What makes expert entrepreneurs succeed? Only 40 percent has written a business plan.
In an interesting article at Inc.com by Leigh Buchanan on the 1st of Feb 2011 quotes are made out of a case study performed by professor Saras Sarasvathy at the University of Virginia’s Darden School of Business. The article and the case study is about how successful entrepreneurs go about when they have an idea to explore. Some comments are truly hilarious and spot on, but also wakens your thought on how venture capital work.
The study has asked 245 of the most successful entrepreneurs in the US to participate in the study. Out of those 45 have responded positively to participate in a two-hour recorded interview where they got questions around the topic what they would do and how they would reason if they were to start this imaginary software gaming company.
Sarasvathy defines two types of entrepreneurial thinking; the casual and the effectual reasoning, where the stereotypical “wild” master or expert entrepreneur is using mostly effectual reasoning and adapting to situation and environment and the successful corporate manager with MBA-type of educations in their history is using casual reasoning. Rookie entrepreneurs use a mix or change between the two types as they grow their business.
The description Sarasvathy uses for effectual resoning is; “Brilliant improvisers, the entrepreneurs don’t start out with concrete goals. Instead, they constantly assess how to use their personal strengths and whatever resources they have at hand to develop goals on the fly, while creatively reacting to contingencies.” The description of casual reasoning is; “They set a goal and diligently seek the best ways to achieve it“. It is claimed in the article that “angels and seasoned VCs think much more like expert entrepreneurs than do novice investors”.
This last sentence I find a little bit odd. I haven’t met or read about one investor, VC or angel that uses the more effectual reasoning. They all have used very much MBA-like thinking and reasoning. It’s all about having business plans, market research, demand, customers signed etc. in order, before they invest. It is very little about believing or acting in effect, as an interpretation of “effectual reasoning” might be. All investor’s that I have talked to have been mentioning “minimizing risk” when they explain how their line of business works. Which of course sounds pretty smart in some ways.
A very interesting reference to another study made by Inc. themselves is made in the article. It is there claimed that out of 500 CEOs chosen by Inc. to study, they found that 60 percent had not written business plans before launching their companies. Just 12 percent had done market research. This really blows my mind!
I recommend reading the article, it’s great fun to read the expert entrepreneur’s comments to the case study questions.