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Robert E Wiltbank, Ph.D.
wiltbank@willamette.edu
The Entrepreneurial Problem
For Profit / Social / Otherwise
• Goals are rarely well known & specified
• The future is extr...
Effectual vs. Predictive Logic
Given
Goals
M1
M2
M3
M4
M5
Distinguishing Characteristic Of Predictive Logic:
Selecting var...
Distinguishing Characteristic of Effectuation:
Imagining & Selecting various goals using a given set of means
E2
E3
E
En
G...
• Causal reasoning takes a particular effect as given
and focuses on selecting between means to create
that effect.
What s...
6 Definition of one of several possible markets
Adding Segments/Strategic Partners
Segment Definition
(through strategic p...
• Causal principles (red) generally taught in bschool
7
• Effectual principles are always in Blue
The Principles of Effect...
8
• Means. The basis for decisions
and new opportunities:
– Who I am
– What I know
– Whom I know
Where to Start
• Goals. G...
• Expected Return.
Calculate upside potential
and pursue the (risk
adjusted) best opportunity.
9
• Affordable Loss.
Calcul...
10
Partnership. Build your “future” together with customers,
suppliers and even prospective competitors.
Attitude Toward O...
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 ca...
Prediction: efforts to position the venture for success based on
forecasts of important market elements.
Control: efforts ...
Predictive. The future is a reliable
continuation of the past. Accurate
prediction is possible and useful.
Transformative....
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 commitment...
New
means
New
goals
Expanding cycle of resources
Means
Engineer
Summer Travel Biz
Relationship with Sakada
Converging cycl...
Take Stock of your means: who, whom, what.
What can you do for near zero; Or where you can afford to lose?
What commitment...
Distinguishing Effectuation in Venture Investing
• Select ventures that appear most capable of influencing
critical market...
25
How we’ve learned
Do experts make decisions differently?
It appears so: very different from novices AND from
expert man...
26
How we’ve learned
Does the level of uncertainty actually matter?
It appears so: as uncertainty is greater, groups of
st...
27
How we’ve learned
Does the use of effectuation affect evaluation?
It appears so: similarities between investors and
ent...
28
How we’ve learned
Does the use of effectuation affect outcomes?
It appears so: effectual angel investors experience few...
FiBAN's business angel training "Effectuation in Venture investing - Do experts make decisions differently?" by Robert Wil...
FiBAN's business angel training "Effectuation in Venture investing - Do experts make decisions differently?" by Robert Wil...
FiBAN's business angel training "Effectuation in Venture investing - Do experts make decisions differently?" by Robert Wil...
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FiBAN's business angel training "Effectuation in Venture investing - Do experts make decisions differently?" by Robert Wiltbank - Presentation "Effectuation principles"

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Presention shared by Dr. Robert Wiltbank at FiBAN's business angel training in Helsinki, 3rd of November.

All the presentations and videos are gathered here: https://www.fiban.org/robertwiltbank

Presentations given:
1. Comparison of Finnish and US angel activity
https://www.youtube.com/watch?v=UKdmr...
- Slides:

2. Angel Returns: https://www.youtube.com/watch?v=juuAK...
- Slides:

3. Effective business angel strategies: https://www.youtube.com/watch?v=TsZQd...
- Slides:

4. Effectuation in Venture investing - Do experts make decisions differently?​: https://www.youtube.com/watch?v=miWap...
- Slides

For additional details and questions: https://www.fiban.org/robertwiltbank

Published in: Investor Relations
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FiBAN's business angel training "Effectuation in Venture investing - Do experts make decisions differently?" by Robert Wiltbank - Presentation "Effectuation principles"

  1. 1. Robert E Wiltbank, Ph.D. wiltbank@willamette.edu
  2. 2. The Entrepreneurial Problem For Profit / Social / Otherwise • Goals are rarely well known & specified • The future is extremely unpredictable • People don’t ‘follow instructions’
  3. 3. Effectual vs. Predictive Logic Given Goals 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
  4. 4. Distinguishing Characteristic of Effectuation: Imagining & Selecting various goals using a given set of means E2 E3 E En Given Means M1 M2 M3 M4 M5 E1 Imagined Ends Effectual vs. Predictive Logic What CAN we do, rather than what SHOULD we do.
  5. 5. • 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. 6. 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 Customer Identification (through Who am I? What do I know? Whom do I know?) THE CUSTOMER
  7. 7. • Causal principles (red) generally taught in bschool 7 • Effectual principles are always in Blue The Principles of Effectuation
  8. 8. 8 • Means. The basis for decisions and new opportunities: – Who I am – What I know – Whom I know Where to Start • Goals. Given (based on predictions)
  9. 9. • Expected Return. Calculate upside potential and pursue the (risk adjusted) best opportunity. 9 • Affordable Loss. Calculate downside potential and risk no more than you can afford to lose. Risk, Return and Resources
  10. 10. 10 Partnership. Build your “future” together with customers, suppliers and even prospective competitors. Attitude Toward Others Competition. Set up transactional relationships with customers and suppliers.
  11. 11. 11 When things pop up • Leverage Surprises. Surprises can present new opportunities. • Avoid them. Surprises are not good
  12. 12. 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
  13. 13. 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.
  14. 14. 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 know Example: 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 know Example: I have person A, I can achieve X, Y, or Z 1. Where to Start Tactics for PredictionTactics for Control Effectual Decision Making
  15. 15. Kevin DeWhitt, Agilyx, affordable loss and co-creation
  16. 16. Padmasree Harish, Easy Auto: persistence, inter subsjective, commitments
  17. 17. Yan Cheung, ACN to Nine Dragons, transformation, $3,800, 10 years.
  18. 18. 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 am What I know Whom I know Expanding cycle of resources Means Converging cycle of constraints on goals Goals What can I do? Call people I know Stakeholder commitments Yngve’s Effectual Process
  19. 19. New means New goals Expanding cycle of resources Means Engineer Summer Travel Biz Relationship with Sakada Converging cycle of constraints on goals Goals What can I do? Interact with people Stakeholder commitments New markets Effectuation in Action
  20. 20. 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 am What I know Whom I know Expanding cycle of resources Means Converging cycle of constraints on goals Goals What can I do? Call people I know Stakeholder commitments Your Effectual Process
  21. 21. 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.
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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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