fiban's business angel training "effectuation in venture investing - do experts make...
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Robert E Wiltbank, Ph.D.wiltbank@willamette.edu
The Entrepreneurial ProblemFor Profit / Social / Otherwise
• Goals are rarely well known & specified
• The future is extremely unpredictable
• People don’t ‘follow instructions’
Effectual vs. Predictive Logic
GivenGoals
M1
M2
M3
M4
M5
Distinguishing Characteristic Of Predictive Logic:
Selecting various means to achieve pre-determined goals
New means may be generated over time
Distinguishing Characteristic of Effectuation:
Imagining & Selecting various goals using a given set of means
E2
E3
E
En
Given Means
M1M2
M3
M4
M5
E1
ImaginedEnds
Effectual vs. Predictive Logic
What CAN we do, rather than what SHOULD we do.
• Causal reasoning takes a particular effect as given and focuses on selecting between means to create that effect.
What should we do?
What can we do?
• Effectual reasoning takes a set of means as given and
focuses on selecting between possible effects that
can be created with that set of means.
6 Definition of one of several possible markets
Adding Segments/Strategic Partners
Segment Definition(through strategic partnerships & “selling”)
Market Definition
Segmentation(using relevant variables such as age, income, etc.)
Effectuation
Causation Model from Expert Managers
Targeting(based on evaluation criteria
such as expected return)
Positioning(through mktg strategies)
Effectuation as Used by Expert Entrepreneurs
CustomerIdentification(through Who am I?
What do I know?
Whom do I know?)
THE CUSTOMER
• Causal principles (red) generally taught in bschool
7
• Effectual principles are always in Blue
The Principles of Effectuation
8
• Means. The basis for decisionsand new opportunities:
– Who I am
– What I know
– Whom I know
Where to Start• Goals. Given (based on predictions)
• Expected Return. Calculate upside potentialand pursue the (riskadjusted) best opportunity.
9
• Affordable Loss.Calculate downside potential and risk no more than you can afford to lose.
Risk, Return and Resources
10
Partnership. Build your “future” together with customers, suppliers and even prospective competitors.
Attitude Toward Others
Competition. Set up transactionalrelationships with customers and
suppliers.
11
When things pop up
• Leverage Surprises.Surprises can present new opportunities.
• Avoid them. Surprises are not good
12
Underlying Logic & What to Do
To the extent we can predict the future, we can control it.
⇒⇒⇒⇒ PLAN
To the extent we can control the future, we don’t need to predict it.
⇒⇒⇒⇒ CO-CREATE
Prediction: efforts to position the venture for success based on forecasts of important market elements.
Control: efforts to directly construct important market elements, in order to lead the venture to success.
A Critical Difference
Prediction Control when facing uncertainty.
Predictive. The future is a reliable continuation of the past. Accurate prediction is possible and useful.
Transformative. The future as shaped (at least partially) by actions of all players. Prediction is neither easy nor useful.
5. Approach
Avoid Contingencies. Surprises are bad. Contingencies are managed by careful planning and focus on targets.
Leverage Contingencies. Surprises are good. New developments encourage imaginative re-thinking of possibilities and continual transformations of targets.
4. Contingency
Perform Competitive Analysis. Protect. Strategy is driven by potential competitive threats.
Form Partnerships. Grow. Strategy is created jointly through partnerships to create new opportunities.
3. Attitude
Toward Outsiders
Calculate Expected Return. Pursue the (risk adjusted) largest opportunity and accumulate required resources. Maximize upside potential.
Set Affordable Loss. Pursue interesting opportunities without investing more resources than you can afford to lose. Set a limit on downside potential.
2. Risk, Return and Resources
Set a Goal. Goals determine actions. For example, the goal of achieving X, will dictate I need person A with skills matched to X.
Assess Your Means. Take action based on what you have available:
* Who I am* What I know* Whom I knowExample: I have person A, I can achieve X, Y, or Z
1. Where to Start
Tactics for PredictionTactics for Control
Predictive. The future is a reliable continuation of the past. Accurate prediction is possible and useful.
Transformative. The future as shaped (at least partially) by actions of all players. Prediction is neither easy nor useful.
5. Approach
Avoid Contingencies. Surprises are bad. Contingencies are managed by careful planning and focus on targets.
Leverage Contingencies. Surprises are good. New developments encourage imaginative re-thinking of possibilities and continual transformations of targets.
4. Contingency
Perform Competitive Analysis. Protect. Strategy is driven by potential competitive threats.
Form Partnerships. Grow. Strategy is created jointly through partnerships to create new opportunities.
3. Attitude
Toward Outsiders
Calculate Expected Return. Pursue the (risk adjusted) largest opportunity and accumulate required resources. Maximize upside potential.
Set Affordable Loss. Pursue interesting opportunities without investing more resources than you can afford to lose. Set a limit on downside potential.
2. Risk, Return and Resources
Set a Goal. Goals determine actions. For example, the goal of achieving X, will dictate I need person A with skills matched to X.
Assess Your Means. Take action based on what you have available:
* Who I am* What I know* Whom I knowExample: I have person A, I can achieve X, Y, or Z
1. Where to Start
Tactics for PredictionTactics for Control
Effectual Decision Making
Kevin DeWhitt, Agilyx, affordable loss and co-creation
Padmasree Harish, Easy Auto: persistence, inter subsjective, commitments
Yan Cheung, ACN to Nine Dragons, transformation, $3,800, 10 years.
Take Stock of your means: who, whom, what.
What can you do for near zero; Or where you can afford to lose?
What commitments have you attracted and followed?
What surprises are you taking advantage of so far?
New means
New goals
Who I amWhat I knowWhom I know
Expanding cycle of resources
Means
Converging cycle of constraints on goals
Goals
What canI do?
Call peopleI know
Stakeholder commitments
Yngve’s Effectual Process
New means
New goals
Expanding cycle of resources
MeansEngineerSummer Travel BizRelationship with Sakada
Converging cycle of constraints on goals
Goals
What canI do?
Interact with people
Stakeholder commitments
New markets
Effectuation in Action
Take Stock of your means: who, whom, what.
What can you do for near zero; Or where you can afford to lose?
What commitments have you attracted and followed?
What surprises are you taking advantage of so far?
New means
New goals
Who I amWhat I knowWhom I know
Expanding cycle of resources
Means
Converging cycle of constraints on goals
Goals
What canI do?
Call peopleI know
Stakeholder commitments
Your Effectual Process
Distinguishing Effectuation in Venture Investing
• Select ventures that appear most capable of influencing critical market elements.
Create and Influence localized markets vs. compete in large “ideal” ones.
• Emphasize current means & capabilities rather than on plans for acquiring the “best” means to reach original goals.
1. Adjusting goals is less expensive than acquiring means.
2. Commitment is more important than Best.
• Encourage the venture to make smaller investments that get to cash flow positive rather than investing in the resources suggested by market research to “hit plan.”
Overhead trails growth
• Avoid prediction as the basis for investment decisions.Emphasize affordable loss over maximizing expected values.
Effectuation is related to a reduction in failures, but ‘homeruns’ appear random.
25
How we’ve learned
Do experts make decisions differently?
It appears so: very different from novices AND from expert managers.
Marketing Under Uncertainty: An Effectual Approach.
Journal of Marketing 2009, vol 73 (May) p1-18
with N. Dew, S. Read, S. Sarasvathy
Effectual versus predictive logics in entrepreneurial decision-making.
Journal of Business Venturing 2009, v24(4): 287-309.
with N. Dew, S. Read, S. Sarasvathy
26
How we’ve learned
Does the level of uncertainty actually matter?
It appears so: as uncertainty is greater, groups of strategic action, and their sequence significantly effect valuations.
Making Sense: Patterns of Competitive Actions and Valuation of New Firms.
Strategic Management Journal, 2010, v31(13): 1474-1497.
with V. Rindova, W. Ferrier
27
How we’ve learned
Does the use of effectuation affect evaluation?
It appears so: similarities between investors and entrepreneurs increases likelihood of investment and investment amount.
I Like How You Think: The Role of Cognitive Similarity as a Decision Bias
Journal of Management Studies 2011 48:7, p 1533-1561.,
with C. Murnieks, M.Haynie, T.Harting
28
How we’ve learned
Does the use of effectuation affect outcomes?
It appears so: effectual angel investors experience fewer failures and the same rate of homeruns.
Prediction and Control Under Uncertainty: Outcomes in Angel Investing
Journal of Business Venturing 2009, vol 24 p 166-133
with S. Read, N. Dew and S. Sarasvathy.
A meta-analytic review of effectuation and venture performance
Journal of Business Venturing 2009
S. Read, M. Song, W. Smit.
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