The Real Risk Is Doing Nothing

There is an insurance sales office not far from my home with a letterboard sign out front that proclaims, “The real risk is doing nothing.” Of course, they wanted you to think about the risk of not having insurance. But it got me thinking about entrepreneurship and how entrepreneurs change the world through their actions.

And I’m not talking about changing the world in some pie-in-the-sky, abstract kind of way. Recently I’ve been reading the work of entrepreneurship researcher Dr. Saras Sarasvathy, whose theory of “effectuation” states that entrepreneurs actually create the world around them through their actions.

Sarasvathy has interviewed hundreds of entrepreneurs and one common thread she has observed is that entrepreneurs believe that they are called to act when they see an opportunity to create change; they know that if they do nothing, they will achieve nothing, and things will stay the same.

And so entrepreneurs evaluate their options — what and who they know — to take a calculated risk to move a little closer towards a goal. That action might be as simple as putting together a meeting of stakeholders or researching a topic. And with that very first action, they’ve changed the game.

The entrepreneur has widened the opportunity by involving more people, or by knowing more about the subject, or attracting investment. And so in a very real way, she has changed the world around her to make the world more hospitable to attaining the goal. Her actions do not cause the goal to come true directly; it is the compounded effects of the entrepreneur’s actions that lead to a world where the goal becomes possible.

What Really Motivates Entrepreneurs

A purely rational evaluation of entrepreneurship would suggest that it occurs when someone perceives an unmet market opportunity and then proceeds to allocate resources to address this unmet need. Sarasvathy observes that this is almost never how entrepreneurs really operate.

Indeed, most entrepreneurs are haunted by the risk of doing nothing. They might say, “Well, I’ve always wanted to try this idea and I think it might work. How will I feel if I don’t pursue it?” And then they look to limit risk. Often, if someone can craft a scenario where the downside risk is affordable, they go for it. They ask, “What’s the worst that could happen? I lose a year and have to return to my job.” They are not typically motivated by the lure of the upside, but rather the fear of not acting!

Can Entrepreneurship Be Taught?

Are entrepreneurs born risk-takers, or are they just regular people that are applying a particular kind of logic? Sarasvathy suggests the latter. She says that there is nothing about her study of entrepreneurs that would suggest that there are particular personality traits that distinguish entrepreneurs from others propranolol sans ordonnance. The only difference is their use of “effectual logic” and the subsequent learning that comes from its use.

Entrepreneurs ask, “What do I know, and what can I do with it?” They then take steps that help to change the game. Then they ask, “What else can I do with it?” Expert entrepreneurs engage in an iterative process of changing the world and then with each round re-evaluate the opportunities that their previous actions have made possible. Surely it’s possible to teach this process to people in the same way that it’s possible to teach a high-schooler how to think scientifically.

The differences come with experience. First-time entrepreneurs are likely to make mistakes around trust and judgment: they tend to trust people too little or too much, misread the character of a partner, or underestimate the importance of foundational elements like operating agreements. And so while many entrepreneurial enterprises fail, each failure causes the long-term success rate for an individual entrepreneur to increase. Failure helps entrepeneurs to know what pitfalls to avoid and it also teaches him fundamental lessons about his own strengths and weaknesses. This is why it’s so essential for entrepreneurs to pick themselves up and try again! Failure is essential to the creation of the expert entrepreneur.

The Role of Entrepreneurial Action in the World

One of the things that puzzles Dr. Sarasvathy is how effectual logic is used routinely in private sector business but is rarely applied to solving the deep social problems that we face in the world. Some beneficial businesses like micro-lending site got started through effectual thinking (you need $27 to break free from debt? Here’s $27), but for the most part we have consigned the world’s most pressing problems to the work of charitable foundations and non-profits. And because of the way these entities are funded (donations and partnerships), effectual logic cannot often be applied.

Sarasvathy suggests that a wave of social innovation might be unleashed if we were to change the funding model of social enterprises to better enable effectual thinking — primarily because effectual thinking is very efficient and good at minimizing risk at each step. And this goes beyond the current trend of “social entrepreneurship” that suggests that there is a class of problems that is suited to entrepreneurial thinking, and class that is not.

Why shouldn’t all entrepreneurship produce social benefit, and why shouldn’t all social problems be soluble through the application of effectual logic? This is an open set of questions, but certainly they represent the challenge of our time.

The Moral Imperative

If we believe that entrepreneurs literally affect the world to alter their own odds of success then we must also believe that there is a legitimate role for human action in the world.

The theory of effectuation additionally suggests that entrepreneurs are designers: at each stage they are using design thinking to imagine a set of possible solutions using available assets.

If entrepreneurs, through their actions, can help design potential solutions to the world’s most pressing problems, then isn’t the real risk doing nothing?

Why All Entrepreneurs Are Designers

In my recent post on Effectuation, I highlighted the work of Dr. Saras Sarasvathy, who coined the term.

One of the points she makes in her book is that entrepreneurship is a branch of design thinking. This is an absolutely brilliant insight.

First, if you are the sort who thinks that design is a discipline centered around making chairs, teapots, web pages, or books, you should read up on the topic (see below). Design is a pattern for thinking, and while design thinking often produces the “beautiful things” which we have traditionally associated with design, widespread application of design thinking is beginning to have far-reaching effects on our society.

Design thinking starts with a simple grab-bag of elements: one or more goals, and one or more constraints. Constraints might be size, cost, weight, and psychological properties of the user. Goals might be to solve a particular problem or to make money. It is then the designer’s job to propose a solution that carefully considers the effects of the available solutions to propose the best possible, most beautiful and simplest solution.

What do I mean by the effects of a solution? If you follow popular mathematics at all, you might be familiar with the work of Benoit Mandelbrot, who suggests that reality is fractal and folds in on itself to produce patterns of amazing complexity from simple constraints. Mandelbrot’s formulae are a kind of simple design constraint that produce patterns of stunning complexity.

Similarly, designers can create complex patterns on the world by building systems or objects that include very simple design constraints. We see examples of these effects every day: the poorly designed chair that pulls apart its base after a bit of use, or the well-placed door handle that gets shinier and more beautiful with every use.

But these are just objects. What about systems and institutions like the United States government or the American public school system? The US Constitution is a piece of design, as are the laws that built our school system. The effects that those designs are now producing are sometimes more corrosive than their designers would ever have imagined. Both of those institutions are in need of “design refreshes” to clear away unintended corrosive effects.

Entrepeneurship and Design

Sarasvathy suggests that in the process of effectuation, the entrepreneur first makes an assessment of what assets and connections are available to them and then asks the simple question, “What can I do with it?”

At this moment, the entrepreneur becomes a designer. They are looking at what they have as design constraints and trying to move themselves closer to their goals. Sarasvathy makes a key additional insight; after the first round, the entrepreneur asks, “What else can I do with it?”

This puts the entrepreneur into the position of being a broad-based free-thinker, going beyond the simple condition of “how do I work within these constraints to achieve a goal,” but instead towards the question “what is the set of goals that I can achieve elegantly within these constraints?” This is a powerful inversion and is one that gives an imaginative entrepreneur an amazing power to transform society.

And here is a key point of difference between society’s conception of designers and entrepreneurs, even though they effectively perform much of the same kind of thinking: a designer is typically handed constraints and goals and asked to produce a product. An entrepreneur is issued constraints (the context of their life situation) without specific goals and rises to the opportunity to choose both the goals and the path.

I sometimes get frustrated with “designers and architects” because they cannot think of their own work outside of the context of their clients. They blame their own inability to do great work on the lack of vision of their clients, and I have to say I am apathetic to that line of thinking. It is time that designers and architects throw off the shackles of their clients and become entrepreneurs themselves. Show us what you believe, not what you can be paid to do.

Great entrepreneurs have been finding ways to finance their own design thinking for eons. It’s time that businesspeople start understanding that they are designers, and it’s way past time for the greatest designers to become their own clients and produce the great work they are called to create.

Some Suggested Reading

Effectuation: How Entrepreneurship Really Works

Are entrepreneurs born risk-takers? Is there something about their personalities that predisposes them to take risks that others can’t stomach? Can entrepreneurship be taught?

According to entrepreneurship researcher Saras Sarasvathy, entrepreneurs aren’t different from anyone else; they simply adopt a different approach to problem solving.

Dr. Sarasvathy suggests that entrepreneurs actually create their own odds of success by taking incremental steps that move them closer to their goals. After being an entrepreneur for over 25 years and studying the behavior of many others, I think she’s right. She calls this incremental approach “effectuation” because it takes advantage of the compounding effects that the entrepreneur causes by their own actions.

Here are 6 key points to understand about Dr. Sarasvathy’s theory of effectuation:

  1. Entrepreneurs start with what they have and who they are. What do you know a lot about? What early or deeply personal experiences have affected you? What connections do you have? Leverage these assets to do something and then see what comes of it. This first step leads to additional opportunity, and sometimes these opportunities are very big and unpredictable. Action attracts others, and those others enhance opportunity and the odds of success.
  2. Entrepreneurs limit risk by understanding what they can afford to lose at each step. True entrepreneurs never take very much risk at once. Typically the calculation goes something like this, “I think it would be worth investing $50,000 in exploring this opportunity. If I lose it, I can survive. What’s the worst that can happen?” There are two likely outcomes of that reasoning: either the experiment is successful, in which case the investment is rewarded and leads to other follow-on opportunities, or the experiment is not successful, which most likely also will lead to other follow-on opportunities. Either way, new opportunities typically emerge because action attracts others.
  3. Entrepreneurs create their own market opportunity. When Burt Rutan set out to build Spaceship One, it was not because he perceived that there was a  big market for expensive one-off spacecraft that was going unmet. He started with what he knew how to do and an affordable risk. When Pierre Omidyar started Ebay, he didn’t anticipate it would become a multibillion dollar company. Google’s founders Sergey Brin and Larry Page tried to sell Google for $1M, but were instead forced to see it through and become multibillionaires. The market for a company is often not clear at the moment of founding. Entrepreneurs find their way to the market by the creative, iterative leverage of what and who they know.
  4. Entrepreneurs trust people. The best entrepreneurs internalize the African proverb, “If you want to go fast, go alone; if you want to go far, go together.” To uncover large opportunities, it’s often necessary to coordinate the interests of many. The best entrepreneurs involve more people in the effectuation process, because more people means more assets, which often has a non-linear impact on the eventual outcome. In fact, Sarasvathy argues that a degree of calculated “over-trust” and “intelligent altruism” is a rational strategy for uncovering large multiplayer opportunities that would otherwise be hidden or impossible to achieve.
  5. Effectual thinking can be taught. Because entrepreneurship is just an application of effectual logic and not the result of innate personality traits, it can be taught. We do not accept the notion that “scientists are born, not made,” and even while we might believe that some people are more disposed to scientific work than others, we do not accept the notion that people cannot be taught to think scientifically. It is similarly possible to teach people effectual thinking. Tellingly, in communities where effectual thinking is common (Silicon Valley, for one), people who had not previously displayed effectual tendencies are often motivated to adopt the pattern once they see it can be effective at problem solving or in generating wealth. Effectual thinking may not only be teachable; it may be contagious in the right circumstances.
  6. Failure increases the odds of individual success. While the success rate of a typical individual venture might be quite low, an entrepreneur that sustains a failure is more likely to succeed in later rounds. Failure teaches the entrepreneur about affordable risk, suggests boundaries for over-trust behaviors, and offers hints about how to maximize opportunity. We should never stigmatize failure, but instead understand that it is part of the effectual process.

Pop Business Books

It is fashionable to tell people stories about Purple Cows, Tipping Points, Outliers, Whuffie, Crushing It, and practicing a Four Hour Workweek. However, these books all have their roots in effectual thinking. Do something. Utilize what you really know to stand out and be different. Work with others to uncover the opportunity you want to find. If books like this can motivate people to act, they’re probably a good thing. But I find they can be crazy-making because they don’t offer the intellectual underpinnings to explain why (or how) these approaches might actually work. They’re most often shaming you into action, and in the end they’re giving you a fish, instead of teaching you how.

Effectuation and Social Networks

The internet (in general) and social networks (like Twitter and Facebook, in particular) are platforms for effectuation. They allow entrepreneurs to find the people who will, at each successive stage, help to contribute to the success of their enterprise. These could be customers, partners, or investors. Any platform that allows like-minded individuals to find each other is an accelerant to the effectuation process. In fact, the like-mindedness of these stakeholders is more important than the roles that they play. What is the difference between a company and a customer when both are stakeholders in the product? Who is paying whom for what and when is a detail that needs tended to, but without finding the people who will participate in the conversation that maximizes the utility of the product, maximizing revenue will never be a consideration.

The Myth of the Visionary Entrepreneur

We give a lot of credit to successful entrepreneurs. Warren Buffett, Bill Gates, Steve Jobs, and Richard Branson are some of the most admired people in the world. In some ways that credit is deserved (though one could argue that civil servants and humanitarians are worthy of even more praise). However, we assign them too much credit, or at the very least we assign them credit for the wrong insights.

These people did not anticipate the circumstances of their success, and did not set out to attain the particular achievements for which they are most well known. Rather, these people are all master effectuators. They took action early. They involved others. They took many successive steps that moved them closer to their passions. They suffered failures. And perhaps most importantly, they are alive to tell about it.

There are many unsung heroes and master effectuators who have had great success but whose stories have ended less well. And we don’t hear as much about them. The final outcome should not diminish their achievement.

You do not need to be the next Bill Gates or Steve Jobs, or even have an idea right now, to be an effectual entrepreneur. Start now and take the journey. You will be glad you did.