What makes entrepreneurs entrepreneurial?

Entrepreneurs think and act differently from managers and strategists.

This 2008 paper argues that entrepreneurs use effectual reasoning, the polar opposite of causal reasoning taught in business schools. Causal reasoning starts with a goal and finds the best way to achieve it. Effectual reasoning starts with available resources and lets goals emerge along the way. Entrepreneurs are explorers, not generals. Instead of following fixed plans, they experiment and adapt to seize whatever opportunities the world throws at them.

Consider this example from the paper. A causal thinker starts an Indian restaurant by following a fixed plan: researching the market, choosing a prime location, targeting the right customers, securing funding, and executing a well-designed strategy. The effectual entrepreneur doesn’t start with a set goal. She starts with what she has (her skills, knowledge, and network), and she experiments. She might begin by selling homemade lunches to friends’ coworkers. If that works, she expands. If not, she watches what excites her customers. Maybe they care less about the food and more about her cultural insights and life experiences. She doesn’t force the restaurant idea. She unasks the question and asks a new one: What do people really want from me? (This is what Airbnb did with its "Experiences". Instead of just renting out rooms, hosts began offering cooking classes, city tours, and adventures, things people didn’t know they wanted until they saw them.) 

Key principles of effectual reasoning

The author, Prof. Saras D. Sarasvathy, interviewed 30 seasoned entrepreneurs and identified key principles of effectual reasoning.

The first is affordable loss. Forget maximizing returns. Entrepreneurs focus on what they can afford to lose. Instead of wasting time on market research, they test ideas in the real world. They fail cheap, fail fast, and learn faster.

The second is partnerships over competition. Entrepreneurs don’t assume a market exists for their idea. They build networks of collaborators who help shape the business. This lowers risk, opens doors, and provides instant feedback. This contrasts with the corporate world, which focuses on outmaneuvering rivals.

The third is leveraging surprises. Managers hate surprises. Entrepreneurs love them. The unexpected isn’t an obstacle, it’s an opening. A pivot. A new market. A better business.

So, effectual reasoning flips traditional business thinking on its head. Most strategies assume that predicting the future gives control. Entrepreneurs believe the opposite: take action, and you shape the future. Rather than waiting for ideal conditions, they start with what they have and improvise.

Discussion

Here is what I make of this. Some people are born entrepreneurs. Maybe you can teach it. Maybe you can’t. Some minds thrive in uncertainty and make it up as they go. Others crave a plan, a map, a well-paved road. 

It’s the old fox-versus-hedgehog dilemma from Grand Strategy. The fox knows many things. The hedgehog knows one big thing.

A smart friend of mine (Mahesh Balakrishnan, who has a related Managing Skunks post here) put it perfectly. On his dream software team, he wants either Jeeps or Ferraris. Jeeps go anywhere. No roads, no directions—just point them at a problem, and they’ll tear through it. That’s effectual reasoning. Ferraris, on the other hand, need smooth roads and a clear destination. But once they have that, they move fast. He doesn’t want Toyota Corollas. Corollas are slow. Worse, they still need roads.

So here’s my corollary (admire my beautiful pun).

If you got to be a causal thinker, be a Ferrari. Not a Corolla.

Postamble

You can tell Steve Jobs is the textbook "effectual thinker" just from this quote.

“The thing I would say is, when you grow up, you tend to get told that the world is the way it is, and your life is just to live your life inside the world. Try not to bash into the walls too much. Try to have a nice family life, have fun, save a little money. But life, that's a very limited life. Life can be much broader once you discover one simple fact, and that is: Everything around you that you call life was made up by people that were no smarter than you. And you can change it. You can influence it. You can build your own things that other people can use. And the minute that you understand that you can poke life, and actually something will, you know, if you push in, something will pop out the other side, that you can change it. You can mold it. That's maybe the most important thing is to shake off this erroneous notion that life is there and you're just going to live in it, versus embrace it. Change it. Improve it. Make your mark upon it. I think that's very important. And however you learn that, once you learn it, you'll want to change life and make it better. Because it's kind of messed up in a lot of ways. Once you learn that, you'll never be the same again.”

Also see "Ask and You Shall Receive" in this post.