Chalk Talk: Sarasvathy's Effectuation Model for Startups

This chalk talk on Saras Sarasvathy’s effectuation model for startups outlines an approach that successful entrepreneurs use to establish and grow their startups. This approach is the most effective one that I have seen.

Chalk Talk: Sarasvathy’s Effectuation Model for Startups

Edited transcript for the Effectuation Model

Sarah Sarasvathy interviewed about 300 successful entrepreneurs and asked them:

What did you do to succeed as an entrepreneur?
What is your view of the process for building a startup?
How does it work?

So let’s walk through the diagram. Each entrepreneur started with:

where they were,
what they knew,
who they knew,

and then asked themselves “what’s my next step that’s adjacent from this?” They might have a bigger vision, but they focus their efforts on what is adjacent.

Now, that may be in the context of a larger goal; for example, we want to head North, but they were content to go Northwest or Northeast if they could find a path they could follow because either will still allow them to move generally North.

They will have conversations with people and ask for introductions. And out of that, they hit many dead ends, but they also gather a lot of interesting information. Some of that turns out not to be relevant. But sometimes you encounter people who get excited and share information or introduce you to others to talk to that revise your understanding and suggest new goals. They may make commitments that may unlock new means.

So, the entrepreneurs take stock of what they have learned and what’s now possible and assess how to move forward from where they are now.

Sweat equity + relationship + know how

Essentially, it’s a model that says there’s sweat equity from putting your time in. There are key relationships that help you gain understanding or barter access to resources. And there is the team’s know-how.

Sweat equity + relationship + know-how

And that you have to look at ends becoming means and outcomes becoming building blocks. So it’s very different from how a big company might make a long-range plan. It’s more like water spreading out and trying to find a crack or a way to get through.

Three examples of successful startups

So I think the three cases are a little different.

MakeSafe Tools

In Scott Swaaley’s case, he was absolutely motivated by a desire to reduce injuries. And so that was part of it. He was running this machine shop and said, “Hey, I think this will help.” And he took advantage of his electrical engineering background and could actually design it. His first install was the shop that he was managing.

DataCare

In the case of DataCare, they saw an opportunity, and then they had to figure out, okay, so what’s the first step? What’s the second step? And they started providing services that the IT infrastructure took cost out of and took cycle time out of. So they built it up step by step.

Emobus

For several years, it wasn’t clear to the Emobus team that there would be a business in cellular cost management.

They had a cellular store. They’d been successful in selling cell phones and accessories. Then, the rug was yanked out from them. The service provider significantly renegotiated the terms of their relationship. So they were feeling their way with what to do. They knew how to take the cost out of cell phone spend for businesses. And so they figured out how to translate that know-how into value for customers, value that customers were willing to pay for.

Affordable Loss Bets

In each case, the entrepreneurs never went all in. They never made a “make or break” bet. They would only make bets they could afford to lose–affordable loss bets. They ran experiments. They would try things. They would kind of put one foot in the water, but they wouldn’t test the depth of the water with both feet.

And I think that’s something that bootstrappers learn how to do, is how to make small bets that have lopsided payoffs. You can afford the loss if you lose it, but if it works out, you’re in a better place. Maybe slightly better. Maybe much better.

I think the other thing that’s going on is that you’re a little bit in a fog. There is a fair amount of uncertainty. So you’re trying to get clarity on the business model that you’re going to use, and you’re trying to identify and lower the risks of getting there.

This model is called effectuation. It’s an excellent model of how successful entrepreneurs build startups.

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Chalk Talk: Sarasvathy’s Effectuation Model for Startups