Chapter 3:

The Basics of
Effectuation in
Action - Venturing
TOPICS COVERED:
BIRD IN HAND PRINCIPLE

START WITH YOUR MEANS...

• People focus so much on whether they will be successful or not and if their idea is good or not, the
forget ALL the things they can do with what they already have – their means.
     - 
 These means can be grouped
into three categories:

Who I Am  
(traits, tastes, and abilities)

When expert What I Know 

(education, training, expertise, experience)
entrepreneurs seek to
build a new venture, they Who I Know 
start with their means.  (social and professional networks)
BIRD-IN-HAND PRINCIPLE
Using a combination of these means, entrepreneurs imagine possibilities and take action. 

Start very small with the closest means and move into implementation without elaborate planning.

With each action, possible outcomes are reconfigured. 

 Clear achievable and desirable goals are formed.

End goals are a combination of imagination, aspirations and people interacted with during the process.
 CAUSAL vs EFFECTUAL REASONING

MANAGERIAL THINKING (CAUSAL) ENTREPRENEURIAL THINKING (EFFECTUAL)

Accumulate means necessary to Imagine many possible new ends
achieve a pre-determined goal using a given set of means.

M1
FIRST FIRST
M1
GIVEN
GIVEN GOAL
MEANS
M1

M1
THEN, ACCUMULATE MEANS  THEN, IMAGINE ENDS
 CAUSAL vs EFFECTUAL REASONING
MANAGERIAL THINKING (CAUSAL) ENTREPRENEURIAL THINKING (EFFECTUAL)
Accumulate means necessary to Imagine many possible new ends
achieve a pre-determined goal using a given set of means.
(Goal Driven) (Means Driven)

M1
FIRST FIRST
M1 GIVEN
GIVEN GOAL:
Maximize Shares MEANS:
$1 Million - Who we are
M1 - What we know
- Who we know

M1
THEN, ACCUMULATE MEANS  THEN, IMAGINE ENDS
 CAUSAL vs EFFECTUAL REASONING
MANAGERIAL THINKING (CAUSAL) ENTREPRENEURIAL THINKING (EFFECTUAL)
Accumulate means necessary to Imagine many possible new ends
achieve a pre-determined goal using a given set of means.
BENEFITS OF(Goal
BEING MEANS
Driven) DRIVEN (Means Driven)

M1
- Not chasing investors FIRST FIRST
- Not M
waiting for the perfect
1
GIVEN GOAL: GIVEN
  opportunity or resources
Maximize Shares MEANS:
- Attract co=creative stakeholders - Who we are
M1 probability of innovation
- Higher $1 Million - What we know
- Decreasing the cost of failure - Who we know
- Creative
M1 with resources (slack
  resources) THEN, ACCUMULATE MEANS  THEN, IMAGINE ENDS
WHO I AM: THE UNBEATABLE COMPETITIVE ADVANTAGE
WHO I AM: THE UNBEATABLE COMPETITIVE
ADVANTAGE
 WHAT I KNOW: BRINGING LEARNING TO THE
VENTURE

Think about all that you know – facts, wisdom and insights.

Everyone has their own stock of knowledge, informed by their own

experiences.

It's no wonder why two enterepreneurs at the same starting point with the
same environment will come up with completely different ventures.
WHO I KNOW: SIX DEGREES OF SEPARATION
Consider network sources – 3 main sources
• First Source: Directly and immediately accessible - Friends, Family and Acquaintances
• Second Source: People you meet serendipitously
• Third Source: People you don’t know directly but they are linked through people you know
HOW IT WORKS: INVENTORY OF YOUR MEANS

WHO  YOU ARE WHAT YOU KNOW WHO YOU KNOW

Tastes, values, preferences Your prior knowledge and Your Rolodex

education (LinkedIn, Facebook)
Passions Knowledge from your job Classmates, Alumni

Hobbies Knowledge from your life Serendipituous Encounters

Interests Informal learning, hobbies The strangers in your life

MAP YOUR MEANS: at school, university, work, private life, parents...

AFFORDABLE LOSS: RISK LITTLE, FAIL CHEAP
 IMAGINE..
You are an entrepreneur. During your 12-year tenure as an engineer at a major computer manufacturer and you
work on your own time to invent a device that recognizes and responds to eye movements. You imagine it might
make a great alternative to the computer mouse. You are convinced the device has huge potential. You pitch your
idea to your company and they are not excited. 
You quit your job to develop this idea further – and you win a business plan competition and have now developed
a prototype. A VC likes your idea and makes an offer: $10 Million investment for 40% ownership.
Your dad's friend offers you $1 Million to adapt your technology in his company. The cost for you will $950000. 
CHOOSING THE BEST OPPORTUNITY
You must choose  between the two options:

• Which is the bigger opportunity?

• What is the net present value of each opportunity?
• What would you be personally investing into each alternative?
(time, reputation, knowledge, emotions)
• What is the downside risk of each alternative?
 ASSESSING AFFORDABLE LOSS
ASSESSING AFFORDABLE LOSS
Venture Capitalist My Father's Friend
Time
Reputation
Opportunity Cost
Knowledge

                          Venture Capitalist                          Father's Friend

• The market is not there and the VC pulls the plug • You miss a critical deadline, making him unhappy with
• The market is there but the VC takes contol and fires you your father
• You both don't get along and you can't fire her • The cost is higher than you estimated
• You deliver somethng defective and an employee gets hurt
as a result
HOW TO FIGURE OUT YOUR AFFORDABLE LOSS?
Consider: life situation, current commitments, aspirations and risk prospensity

How much you really need to start your business?

The less you need, the less you need tgo worry about losing.

 What are you really able and willig to lose to start your business?
 Take a list of your available resources and gauge your risk tolerance.
 Time
DECIDING ON
YOUR Windfalls

AFFORDABLE
Long Term Savings
LOSS: SOME
GUIDELINES Home Equity

Credit Cards

Loan from Family and Friends

DECIDING ON
YOUR
AFFORDABLE
LOSS: SOME Time
Loan Long
from
Home
Credit
Windfalls
Family
TermEquity
Cards
Savings
and Friends
GUIDELINES
CRAZY QUILT
PRINCIPLE:
FORM PARTNERSHIP
THE PATCHWORK QUILT AND THE PUZZLE

Effectual Approach Causal Approach

• The quilter determines the pattern.  •  A puzzle can only come together in one way.

• Large quilting projects are usually communal. • Work with others - to solve it quickly.
Other patches with unique inputs. • End is determined
• Uncertainty of what the quilt will look like • Just needs to be completed. 
when it's done.  

• The quilt must have a purpose

HOW EFFECTUAL PARTNERSHIPS
HAPPEN [THE ASK]
Friends, family, colleagues, random people.
• Obtaining commitments to the contruction process
• Each commitment is a patch on the quilt.
• Two effects of interactions:
1. Means of venture increases
2. Goal of venture crystallizes and becomes specific. 

ADVICE INPUT KNOWLEDGE HELP

INTERACTIONS New means to the venture
BETWEEN
EFFECTUAL
STAKEHOLDERS Strives to invest in only what
they can afford to lose

Based on 3 principles:
Every interaction contains
unexpected contingencies
THE
LEMONADE
PRINCIPLE
THE LEMONADE PRINCIPLE: LEVERAGING SURPRISE
• In entrepreneurship, you can do well by acknowledging and appropriating the accidental events, meetings and
information that the environment sets up.
• Traditional model - envision goals and plan to reach them before venturing into a new business.
    Rigid plans frame surprises as problems. In overcoming, we might miss out on opportunities.
• The unexpected is not a cost but a resource.
NEW BUILDING
BLOCK/
UNEXPECTED RESOURCE for a
young enterprise.
UNDERSTANDING DIFFERENT  KINDS OF
CONTINGENCIES

People Event Information

THE CONTINGENCY PATH TO NOVEL OUTCOMES

CONTINGENCIES
People             Information               Events

CHANGE YOUR MEANS

 What you know    Who you know    Who you are     
 
      
NEW MEANS TO LEVERAGE
'Now, what can I do with my revised means?'

NOVEL OUTCOMES

New Venture Directions

THE EFFECTUATION PROCESS: PUTTING IT  TOGETHER