Hey readers!
Today I’m breaking down some of the guiding principles I used to build my companies Near, Scalepath, Dura Software and more…
- The 5 principles of Effectuation
Let’s get into it!
I’ve started 8 companies that employ >1,000 people. But I don’t build startups like everyone else.
I’ve tried the standard startup techniques.
The “Lean” model is all about asking customers their problems. I find it produces small ideas that aren’t exciting to work on.
The “Waterfall” method says, “build a big vision and your customers will come”. It’s popular with VCs, but carries too much risk for my taste.
So I watched baller entrepreneurs, and soaked up how they operated.
Then, after I’d figured it out the hard way, I learned that a super smart business professor had already defined what I was doing — and called it Effectuation.
The 5 principles of Effectuation
I’ve used the 5 principles of Effectuation to build multiple companies.
They’re all about keeping your risk low, your momentum high, and your plans agile.
They are:
- Bird in Hand
- Affordable Loss
- Lemonade
- Crazy Quilt
- Pilot in the Plane
Let’s look at each one.
The Bird-in-Hand Principle
Successful entrepreneurs don’t try to predict the future. They look at what they have today.
So first, list your your resources.
- Who you are (your personality and abilities)
- What you know (your education and skills)
- Who you know (your network and/or audience)
If you’re building a business, use these as your starting point to find viable ideas.
Then get started building something ASAP!
The Lemonade Principle
Mistakes are inevitable. Embrace them.
And the best mistake is the one you make as fast as possible. Because each piece of bad news or failure steers you away from a path that isn’t working.
Treat every mistake as a gift, and you will learn quickly.
The Affordable Loss Principle
Each step in Effectuation startup building has bigger “bets” as conviction grows.
You shouldn’t be going all in on anything until you’ve proven a lot of groundwork.
Look at a VC-backed company. They’re often given capital to make a big all-or-nothing bet. It’s super risky for the company!
Notice, though: the VC fund is actually following the affordable loss principle. They assume most companies will fail — and that’s why they back so many.
It’s a good deal for them. But it’s not the environment I like to build in.
The Crazy Quilt Principle
This is about building the team around you: you should find people whose skills are different than your own.
A team with a “crazy quilt” patchwork of different skills covers way more areas of competence.
The other part of this principle: only choose partners willing to put skin in the game.
If a person or an organization isn’t willing to be all-in, you have no room for them!
Nothing kills momentum faster than half-hearted participation. Everything will grind to a halt.
The Pilot in the Plane Principle
Focus only on the activities you can control.
You can’t predict the future. And focusing too much on your desired future state can close your eyes to opportunities in the moment.
By staying in the present, you’ll be better prepared to take advantage of great chances when they come up.
And by focusing on the here and now, you create a better tomorrow!
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Those are the five main principles of Effectuation.
But I’ve added one more: The Backwards Cycle.
Most of the time, planning starts with setting goals. The way I look at it, your goals should actually come last.
Using the principles of Effectuation, the journey goes like this:
Your capabilities lead to your initial actions and experiments.
Your experiments teach you things, which increase your conviction and commitment.
And goals (especially audacious ones) emerge!
All done in a low-risk way.
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To recap, the principles are basically:
- Start with what you can do
- Make small bets
- Rapid mistakes maximize your learning
- Find partners with skin in the game
- Build against the future
- Go against the grain
Now go forth and build!
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Effectuation was coined by professor Saras D. Sarasvathy — and there are tons more resources at effectuation.org.
By the way:
These principles are more about the “mindset” of building.
If you want a step-by-step, super practical guide on how I start companies, I put a detailed walkthrough of my whole method in my e-book The Low Risk Business. Check it out!
Have a great week!
Michael
