Posts Tagged ‘entrepreneur’
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This is Part 2 of the series What Makes Entrepreneurs, Entrepreneurial? If you missed Part 1 check it out here as this will be a continuation of the last articles ideas.
To sum up Part 1 there are two main types of logical reasoning when solving complex problems: Casual Reasoning and Effectual Reasoning. Casual Reasoning deals with knowing the set of means or inputs and planning effects given these inputs. This is the prevailing thought process taught by universities and management training programs around the world
Effectual Reasoning on the other hands starts with who you are, what you know, and who you know then imagines the possibilities and combinations, then jumps directly into execution without much regards to planning at all. This is the thought process favored by entrepreneurs.
In Part 1 we laid out the two forms of reasoning and began to explain the processes behind effectual reasoning. In Part 2 I will explain some principles of effectual reasoning and explore the logic behind the two reasoning methods.
Principles of Effectual Reasoning vs. Casual Reasoning
|Effectual Reasoning||Casual Reasoning|
|Focuses on affordable loss||Focuses on expected return|
|Built upon strategic partnerships, teams, and customers||Depends upon competitive analysis|
|Stresses the leveraging of contingencies||Emphasizes pre-existing knowledge and prediction (Eliminating contingencies)|
The three principals we will delve into are:
- Affordable loss principle
- Strategic partnership principle
- Leveraging contingencies principle
1. Affordable Loss Principle
While managers are taught to analyze market and choose segments with the highest returns, entrepreneurs tend to find ways to reach the market with the minimum expenditure of resources such as time, effort, and money. Experienced entrepreneurs tend to not believe in market research and would rather take the product to the nearest possible potential customer even before the product was built.
This falls right in line with the entrepreneurs’ tendency of action and just going for it, instead of sitting down and planning and asking themselves questions. This leaves the entrepreneur open to positive randomness and allows the entrepreneur to maximize flexibility of what ultimate direction to take since the product/service has not been designed and built yet.
2. The Strategic Partnership Principle
Effectual reasoning leads the entrepreneur to look for strategic partnerships instead of doing a detailed competitive analysis and broad based market information gathering. Since the entrepreneur wants to limit to expenditure of resources (affordable loss principle) and launch their company with the lowest levels of capital outlay, entrepreneurs will look to key partnerships and customers very early on even before the product is built.
An example of this is obtaining pre-commitments from key stakeholders to help reduce the uncertainty in the early stages of creating a venture. I experienced this firsthand during an entrepreneurs pitch to a group of top decision makers at our University where the entrepreneur asked for a non-binding commitment at the end of his presentation. If the entrepreneur receives a positive response and a good number of pre-commitments then he will launch his venture and if not than he hasn’t expended any capital in designing his product, only his time.
3. Leveraging Contingencies Principle (or as I like to call it the Lucky Break Principle)
This principle is the heart of the entrepreneurial thought process in turning the unexpected into opportunity. Great entrepreneurial firms are products of contingencies (unexpected randomness that occurs) and the entrepreneurs inside the firm taking advantage of these particular events.
Although it is not the specific contingencies themselves that shape the ventures but it is how the entrepreneur leverages these contingencies that forms of the core of effectual reasoning. The main takeaway is that all surprises are not bad, and surprises whether good or bad, can be used as inputs into the new venture creation process. Casual reasoning tends to focus on the avoidance of contingencies as much as possible.
The Underlying Logic Between Effectual and Casual Reasoning
- Casual reasoning is built upon the logic of “To the extent that we can control the future, we can control it.”
- Versus effectual reasoning is built upon the logic of “To the extent that we can control the future, we do not need to predict it”
This difference in belief opens up the questions: Is the future largely a continuation of the past? To what extent can human action actually change its course?
Casual reasoning favors the belief that the distribution of events can be discovered over time, and the learnable future becomes predictable over time. This is why academics and practitioners spend an enormous amount of time and resources creating predictable models.
On the other hand effectual reasoning favors the belief that the future is not “out there” to be discovered but it is created through the strategies of the players within the system. This might be just a hopeful belief rather than the reality, and many entrepreneurs in the real world fail.
But on the whole entrepreneurs are in the business of creating the future, which entails having to work together with a wide variety of people over a long period of time. Which is why effectual logic is people dependent since the people the entrepreneur brings together to transform the inputs of human imagination into the fulfillment of human aspirations through economic means.
This is why people in the business of venture creation (venture capitalists, lawyers, angels, etc) have always agreed that finding and leading the right people is the key to successful venture creation. And these “right people” need emotional ownership in the goals of the venture and can only be incentivized by the belief that their effects they create will embody their deepest passions and aspirations while enabling them to achieve their best potential.
Have you ever wondered why people would take deep pay cuts, stressful work environments, and social work life imbalance? The paragraph above is the reason why. No amount of money can satisfy the soul of an entrepreneur working in a meaningless job, the entrepreneur craves to be in a place where they can make a large impact and feel deeply connected to the greater mission of the company.
To end Part 1 and Part 2 of this series lets revisit the question what makes entrepreneurs, entrepreneurial? Entrepreneurs are entrepreneurial because they think effectually, the believe in a yet-to-be made future that is shaped by human action thus have no need to predict the future, and since there is no point of trying to predict the future they strive to work and understand with the people who are engaged in the decisions and action that bring our future into existence.
What do you think shapes our future? Please share any thoughts or stories in the comment section below!
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I just finished reading the most eye opening and inspirational papers I have ever seen before. The paper is called “What makes entrepreneurs, entrepreneurial?” and it was recommended as one of Vinod Khosla’s top reads.
If your unfamiliar with who Vinod Khosla is check out his wikipedia entry http://en.wikipedia.org/wiki/Vinod_Khosla . He was one of the original founders of Sun Microsystems, venture partner at Kleiner, Perkins, Caufield & Byers and visionary of the silicon valley revolution and currently the greentech revolution.
I think it’s safe to say Vinod knows a thing or two about entrepreneurship, and this paper he recommended completely blew my mind away. It perfectly describes the logical processes entrepreneurs go through vs. the logical processes of typical management/non-entrepreneurs apply. After carefully reading every sentence of the paper I thought long and hard about the messages presented, shared it with my friends, had a discussion about it, and now I want to share it with all of you.
There is so much good info in here this will be a part 1 of 2 series where I will lay out some of the main ideas and some interpretation on my behalf.
What Makes Entrepreneurs, Entrepreneurial?
In solving complex problems, such as starting a company, there emerges two main types of thinking. The first of which is casual reasoning.
1. Casual Reasoning is the process in which you begin with a pre-determined goal and a given set of means, and the process seeds to determine the optimal (fastest, most efficient, cheapest, etc) alternative to achieve a certain goal. This type of reasoning is taught in general to all MBA programs around the world and in every functional area of business. If we diagramed casual reasoning this is what it would look like:
2. Effectual Reasoning on the other hand is the complete inverse of the casual reasoning process. Effectual reasoning does not begin with a specific goal in mind rather it begins with a set of means and allows goals to emerge over time from varied imaginations and aspirations. If we diagramed effectual reasoning this is what it would look like:
A good metaphor is casual thinkers are like great generals (Ghenghis Khan) seeking to conquer fertile lands and effectual thinkers are like explorers (Colombus) setting out onto voyages into uncharted waters.
People can use both types of reasoning at different times but entrepreneurs have a greater tendency to use effectual thinking over casual reasoning. While both types of reasoning require domain specific knowledge and training effectual reasoning demands something different: imagination, spontaneity, risk taking, and salesmanship. In my opinion this is why I believe entrepreneurs have a greater tendency to be generalists and insatiably curious in many different topics and fields.
To end part 1 in this series here is an outline of the effectual reasoning process
Effectual Reasoning Process
Entrepreneurs begin with three categories of means (inputs to figure out effects/goals), which are:
1. Who they are – tastes, abilities, traits
2. What they know – education, training, expertise, experience
3. Whom they know – social and professional networks
Using these three means or inputs entrepreneurs then imagine the possibilities and implement possible effects that can be created through these possibilities. Entrepreneurs most often start very small with the resources and means closest at hand and move directly into action without any elaborate planning. In my opinion this is why I believe entrepreneurs jump straight into projects without considering many of details involved and prefer action over thinking things through.
Contrast this to casual reasoning, which involves careful planning and subsequent execution, rather than jumping straight into execution. With effectual reasoning plans are made, unmade, revised, and rewritten through action and interaction with others on a daily basis. Through the effectual reasoning process eventually certain emerging effects come together to form clearly achievable and desirable goals like landmarks that point to a path in the wilderness.
However in the classroom setting we teach entrepreneurs a very casual process of thinking: idea – market research – financial projections – team – business plan – financing – prototype – market – exit with a caution that surprises will come along the way.
But the seasoned experienced entrepreneur knows that surprises are not deviations from the path but instead are the norm from which one learns to form a path through the jungle. The unexpected is the stuff of entrepreneurial experience and transforming the unexpected into the utterly mundane is the special domain of the entrepreneur. This is why I believe that entrepreneurs tend to excel in the face of chaos and pressure, and everything seems to turn out ok (when you succeed of course) even through from the outside the situation looks like utter madness.
This concludes part 1 of the series, in the next part I will write about the principals of effective reasoning vs. casual thinking, the underlying logic of these two reasoning methods, and how you can learn and apply these methods to whatever you are doing.
Leave a comment and let me know what you think of the series so far!
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With June around the corner students around the globe will be graduating from college and making a major decision in their lives: Do I get a corporate job? Or do I choose the path of entrepreneurship and create my own career path?
With my graduation date set for June 14th I have been contemplating the same questions over and over again, and I’ve heard a ton of advice from a ton of different people. I wanted to share some of the best I’ve heard and share the story of what I am planning on doing.
- The textbook path to life
- The throw out and write your own textbook path to life
Path #1 – The textbook path to life is a very familiar path, this is the path where you go to college, strive to get good grades, work a few internships, interview with a lot of companies, pick a good stable corporation, continue working the corporate ladder, have a successful life, and be happy.
This is definitely the path of least resistance. The positives are you can work your 9-5 and then after work completely forget about everything related to work and peruse your own interests whether they are partying with friends, traveling to cool places, a hobby, keeping up to date with sports, etc. You work hard during “work time” but your work and life outside of work are kept separate. Life is somewhat predictable, your emotions are easily controllable, and your mind is clear and free of all the worries of work and its much easier to enjoy.
Path #2 – The throw out and write your own textbook path to life is the scary path to life. This is the path where your family and close friends ask what are you doing with your life?! This is the path that has no set rules, no set boundaries, and it is very unique to each person.
This is definitely the path of most resistance. The positives are you can do what you love and express your values & beliefs through the career path you choose. You have the opportunity to make a huge difference and impact to the world but this potential comes at a cost. In this path life unpredictable, your emotions become much harder to control and much more volatile, and the line between work and life can easily become blurry if not cross over completely.
Jun Loayza, a new friend of mine, who I met at UCLA wrote this very intriguing post on the subject:
In it he shares his personal experience of corporate life and his transition to the entrepreneurial life. Here are a few things I took away from his post:
- The corporate life has lower responsibility (there whole team of people who can pick up the slack)
- The corporate life was comfortable and relaxing
- The corporate life did not use his talents to the maximum capacity
- The startup life is a much more riskier proposition
- The startup life is much more time intensive (Jun works 100+ hours a week)
- The startup life forces you to push yourself to your limit and take on much more personal responsibility (there is no safety net)
- The startup life is not better than the corporate life and vice versa, it all depends on what type of person you are and the situation you are in.
She wrote an interesting post touching on the corporate life vs. entrepreneurial life with the focus group of the top engineering students from one of the worlds top Universities, Stanford.
Here are some interesting points I got from the article:
- Working for a big corporation leads to a narrow skill-set
- The skills required for entrepreneurship are “frighteningly” wide
- Working for a startup might be a better preparatory step to working in a corporation
- Consulting and corporate experience is valuable for a short period of time
I definitely subscribe the lifestyle of entrepreneurship (hence the name of my blog) much of which has been installed in me though my experiences growing up and especially during college at Cal Poly, check out my About Page for more about these experiences. With graduation coming up in June though I am now finally starting to realize the huge risk I am taking and the amount of work I am going to need to do.
However I think I have finally decided what I want to do (at least after I graduate!) but I can’t release all the info about it now. More details to come soon…
What path did you take? How did you make your decision? Share your story in the comment section!
Inspirational Keynote Speech on Entrepreneurship – Ben Casnocha at the UCLA Entrepreneurship Tradeshow
This last Thursday I was a judge for the UCLA Entrepreneurship Tradeshow and the keynote speaker for the event was one of my favorite writers Ben Casnocha author of My Start-Up Life. I’ve heard a lot of successful entrepreneurs speak before and I was expecting Ben to speak about similar things but WOW I have to say his keynote speech was one of the most inspirational talks I have ever seen and I wanted to share his talk with everyone. Here is the transcripted outline of what he said:
Ben started off by reciting the words from the “Think Different” video
My favorite quote from that video: “People who are crazy enough to think that they can change the world are the ones who do.”
Then Ben talked about the 2 main philosophies or life paths
1. The Textbook Approach to Life or Path of Least Resistance – Go to a good college, get good grades, get a good paying stable job, climb the corporate ladder, live happy, and have a successful predictable life.
2. The Throw out the Textbook to Life or Hard Path – This is where you take your own blank book or canvas and try to paint a picture that uniquely fits you like a glove. In this path you don’t follow the status quo and you take on opportunities that interest you and experience the journey of life.
Then Ben proceeded to make 3 main points in his talk:
What does Entrepreneurship mean? The common answer is it means starting a company but that is only one small piece of entrepreneurship. Entrepreneurship is much more broad that starting a company, its more of a life philosophy than a business one. In short it’s being the CEO of your own life.
So what traits do entrepreneurs tend to have in common? There are 4 of them:
1. Impact – know your ideas/beliefs are going to affect others
2. Love to Screw Around – Don’t respect the status quo and you don’t strive for a 4.0 GPA (The average GPA of self made millionaires is a 2.6 GPA)
3. Optimism – Entrepreneurs tend to be relentlessly optimistic. Its good to have a bit of self-delusion that you can personally change and affect reality.
4. Persistence – The only universal “trait” of successful entrepreneurs
Entrepreneurs have a relentless commitment to self-improvement in all mental, spiritual, emotional, and physical aspects. Ask yourself did I go to bed smarter than when I woke up?
Here are 4 things can you do to improve yourself:
1. Improve your soft assets – these are relationships, knowledge, and connections.
2. Creativity – Recognize that you are creative even if your not “artistic”. Humans are the most creative creatures on the planet and its important to recognize the interplay of the left and right brain.
3. Opportunities – The best way to find opportunities is to shut up and listen, and expose yourself to randomness.
4. Mentors – The worst thing is to go up to a potential mentor and ask, “Will you be my mentor?” It is like going up to a new acquaintance and asking “Will you be my friend?” Instead seek out potential mentors, don’t ask them to be your mentor, develop your relationship for the long term, and realize a deep connection will not happen in weeks but in years. And never be afraid to ask out a person to coffee to learn from them and pick their brain.
The most important point is ACTION. 99% of people bitch about problems and the other 1% do something about them and learn by doing is the absolute best way to learn.
Ben collected these 4 quotes to inspire him to action:
1. “We regret the things we don’t do more than the things we do”
– Mark Twain
2. “We have a strategic plan and its called doing things”
– Herb Keller
3. “Blame Nobody. Expect Nothing. Do Something.”
– Bill Parcells
4. “But I think it is very important for you to do two things: act on your temporary conviction as if it was a real conviction; and when you realize that you are wrong, correct course very quickly.”
– Andy Grove
The 3 main takeaways from Ben Casnocha’s Keynote were:
1. Think like an entrepreneur
2. Commit yourself to self-improvement
3. Start NOW