Risk-taking is celebrated as the essential DNA of entrepreneurship. But is the risk-taking mindset an advantage or a disadvantage to successful scaling?
In the early 2000s, Dr. Saras Sarasvathy of UVA Darden conducted a series of cognitive studies considering two main questions:
• “What commonalities and differences exist in the decision-making process of a group of expert entrepreneurs?”, and
• “In the face of non-existent or not-yet-existent markets, what underlying beliefs about the predictability of the future influence their decisions as they build a new venture?”
Her key discovery was that successful entrepreneurs have a distinctive mindset, related to how they viewed the future.
AN IDEA IS NOT A GOAL
The conventional approach to entrepreneurship is that you have an idea, you set it as a goal, then you build a plan to get you from the present moment to the desired goal. In the startup world, this translates to the traditional development path from idea to plan (or a pitch deck), then you go get (or beg for) money to execute your plan. Seems logical, isn’t it?
This mindset assumes you can identify the strengths, weaknesses, opportunities and threats which you will encounter, that you “know your knowns” and your “known unknowns” — that the future is knowable.
But it’s always the “unknown unknowns” that get you. Because in reality, the future is unknowable.
IDEAS ARE A STARTING POINT
Dr. Sarasvathy’s key observation is that successful entrepreneurs understand that the future is unknowable, so instead of using their idea as the goal, they use it as a starting point to explore potential outcomes. This approach, called effectuation, is the cognitive foundation of the Lean Startup methodology.
Through effectuation, you iterate from the status quo, taking considered step after considered step, using what you currently have as resources in hand, combined with what you learn, who you meet, and the change in how you perceive your environment, to iterate to a new, desirable and positive outcome.
INVEST ONLY WHAT YOU ARE WILLING TO LOSE
Effectual-minded entrepreneurs minimize the downside by investing only what they are willing to lose. This behaviour is the reverse of that of risk-takers, who invest based on their perception of what they could gain if they succeed.
This is where the conventional startup mindset of “take big risks to gain big rewards” hits the wall of reality. Too few ventures founded by big-risk-taking entrepreneurs survive their first contact with the market because their collective mindset is the opposite of what successful entrepreneurs do. Stop swinging for home runs and focus on singles. Keep your eyes open for undervalued opportunities you can act on with the means at hand.
The effectual-minded entrepreneur takes for granted that the future is unknowable. Their inclination to decide based on avoidable loss means they will focus more on avoiding things that don’t work than trying to find out what does work. This is not being risk-averse, it’s being opportunity-alert.
The startup world’s focus on “disruption” comes from a misunderstanding of what this term really means. Disruption starts by providing value to an underserved and undervalued segment of the market. Start by seeing where you can add to the existing value creation chain in a way that no one else is willing to do. Build credibility, capability and cashflow so you can first become a market influencer. Then, when you have momentum, you can recognize the next undervalued opportunity to move the market in the direction you want it to go – and iteratively make your way to becoming the new market leader. Scaling into market leadership requires a maturity to do the work and to resist taking risky shortcuts.
THE FUTURE IS UNCERTAIN
We are moving into a post-global age, where the structures and norms built to support post-WWII prosperity are being swept aside and replaced by…whatever, your bet is as good as mine because there are too many unknown unknowns. In this uncertain, unpredictable and unforgiving economic future, big-risk-takers will be at a distinct disadvantage. By learning how to manage uncertainty, effectual-minded entrepreneurs will be in a much better position to scale resilient and profitable businesses.
For more information:
Dr. Sarasvathy’s main site on Effectuation: http://effectuation.org
Davender’s presentation: “Effectuation: Managing Uncertainty by Optimizing Opportunity” on Slideshare: