Effectuation Theory of Entrepreneurship
Dr. Saras Sarasvathy is a business school professor at the University of Virginia who proposed the Theory of Effectuation in the early 2000s.
After studying a sample of expert entrepreneurs, she identified a specific "logic" they use to solve problems. Effectuation is considered a process theory because it explains how entrepreneurs create new ventures.
Effectuation vs. Causation
Effectuation logic contrasts with "Causation" logic.
- Causation (Managerial Thinking): Starts with a specific goal and then acquires the resources needed to achieve it. (e.g., "I want to build a $10M app, so I need to raise $2M.")
- Effectuation (Entrepreneurial Thinking): Starts with the resources available today and imagines what goals can be made from them. (e.g., "I have a laptop and coding skills; what can I build right now?")
The 5 Core Principles
Sarasvathy suggests that expert entrepreneurs rely on five core principles:
- 1. Bird in the Hand: Start with what you have. Don't wait for the perfect resources. Look at who you are, what you know, and whom you know.
- 2. Affordable Loss: Focus on the downside risk. Don't obsess about predicting "windfall profits." Instead, ask: "How much can I afford to lose if this fails?"
- 3. Crazy Quilt: Form partnerships. Weave potential deals with partners (customers, suppliers) who are willing to commit, rather than worrying about competitive analysis.
- 4. Lemonade: Leverage contingencies. When life gives you lemons, make lemonade. Bad news or surprises are not just problems; they are clues to new opportunities.
- 5. Pilot in the Plane: Control rather than predict. Focus on activities within your control today rather than trying to predict the market of next year.
The "Chef in the Kitchen" Analogy
A simple way to understand the difference is to imagine a chef.
- The Causal Chef: Decides on a menu (Goal), writes a shopping list, buys specific ingredients, and cooks the meal.
- The Effectual Chef: Opens the fridge, sees what leftovers and ingredients are currently there (Means), and improvises a meal based on those available resources.
Effectuation is useful when there is high uncertainty and no definable market to analyze. It has become a theory-rich complement to experiential courses such as Lean LaunchPad.
Video Overview: Saras Sarasvathy Explains Effectuation
Sources
- Chandler, G. N., et al. (2011). Causation and effectuation processes: A validation study. Journal of Business Venturing, 26(3), 375-390.
- Read, S., Song, M., and Smit, W. (2009). A meta-analytic review of effectuation and venture performance. Journal of Business Venturing, 24(6), 573-587.
- Sarasvathy, S. D. (2001). Causation and effectuation: Toward a theoretical shift from economic inevitability to entrepreneurial contingency. Academy of Management Review, 26(2), 24
