Effectuation. Put that word into your startup dictionary. Effectual thinking divides the world into things entrepreneurs can control and things they can’t. Effectual thinkers do what they can with the resources at hand to move in a desired direction.They rely less on trying to predict outcomes and more on taking actions that make sense. When forced by necessity or drawn by opportunity they shift gears, realizing that the success they achieve may be different than the result they expected.
Saras Sarasvathy, a professor at the University of Virginia’s Darden School of Business, put that word into the business lexicon in 2008 when she first published Effectuation: Elements of Entrepreneurial Expertise, a scholarly treatise that lent dignity and rigor to what might be called a seat-of-the-pants approach to starting new ventures.
In 2022, when Sarasvathy published an updated version of Effectuation, she earned the Global Award for Entrepreneurship Research in recognition of the concept’s importance to understanding the process of innovation. For the non-scholar, Effectuation’s virtue lies in the intuitive simplicity and practicality of its basic principles:
Bird in the Hand: Begin with what you have. Rather than aim toward a specific goal from the start, the entrepreneur should ask, “Who am I? What do I know? Whom do I know?” By focusing on your skills, resources, and connections, you can begin to create something meaningful. Instead of trying to gather what you need to achieve some distant goal, start building toward it with what you have on hand.
Affordable Loss: Traditional business plans often focus on maximizing returns, but Sarasvathy introduces the concept of Affordable Loss. Instead of trying to predict future profits she advises asking, “What can I afford to lose?” That mental shift frees the entrepreneur to take bold steps without fearing catastrophic failure.
Crazy Quilt: In entrepreneurship, success often depends on collaboration. The Crazy Quilt principle is about working with people who share a vision and are willing to put some skin in the game. This creates a patchwork quilt team invested in their common success.
Making Lemonade: Unexpected challenges and events are inevitable. The Lemonade Principle urges entrepreneurs to turn setbacks into opportunities. Use each challenge as a chance to learn, adapt, and grow. This mindset keeps you resilient and ready to make the best of difficult situations and alert to unforeseen opportunities.
Pilots in the Plane: Entrepreneurs should see themselves as Pilots in the Plane. They try to chart the best course through a turbulent world. By taking control of the factors they can influence they have a chance to create their own luck and guide their ventures toward success.
The common sense appeal of Saraswathy’s principles arise from her experiences as a young woman who started a business to make and deliver lunches to office workers in Mumbai, India.
As Sarasvathy relates in an episode of the Hidden Brain podcast, the venture at first proved so successful that she hired a delivery driver so she could focus on making and selling more meals. Alas, that backfired. Sales fell. A customer survey revealed why.
“It turns out there was something about my personality and these conversations we had that people missed,” she told host Shankar Vedantam. “They were ordering (lunch) partly to see me deliver.”
Effectual thinking helps people with big dreams relax and draw satisfaction by taking tiny steps forward and accepting the inevitable detours on their journey.
Instead of asking, “What do I want from the future?” Sarasvathy suggests that entrepreneurs ask, “What do I have to offer that might change the future?”