The document summarizes the five principles of effectuation used in entrepreneurial thinking: 1) Bird in hand - leverage existing means and resources, 2) Affordable loss - assess downside risks, 3) Lemonade - leverage unexpected opportunities, 4) Crazy quilt - build partner networks to co-create outcomes, and 5) Pilot in the plane - focus on actions that directly influence outcomes. It discusses each principle and questions whether entrepreneurs can accurately estimate risks and opportunities or if more caution is needed in new ventures given high failure rates.

1. Effectuation
Gavan Cleary & Norah Cussen

2. Effectuation
• What is effectuation..
• Short Video
• Principles of effectuation:
• Norah
• Bird in the hand – Leverage your means
• Affordable Loss- Assess potential loss rather than potential gain
• Lemonade – Leverage Contingencies
• Gavan
• Crazy Quilt – Build partner networks to co-create the outcome
• Pilot in the plane – Focus on actions which directly influence the outcome
• Summary, Q&A, Discussion

3. Bird in Hand
• The effectual cycle begins with the first principle – Bird in Hand.
• This implies that entrepreneurs use the means available to them to
achieve an imagined end.
• There are three categories of means:
1) Who you are – traits, tastes and abilities
2) What you know - education, training, expertise and experience
3) Who you know - your social and professional networks

4. Entrepreneurial and Non- Entrepreneurial Thinking
Effectual Reasoning
Entrepreneurial Thinking – Effectual Reasoning
Imagining possible new ends using a given set of means
M M M
M M
GIVEN MEANS
E
E
E
E
IMAGINED ENDS
(Saravarthy S. , Effectuation 101, 2012)
Causal Reasoning
Imagining possible new ends using a given set
of means
Selecting between given means to achieve a
predetermined goal
Sarasvathy, S. (2012) “Effectuation 101”

5. What does this mean?
“Entrepreneurs are entrepreneurial, as differentiated from
managerial or strategic, because they think effectually; they
believe in a yet-to-be-made future that can substantially be
shaped by human action; and they realize that to the extent that
this human action can control the future, they need not expend
energies trying to predict it.” (Sarasvathy, 2012)
Common Questions:
What are the characteristics, habits, and behaviors of the entrepreneur?
Is there a learnable and teachable “core” to entrepreneurship?
Effectuation Considers:
Is there such a thing as “entrepreneurial thinking” that can be applied across
space, time and technology?
Does this provide a learnable and teachable “core” to entrepreneurship?
Sarasvathy, S. (2012) “What Makes Entrepreneurs Entrepreneurial?”

6. Affordable Loss
• Effectuation is not just the entrepreneur’s ability to identify the means
they have available to them but also their ability to use them effectively.
• This brings the second principle in the effectual cycle – Affordable Loss
• Causal models focus on maximising returns by selecting optimal
strategies.
 The entrepreneur will calculate upfront how much they will need to start a new
venture and spend time and energy raising this money.
• Whereas, the “effectuator” will estimate the downside of what they are
willing to lose.
 Making decisions based on the factors within their control
Effectuation.org “The Affordable Loss Principle”

7. • The concept is that the ‘effectuator’ is thrifty and at every stage
they are asking;
- Where do I stand?
- How can I use what I have, what I know and who I know to get me to
the next stage?
- What can I afford to lose on the way?
• While calculating affordable loss may seem possible it requires
the entrepreneur to have a clear understanding of;
- their financial condition
- psychological estimate of how much they are willing and able to
commit.

8. • Given the unpredictable nature of the business environment
and the ‘entrepreneur type’ I consider:
Can an entrepreneur accurately estimate what they will need to
invest?
And;
Can they estimate their own capabilities without bias?

9. Lemonade
• The third principle Lemonade - refers to the entrepreneur’s
ability to leverage contingencies.
• The ‘effectuator’ when faced with unexpected events sees
opportunity where others see distraction or even catastrophe.
The ‘effectuator’ will;
• Leverage unexpected events and go ‘off road’.
• Invite the chance of opportunity instead of thinking - “what if”
• Interpret unforeseen events as the potential for tangent in the business plan
hoping it will lead to unexpected growth
Effectuation.org. “The Five Princples of Effectuation”

10. • Indeed, viewing unexpected events as opportunity can be beneficial
and may lead to growth.
• However, following unforeseen opportunities can;
- divert from the original business objectives
- lead the entrepreneur into a negative tangent
- which can waste time and money all detrimental to the success of the
business.
Which would lead me to ask;
Should new entrepreneurs practice more caution and curb the
‘entrepreneurial streak’ at the beginning of new venture?

11. Increasing
Risk
End Goal
Negative
Opportunities
Positive
Opportunity
Business Plan
Not all Opportunities are Good Opportunities
“Be firm in your vision – its what gets you through the dark days” – Jennie McGinn founder
of Opsh online fashion retailer

12. • Entrepreneurs should carefully assess the risks of new opportunities.
• Given that 80% of new ventures fail, erring on the side of caution is
not to be disregarded.
Example;
Consider a plumber (Joe) who is a first time entrepreneur. Joe has
invested the maximum amount of his resources financial, time and
psychological to set up a small business.
Is it wise for Joe to chase new opportunities & stakeholders when he is
already over run trying to achieve his initial goal?

13. Crazy Quilt –
Building Partnership Networks
• “Partners are a source of new means, a source of new ideas, a way of sharing risk,
and the people who help you to create an opportunity.” (Read, Sarasvathy, Dew,
Wiltbank, & Ohlsson, 2010)
• Carefully selected stakeholders commit differing means in exchange for a chance
to influence goals and final outcomes
• Self-selection is critical – commitment is more important than precise alignment.
• Partnerships Should:
• Increase the available means
• Align to co-create the end result

14. Partner Acquisition
• All significant stakeholders are potential partners
• Tools of Influence
• Reciprocation, Commitment , Consistency, Credibility, Likability,
Opportunity cost.
• Consider
• What will this partner bring to the venture ? Will s/he fit ?
• Are you persuadable, willing to re-shape the venture with partners in
order to gain their commitment to it? What are you reluctant to
change? Why?
• In the process of bringing a partner on board, when do you need
persuasion and when do you need negotiation?
• What partners would like to see you succeed? Why?

15. Ownership vs Control
• Ownership is what remains when commitments are met and bills are paid.
• Is it better to own 100% of a failing company or 5% of a successful company
which you control?
• Sharing ownership wisely can create more cash than hoarding it. In new
ventures, the pie is not fixed.
• Contracts (meta rules) specify who controls the business.
• Bill Gates owned 9.4% of Microsoft in 2008
• Offering Equity to key partners can incentivise and align interests
• External stakeholders do not typically seek control of the venture, but want protection from downturns
and participation in upturns.
• Equity can be offered temporarily, and bought back at agreed milestones.
• Other options include, equity options, profit share, discounted pricing, recognition.
• Control is rarely simple, never absolute, and frequently illusory.

16. Pilot in the plane principle.
Non predictive Control
• Focus on activities where you know your actions will directly
influence the outcome.
• Taking action based on your means is more controllable
• Evaluate actions based on whether the downside risk is acceptable
• Work with partners who will commit
• Being flexible gives more control in an uncertain environment than
sticking to a pre-defined plan.

17. What is control
• Causal thinking (Prediction) allows a degree of control, if you are
operating in a stable environment.
• Effectual thinking is particularly useful in uncertain, entrepreneurial
situations because it does not rely on the past to predict the future.
• The control you exercise can be either exogenous ( shaping the
environment) or endogenous (shaping yourself).
• Not everything is controllable, but the effectual entrepreneur focuses
on what elements s/he can control to create outcomes that s/he finds
desirable.”

18. Control Paradoxes (Read et al, 2010, p184)

19. Summary- 5 Principles of effectuation
• Bird in the hand. Leverage your means
• Who am I, What do I know, Who do I know?
• Affordable Loss
• Can I bear the loss if my actions are unsuccessful?
• Lemonade – Leverage contingencies
• Am I open to opportunities arising from the unexpected?
• Crazy Quilt – Build stakeholder partnerships/networks
• Will I allow and incentivise others to co-create the outcome?
• Pilot in the Plane – Focus on actions where you directly influence
the outcome
• Will my actions today move me forward?