future through the creation of an enterprise, campaign, or initiative. Your resources are based on who you are (your traits, tastes, abilities), what you know (your education, training, expertise and experience) and whom you know (your social and professional networks). Entrepreneurial effectuation starts with what is at hand and builds on it with time, creating room for goals to emerge as the situation requires. This way of thinking assumes the future is unpredictable and goals cannot be clearly known or defined; surprises are as inevitable as the deviations from your plan or path.

“Effectual thinkers are like explorers setting out on voyages into uncharted waters, e.g., Christopher Columbus” (Sarasvathy, 2001).

Whereas causation is the opposite of effectuation, entrepreneurs have pre-determined, unwavering goals to achieve and they develop the strategy and accumulate the necessary resources to get there.  Shaping the future is deemed a sequential process from idea to market validation to organizational formation to scale-up.

“Causal thinkers are like great generals seeking to conquer fertile lands, like Genghis Khan.” (Sarasvathy, 2001).

The best entrepreneurs have the distinct capability to expertly apply effectual and causal reasoning based on the situation and circumstance. Effectuation is a particularly important tool when setting-up the enterprise and way finding, making it as inherently creative as you allow it to be. Causation begins to play at a particularly larger part in later stages of the growth cycle.

This results in some core principles of effectuation and causation combined:

• When expert entrepreneurs set out to build a new venture, they start with the intuitive sense of a great market opportunity. They reflect on their means: who I am, what I know, and whom I know. Only then can entrepreneurs see how imagined possibilities could become real.
• Entrepreneurs are defined as “persons who start, organize and manage any enterprise”, especially a business, usually with considerable initiative and risk. Entrepreneurship is risk by design. Expert entrepreneurs limit risk by understanding what they can afford to lose at each step, instead of seeking large all-or-nothing opportunities. They choose goals and an action where there is upside even if the downside ends up happening.
• Expert entrepreneurs invite the surprise factor. Instead of making “what-if” scenarios to deal with worst-case scenarios, experts interpret “bad” news and surprises as potential clues to create new markets.
• By focusing on activities within their control, expert entrepreneurs know their actions will result in the desired outcomes. An effectual/causal worldview is rooted in the belief that the future is neither experienced nor predicted, but made.

In strategy, this difference can be equated to a resource-based view versus one based on market opportunity.  The resource-based view assumes that the basis for the competitive advantage of a company lies primarily in the application of the internal resources at its disposal, in particular those that cannot be easily copied.  The market opportunity-based view assumes that the basis for competitive advantage lies primarily in its timely and effective allocation of resources. This will attract market opportunities with the highest growth and opportunity for differentiation.

Effectuation as a way of thinking is quite prevalent in large corporates with significant resources at their disposal that define (but also limit) their goals and plans. By contrast, entrepreneurs, in many cases, have very limited means and therefore are more inclined to causal thinking.

Successful entrepreneurs know that success is defined by a great market opportunity as well as some differentiating edge.  They are visionary and believe that the best way to predict the future is to create it (causation thinking). Entrepreneurs must leverage the expertise and resources they can access and navigate uncharted waters (effectual thinking).

In the end, many entrepreneurs do fail.  After all, risk taking equates a real probability of failure. Failure can be explained by either insufficient nature and nurture – not having what it takes to be a successful entrepreneur – or by adopting the wrong strategy, making the wrong choices or underestimating the risks involved. It is all in the game.