2. Effectuation

3. The Fairy Tale Journey Roadmap ascribed to the mythical entrepreneur 1.Searches for a “new, high-potential opportunity”. 2.In a lightbulb moment, discovers something nobody has thought of before. 3.Writes a business plan. 4.Raises lots of investment money – especially from venture capitalists (VCs). 5.Hires a great team. 6.Builds a product. 7.Orchestrates a big launch. 8.Achieves steady, or better yet, hockey-stick growth. 9.Sells the venture or has an initial public offering. 10.…and, finally, retires to the Bahamas.

4. Actual Course: Data Points Only 28% of a sample of Inc. 500 firms had completed a formal business plan (Bhide, 2000) More than 73% of Initial Public Offerings (IPOs) are not funded by VCs (Gompers and Lerner, 2001:145) Average amount of money it takes to create a business in the US is less than $30,000 (Kaufmann Foundation, 2009). Dell computers launched in 1984 with US$ 1,000. Number of businesses funded by VCs in US in 2014 (a good year for raising venture capital investments) was 4,356 (PwC, 2014). No. of new businesses started in US in 2014 was about 1.8 million (SBA, 2015).

5. Where do ideas come from? In theory Patent Office Gazette Government (NASA, CERN) Technology transfer Trade shows Doctoral dissertation Invention expositions Brainstorming In practice A personal satisfaction or dissatisfaction Market knowledge from prior job Hobbies Other people Acquisition of a company or product already launched The news Rejects from employer or other company Customers

6. Examples of radical business model change CompanyWhere they startedWhat they do now Tiffany & Co.Started as a provider of stationery in 1837. Not until 1853 did the firm shift over to jewellery. ColgateSoap, candles and starch were the first products. Founded in 1806, Colgate did not make toothpaste for nearly 70 years. John DeereStarted as a blacksmith, making plows. A full range of farm products, but best known for making its iconic green tractors.

7. Fail cheap and learn quickly “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” Bill Gates Fewer than 2% of new ventures reach an IPO. 92% of ventures exit without outstanding debt. Soooo… If success is defined as an IPO, 98% of ventures fail. But if failure is defined as bankruptcy, only 8% of ventures fail.

8. Deciding and Learning “Sir, what is the secret of your success?” a reporter asked a successful businessman. “Two words.” “And what are they, sir?” “Right decisions.” “And how do you make right decisions?” “One word.” “And what is that, sir?” “Experience.” “And how do you get experience?” “Two words.” “And what are they, sir?” “Wrong decisions.”

9. Max-Min approach Instead of calculating the opportunity cost of starting a business in terms of current salary and future earnings potential, calculate two relatively simple values. First, estimate the absolute maximum amount you are willing to lose. Second, decide on the absolute minimum you want to earn. Now evaluate only those opportunities you can afford with your maximum investment that will pay you at least the minimum earnings you need.

11. Effectual means Who am I What do I know Who do I know

12. Effectual logic of expert entrepreneurs Start with your means. Don’t risk what you can’t afford to lose. Build the future together with partners. Be open to surprise. These enable control, so the entrepreneur need not rely on prediction.

13. Fundamental assumptions Novice. To the extent that we can predict the future, we can control it. (Causal logic) Expert. To the extent that we can control the future, we do not need to predict it. (Effectual logic) Heuristics developed in making opportunities in uncertain environments have been extracted by studying expert entrepreneurs.

14. Principles of Effectuation Start with your means – Who I am – my traits, tastes, and abilities. – What I know – my education, training, expertise, and experience. – Who I know – my social and professional networks.

15. Principles of Effectuation (Cont’d) Set affordable loss Building a venture by making only affordable investments offers two advantages.  Feedback. It is possible to incorporate feedback each time you iterate.  Control. You don’t have to give up an equity position to a financial investor.

16. Innovation Many innovations are not true inventions – created from scratch – but rather new combinations of things we already have. Role of surprise. Many of the products we know and love today came from accidents and unintended results of completely different ideas e.g., Post-It Notes.

17. Principles of Effectuation (Cont’d) Leverage contingencies (Make lemonade out of lemons) Expert entrepreneurs learn not only to work with surprises but also to take advantage of them.

18. Lemonade Principle Unexpected Information Unexpected Meetings Unexpected Events Positive (Serendipity) Potato ChipsSilly PuttyWD-40 Viagra Negative (Murphy’s Law) Microwave Oven Staples stores Network for Teaching Entrepreneurship Post-It Notes

19. Principles of Effectuation (Cont’d) Form partnerships Obtaining pre-commitments from key stakeholders, suppliers or customers helps reduce uncertainty in the early stages of creating an enterprise. This principle dovetails well with the affordable loss principle to bring the entrepreneur’s idea to market with very little cash expenditure. Since the entrepreneur is not wedded to any particular market for his or her idea, the expanding network of strategic partnerships determines, to a great extent, which market or markets the company will eventually end up entering or creating.

20. A different way of looking at the world Effectual thinkers: See the world as open, still in the making. They see human action as having a genuine role. They see firms and markets as human artefacts. Do not see opportunities as given or outside their control. On the contrary, they believe in creating, as well as recognizing and discovering opportunities. Do not have an instrumental view of the world. On the contrary, they see companies as tools that allow them to create novelty for themselves and the world; they see markets as made rather than found; and consider stakeholders to be partners in co-creation rather than simply customers or suppliers. Work on making success happen rather than trying to avoid failure. They see failing as a normal part of venturing. Because they are willing to fail, they often create portfolios of ventures, knowing and learning to kill those that will lead nowhere and nurture those with potential.

21. Bird-in-hand principle There are three categories of means available to all of us: – Who we are (traits, abilities, attributes) – What we know (expertise and experience) – Who we know (social networks).

22. Managerial Thinking (Causal) Distinguishing Characteristic Accumulate means necessary to achieve a pre-determined goal. Entrepreneurial Thinking (Effectual) Distinguishing Characteristic Imagining many possible new ends using a given set of means. THEN ACCUMULATE MEANS GIVEN GOAL THEN IMAGINE ENDS GIVEN MEANS M1M1 M2M2 M3M3 M4M4 M5M5 M1M1 M2M2 M3M3 M4M4 M5M5 CAUSAL vs. EFFECTUAL REASONING

23. Causal versus Effectual Reasoning

24. “Slack” The world is full of “slack” – resources left over from other uses or simply lying around because nobody has paid attention to them. Slack can include anything from waste to empty space to loopholes in the law to buffers created for emergencies.

25. How to get around the money hurdle When dealing with your suppliers, think of negotiating the following: – Delayed payment terms – Payment as a percentage of revenue – Direct capital investment – Paying them in direct services (make them customers) – Using their process/assets/talent during their downtime (use their slack resources) – Getting them to guarantee a line of credit for you at their bank.

26. When working with customers Get a solid purchase order and then connect to a lender that will accept that as a collateral Use their commercial bank and piggy bank on their line of credit (slack resource) Get them to guarantee a line of credit Pre-sell them the first year’s worth of their purchases.

27. When going to investors Borrow money from them, don’t just take investment Pay them back as a variable cost against a percentage of revenues (not against time) Get them to guarantee a line of credit Take investment but negotiate for a “clawback” where you can earn back ownership if things go well.

28. When hiring employees, think about offering Options rather than cash Percentage of sales rather than base salary. All of these options can lower the cash-based entry barrier. And when all else fails, use your credit card!

29. Timeless rules of new venture bootstrapping Never buy what you can rent. Never rent what you can barter for. Never barter for what you can borrow. Never borrow what you can get for free.

30. Crazy quilt principle Metaphorically, effectual and causal approaches can be contrasted using the image of a quilt and a jigsaw puzzle. Unlike the puzzle solver, the quilter determines the pattern. A puzzle can come together in only one way. The quilter must decide who to work with and why, manage various coordination issues, and deal with the unexpected. The puzzle solver may work with others, but this means only that the puzzle may come together more quickly, not that it will be transformed in any way by the contributions of others. The uncertainty of what the quilt will look like when it is done, is resolved one commitment at a time. The quilt must be not only pleasing and meaningful, but also useful and valuable. The puzzle just needs to get finished; all the pieces must be in place.

31. Stitching together the crazy quilt using effectual logic

32. Hierarchy of effectual asks Others ask on your behalf Others ask you Ask strangers Ask who you know Ask you PILOT IN THE PLANE What made you want to work with me? How can we co-create with others? What can I do to make it a HUGE win for you? What else can we do together? With who else? LEMONADE What would it take for you to work with me? What can we co-create together? CRAZY QUILT Would you please work with me to build the venture? How can I make it an affordable loss for you? Can you introduce me to someone else? AFFORDABLE LOSS What is my affordable loss? Given my affordable loss, what would I like to pursue first? BIRD IN HAND Who am I? What do I know? Whom do I know? What resources are within my control? What is not? Given the above, what new ventures can I start? Immediately?

33. Hierarchy of effectual asks

34. Contingencies A contingency can be thought of as something that is a mere possibility, something that may or may not happen. Unexpected people – accidental interactions with other people. Unexpected events Unexpected information (Diagram on page 188)

35. The Effectuation Process

38. 37 You are Nils Bergqvist: What will you do next? Take an inventory of your available means. What do you have and what you can do based on what is available to help you build an ice hotel? Take an inventory of your available means. What else can you do besides build an ice hotel? How will you leverage partnerships to help you create an ice hotel (choose a specific example and plan out how you would approach the partner, and how would you structure the relationship)? What would you be willing to lose (your “affordable loss”) in working to build an ice hotel? How will you manage contingency (what are 5 possible unexpected events, and how can you use them to your advantage)?

39. 38 You are Nils Bergqvist on that rainy Monday morning. What will you do? Take an inventory of your personal means (Please put these onto a flipchart or overhead) – Whom do you know? – Who are you (what do you have)? – What do you know? You are out of money. You need to get a new business going. What can do right now based on what is available to you?

40. 39 You are Nils Bergqvist on that rainy Monday morning. What will you do? Imagine that you have the idea of building an ice hotel. (this is not what Neils ends up doing with the business, but be creative) What would you be willing to lose (your “affordable loss”) in working to build an ice hotel? How will you manage contingency (what are 5 possible unexpected events, and how can you use them to your advantage)?

41. 40 You are Nils Bergqvist on that rainy Monday morning. What will you do? Imagine that you have the idea of building an ice hotel. (this is not what Neils ends up doing with the business, but be creative) What possible partnerships might help create an ice hotel? Who will you talk with? What would you tell them?

42. 41 You are Nils Bergqvist three years later. At the rained-out ice art exhibition, you created igloos People slept in the igloos, and liked it The igloos became popular People started paying to come sleep in them The ice hotel is a real business, with a dozen rooms, and a waiting list of winter guests Take an inventory of your personal means – Whom do you know? – Who are you (what do you have)? – What do you know? You want to get a new business going What can do based on what is available to you? Try to come up with 5 possible business ideas you could initiate, and select one you (as a team) find the most appealing.

43. 42 You are Nils Bergqvist three years later. At the rained-out ice art exhibition, you created igloos People slept in the igloos, and liked it The igloos became popular People started paying to come sleep in them The ice hotel is a real business, with a dozen rooms, and a waiting list of winter guests How will you manage contingency (what are 5 possible unexpected events, and how can you use them to your advantage)?

44. 43 You are Nils Bergqvist three years later. At the rained-out ice art exhibition, you created igloos People slept in the igloos, and liked it The igloos became popular People started paying to come sleep in them The ice hotel is a real business, with a dozen rooms, and a waiting list of winter guests You want to get a new business going How will you leverage partnerships to help create something new? Who will you call first? What would you tell them?

46. Icehotel

47. Ice Hotel Jukkasjärvi, Sweden: 200 kilometres north of the Arctic Circle

72. Ice Hotel Jukkasjärvi, Sweden: 200 kilometres north of the Arctic Circle