Tag: effectuation

Problems matching entrepreneurial theory to reported experience

How does entrepreneurship happen? Viewed from the outside, it can sometimes seem mysterious. But through the work of researchers such as Baron and Shane (2008), we can understand it as a process: an opportunity is spotted, a decision is made to exploit that opportunity, resources are gathered, plans are made and a venture is launched. All being well, the business generates profit and personal satisfaction for its founders, and continues for however long circumstances allow. 

The quest to understand entrepreneurship, in order to emulate it or teach to embark upon it, lends itself to segmentation of this process. If we can break down entrepreneurship into a series of sequential steps, we can see the pathway from business conception to realisation. And if we see it, we can analyse it, test it and comprehend it. The mystery becomes a recipe.

Conceiving of entrepreneurship as a process led to the development of my own process map, which stepped through nine stages of the entrepreneurial process: self-concept, idea generation, opportunity spotting, decision to proceed, resource gathering, launch, managing growth, harvesting rewards and exit. This provided a helpful framework for my narrative research interviews with creative industries entrepreneurs. 

I structured my prompting questions for these interviews in accordance with this framework. Then as I visualised those interviews as narrative timelines, I sought to map the interviewee’s entrepreneurial journeys along those nine stages to see how closely they aligned. This provided an opportunity to test the recipe; to see if the lived experience of entrepreneurship would follow a neatly segmented description of it.

It didn’t. The narrative accounts by entrepreneurs naturally jumped back and forward in time, mixing the chronology of events, but even when a rough chronology was established, these accounts defied linear categorisation. In my first few timelines, I struggled to align the narratives with the nine stage entrepreneurial process I had articulated. What I found in practice was that these stages frequently overlap, or merge into each other. 

Sometimes, the stages happen out of order. Some stages – such as decision to proceed, resource gathering and launch – were difficult to discern from each other, thus appearing from the narrative accounts to happen almost simultaneously. The formative stages of entrepreneurship were also concentrated closely at the chronological beginning of the narrative accounts – bunched up closely together on the timeline – and the “managing growth” phase dominated the timeline, often becoming a catch all category for the various ups and downs of running a business. Finally, no discernable pattern emerged through looking at the timelines through this segmented approach. I abandoned trying to map the accounts against this linear process, to concentrate on thematic analysis of the narratives themselves.

Effectuation – an introduction

There is a resonance here with Sarasvathy’s (2022) development of the theory of effectuation. Through her research on “expert” entrepreneurs (“a person who has, either individually or as part of a team, had founded one of more companies, remained a full-time founder/entrepreneur for ten years or more, and participated in taking at least one company public” (Sarasvathy, 2022)), she found that entrepreneurs’ eschewed a “causal” approach to entrepreneurship, taught within business schools and based in marketing studies. The causal approach supposes a logical, segmented approach to entrepreneurship based on market research. Such an approach flows sequentially through market definition, segmentation, targeting (based on evaluation of expected financial return) and market positioning. 

Through her analysis of the careers of expert entrepreneurs, Sarsvathy found evidence of a more organic, less linear process, characterised by a distrust of market research. She found that entrepreneurs tended to start with their own personal resources and skills: who they are, what and whom they know. She identified five principles of entrepreneurial expertise, based on a worldview that future events cannot be effectively predicted and that the future can be shaped by the actions of individuals.

• The bird-in-hand principle: a venture is committed within existing means (resources on hand) rather than being led by seeking to achieve a predetermined goal.
• The affordable loss principle: entrepreneurs are more likely to commit an amount of funds they are prepared to lose in support of a new venture, than calculating expected financial returns.
• The crazy quilt, or self-selection, principle: stakeholders involved are identified primarily by their willingness to commit to a project, and they help form the goals of the venture (not vice versa). Opportunity costs, competitive analyses and targeting specific resources are downplayed.
• The lemonade principle: named after the aphorism about “making lemonade out of lemons”, this principle describes an entrepreneur’s propensity to leverage surprises rather than trying to avoid or adapt to them.
• The pilot-in-the-plane, or co-creation, principle: they view that history is co-created through human action and that all stakeholders are active participants in creating a desired future.

Sarasvathy describes this approach as “effectuation”, a conceptual opposite of causation. In practice, the differences between causal and effectual approaches can be seen similar to the differences between structural planning and spontaneous decision making. As she explains:

Another example I like, particularly to illustrate the inverse relationship between means and ends is an effectual as opposed to a causal logic, is that of a chef cooking dinner. There are two ways the chef could organize the task. In the causal case, he selects a menu, comes up with good recipes for each item on the menu, shops for necessary ingredients, arranges proper implements and appliances, and then cooks the meal. The causal process starts with selecting a menu as the goal and finding effective ways to achieve the goal. In the effectual case, the chef begins by looking through the kitchen cupboards for ingredients and utensils. She then designs possible menus based on those ingredients and utensils. In fact the menu often emerges as she is preparing the meal. The effectual chef starts with a given kitchen, and designs possible, sometimes unintended, even entirely original meals with its contents. (Sarasvathy, 2022)

What Sarasvathy highlights is the difference between how entrepreneurship is supposed to happen, and how it actually plays out. This is evident in my research with creative industry entrepreneurs, where traditional markers on the entrepreneurship journey are obscured or missing entirely. Opportunity spotting, for instance, is often difficult to isolate and identify within the narrative accounts of entrepreneurship. A specific decision to launch is often not that at all, but instead a gradual transition into founding and running a business. Intentionality in these cases is often unclear. Such variations from the theoretical standard entrepreneurial process might be partially explained by the idiosyncrasies of creative practice, but are probably more prosaically explained as the difference between theory in practice.

How effectuation emerges in narratives of creative industries entrepreneurship

Effectuation may be a better match for the process of entrepreneurship in creative industries than the causal approach. Certainly, the five principles of effectuation can be seen within the accounts of creative entrepreneurship collected for my research. Jewellery designer Beth’s^* account of the genesis of her multimillion dollar business aligns with the bird-in-hand approach. Like many of those interviewed, she started her business with no specific goal. “I didn’t really think of starting a business,” she noted, going on to outline how her travels around Mexico led to a love of distinctive, silver jewellery and a desire to introduce it to Australia.

… at that time, Australia had, you know, silver jewellery from Thailand and Bali and it was a little bit ethnic, bit hippie sort of, you know. But I was bringing back jewellery that was sort of like Scandinavian design and quite heavy and silver and I just saw… well, I did what I wanted to do. I could, I could make a living out of this and keep on travelling to Mexico, which I wanted to do. But I also saw that there was an opportunity in the market for this sort of beautiful jewellery… So, I started very small. I sold in the markets in Balmain and in Paddington and I started doing gift fairs. I joined a jewellery group, a buying group, they all thought I was a bit crazy. But, you know, it was all the slow growth, you know. And it was all, it was a lifestyle for me in a way. So, I didn’t from that perspective, I didn’t decide to start a business.

Her assertion that “I did what I wanted to do” is consistent with the effectual entrepreneurs’ approach of starting with who they are and what they have at hand. Note also the small start within local markets and gift fairs. And although not explicitly stated, that small scale approach echoes the affordable loss principle; often the founding activities of creative industries businesses are small because capital is scarce and the amount which can affordably be lost is close to zero.

In some entrepreneurs’ accounts, the potential loss is made more affordable by transitioning from employment. Like Beth, architect Liz didn’t think of the start of her solo practice as starting a business. But a period of unstable employment led her to supplement that with projects of her own.

I think I had two private jobs that I was just doing on the side in my, in a very slow time frame. And so I went back to [my boss] and said, “how about if I rent my desk space and this computer from you and then I can do my projects here and maybe do them more quickly and then just charge myself out to you on an hourly basis for the time I’m doing your work.” … 

Anyway, the very day I started being in control of my diary and when I could go where and do what, I just realized I don’t think I’m ever going to become an employee again. It was just kind of, I don’t know. It was just this liberating thing and so as I worked into that and worked out that I don’t think I can go back to being an employee.

Similarly, graphic designer Kira was working in an agency, whose owner refused to update the computer equipment Kira could see was going to become essential to her work. This sparked her desire to start her own business, but two factors which mitigated the chance of financial loss, also influenced her. One was the opportunity to share rental expenses and the other was confidence in her ability to get another job, if the business failed.

There was a freelancer that I had coming in quite regularly, you know, within my role in that business, and she came to me one day and said… “this other design business has got, has just moved into a new space. They’ve got like, this great loft space. I’m actually going to move out of here, go to that space.”

…So all of a sudden, this opportunity opened up, that I could move into the same space with her. We could share the cost, you know and all of a sudden like literally within three weeks. I was starting my own business.

It wasn’t something I’d been thinking about for a long time… it was a very quick decision to go. I need to do this by myself. And the worst thing that can happen is, you know…. if I get, if I had no work. I mean, I hadn’t done anything, any thinking about who I would do work for, but the worst thing is I’ve, you know, educated myself. I’ve learnt the tools, I’ve trained myself. So if I don’t get any work and the business doesn’t go well, then at least I’ve got the skills and I can go back and work for someone else.

Kira’s observations that “it wasn’t something I’d been thinking about for a long time” and “I hadn’t done… any thinking about who I would do work for” reflects the crazy quilt principle that detailed research and preparation are not standard for entrepreneurs to undertake prior to launching. 

Games developer Henry’s account reflects some awareness of the external environment when starting his business with fellow students, though again no specific research. His narrative also shows another aspect of the crazy quilt principle, that of collaborating with stakeholders who are present and willing, in this case a set of fellow students he had only recently met.

Before the global financial crisis, [my city] used to be a mecca for games, so it had, I dunno, four or five, maybe up to six significant size studios with several hundred employees each. So, [I shifted my studies] to sound for games because that seemed like a logical choice. Lots of game studios. I’m a sound guy. They need sound guys, maybe we can make that work. So, in my last year, I did extra game degrees and extra, extra gaming units to try and turn that into something more.

But it was just as the GFC was happening and when the dollar hit parity, all these businesses went bust basically, because their entire business model was $2… no, $1 American gets you $2 Australian work, so once the dollar hit parity, that was not a business model anymore. And so, the market was suddenly saturated with people who had decades of experience and who were kind of desperate for work. And … I was like, uh, this is not likely to work out for me … 

So, the government had the New Enterprise Incentive Scheme at the time. And so, we went on to that. I mean, partially it was, we all just finished from uni, so no one had spouses or kids or anything there. So, we could do the fully bootstrapped, no investment, just kick into it because the stakes were so low. Like everyone, everyone lived in share houses and whatever, rent was not a huge problem…. So, I barely knew the people I started the business with at the time. I’d known them for six months, but probably only an hour a week or less just for that six months but they, they all knew each other pretty well.

Henry’s narrative embodies the first three of Sarasvathy’s principles, and it also touches on the fourth. He was able to make lemonade out of the lemons of a shifting global economy and an overcrowded jobs market. There are numerous examples of this approach in the narratives collected, and for many, COVID has recently provided the catalyst for innovative problem solving. Susi’s business, which provided art classes for children, initially floundered: 

In COVID, I had to close for three months in COVID and parents were… “what can you do? Can you go on Zoom, can you…” you know, whatever. So I started making these creative packs: weaving, kits, and tassel kits, and all just very… craft kits, basically. Art journaling kits and then the state government decided that parents could use their [Creative Kids] voucher on supplies and online tutorials. So, as long as I had an online component, they could buy things from me.

That was the most enormous part of my business last year. So, in the, the, November and December when every parent got an email from Service NSW saying you haven’t spent your voucher yet, they all like I was getting, some days I had 30 orders in a day, it was nuts. So, completely, like, that’s, you know, that’s part of, that’s a big part of my business now, and it’s nothing I ever thought would be a part of my business. It was a response to… it was a survival thing with COVID, like I needed to sell stuff.

The final principle of effectuation, the pilot-in-the-plane, emphasises the role of human action in shaping the future. As an entrepreneur quoted by Sarasvathy put it, “I can either ask, how can I build a venture that will succeed in this world, or I can ask, how can I build a world in which my venture will succeed?” (Sarasvathy, 2022) Whereas large scale entrepreneurs may have the resources and influence to grow consumer demand for a product, to build an environment which suits a business might seem a difficult task for small scale entrepreneurs.

However, the accounts of creative entrepreneurs chime with the effectual approach of prioritising the product they want to create, over creating a product based on predicted future demand. 

This is demonstrated in a number of ways by interviewees for this research. Children’s choir founder Eleanor, was driven to create a product untested in the market, by her love for the artform: “I, you know, I, it needed to be created. There was a, you know, children’s choirs, I thought, they’re a great thing. There aren’t any in [my city]. Let’s make one!”. For Edward, making sunglasses out of recycled plastic bottles was driven by a commitment to his children to take action to improve the environment. He actively avoided a minimum viable product (MVP) approach which would take account of predicted consumer demand.

People say, build a MVP…. You can’t build something that’s a fashion accessory that needs to prove to people that it’s trash here, beautiful, good here. Because they’ll just judge you on what it is. And so, it’s really easy in software to build MVPs and I love really, reading all these amazing stories of brands like Dropbox, their minimum viable product was a, was a video that explained the products and all these people signed up. [ ] Yeah, you know, we, we couldn’t do that. People were going to judge us on what they saw, so we had to get it to a certain level from day one, because you can’t, we had to just do it. Whether the experts agree or disagree. We just had to make it and it had to be a sellable item.

There’s a double meaning in Edward’s assertion that “We just had to make it and it had to be a sellable item.” In one sense, he’s making the point that he had to go through a long process of trial and error creating physical prototypes of his sunglasses, and this couldn’t be done digitally or cost-effectively. But in another, he’s expressing the pilot-in-the-plane’s principle of taking action to create a world in which his product can succeed. He had to make a sellable item to fulfil his commitment to his children but to also show the market that such a product could exist.

Consider also filmmaker Darcy’s struggle to get support for the genre feature films he wanted to produce, and his response.

The pilot-in-the-plane principle is not necessarily about being pigheaded (as Darcy puts it), or about proceeding without the support of stakeholders. Darcy instinctively distrusted the funding body’s view that there was not a market for low budget genre films, and went on to raise the budget through other means. That his films found considerable audiences and recouped their budgets is vindication of his belief, but in his procurement of investors and supporters for his vision, we can see a determination to build a world in which his venture would succeed.

Conclusion

To return to my opening question: how does entrepreneurship happen? Effectuation is an attempt to answer this, by reconciling theories of entrepreneurial process with what happens in practice. And the answer is something like, “not how the textbooks say it happens”, and there is a lot more instinct, improvisation and spontaneous decision making than they suggest.

For me, there is great value in an approach which attempts to explain the lived experience of entrepreneurship, and something reassuring in observing elements of effectuation theory in the accounts of creative industry entrepreneurs. It corresponds with the data emerging from my research, which indicates that for creative industry practitioners, entrepreneurship is often unplanned, stop-start and experimental. This suggests that effectuation as a characteristic of creative industry entrepreneurship is a promising area for future research.

*Pseudonyms used throughout.

Baron, R. A., and S. A. Shane. 2008. Entrepreneurship: A Process Perspective. Thomson/South-Western.

Sarasvathy, S.D. 2022. Effectuation: Elements of Entrepreneurial Expertise. Edward Elgar Publishing.