Inside the mind of great entrepreneurs

February 2, 2011

Inc. magazine reports on a study in which Saras Sarasvathy, professor at the Darden School of Business, “eavesdrop(s) on the thinking of the country’s most successful entrepreneurs” in order to understand how their minds might differ from those of corporate executives.

Founder and CEO

Founder and CEO, Abby Normal

From How Great Entrepreneurs Think:

Discussions of entrepreneurial psychology typically focus on creativity, tolerance for risk, and the desire for achievement—enviable traits that, unfortunately, are not very teachable. [Sarasvathy] set out to determine how expert entrepreneurs think, with the goal of transferring that knowledge to aspiring founders.

Sarasvathy likens great entrepreneurs to Iron Chefs,  “at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest.”  She terms this  mindset effectual reasoning, and contrasts it to the causal reasoning of successful corporate executives who “set a goal and diligently seek the best ways to achieve it.”

In our experience, the entrepreneurs who make it from garage to funding to successful high-growth company have the ability to reason both ways:  causally and effectually.  We found the study fascinating and enjoyed the author’s description of the participating entrepreneurs:

On Forecasting:

Corporate managers believe that to the extent they can predict the future, they can control it. Entrepreneurs believe that to the extent they can control the future, they don’t need to predict it.  Entrepreneurs thrive on contingency. The best ones improvise their way to an outcome that in retrospect feels ordained…

That attitude is a bit like Voltaire‘s assertion that the perfect is the enemy of the good. In this case, the careful forecast is the enemy of the fortuitous surprise.

On Market Research:

Having even one real customer on board with you is better than knowing in a hands-off way 10 things about a thousand customers.” Merely gathering information from a large number of potential customers, she says, “increases all the different things you could do but doesn’t tell you what you should do.” Toward that end, many of her subjects described their preference for an almost anthropological approach to customer interaction: observing a few customers as they work or actually working alongside them.

On Competitors:

Entrepreneurs fret less about competitors, Sarasvathy explains, because they see themselves not in the thick of a market but on the fringe of one, or as creating a new market entirely. “They are like farmers, planting a seed and nurturing it,” she says. “What they care about is their own little patch of ground.”

UPDATE (2/10/11)

Jim Manzi cites Sarasvathy’s study in The Eternal Sunshine of the Entrepreneurial Mind:

At root, what’s so fascinating to me here is the distinction between risk and uncertainty. By “uncertainty,” I mean non-quantifiable lack of predictability…  I think that this distinction points to a fundamental cleavage in worldviews in economics that turns on the role of the entrepreneur…  Entrepreneurs choose to operate in sectors in which uncertainty dominates. This is inherent to what entrepreneurship is. The kind of predictive tools that work well for the U.S. aluminum market don’t work very well when you’re inventing the Software-as-a-Service business model. What works better is trial and error learning or, more formally, experimentation. As an entrepreneur, you throw yourself into an evolutionary competition, and use whatever resources you have to succeed. You don’t believe that you (or anybody else) can predict the multi-step game in advance.

There is a heterodox tradition of economists who focus on the centrality of these issues for the long-run growth of the economy. Frank Knight, Joseph Schumpeter, F.A. Hayek, Vernon Smith, and Douglas North are obvious examples. This focus leads to an emphasis on uncertainty, experimentation, and evolution, and stands in contrast to the currently-dominant paradigm within university economics departments of risk, quantification, and equilibrium.

I believe that entrepreneurship, broadly defined, is central to economic growth, and that determining public policy using economic models that inherently under-emphasize this is a very bad idea. Professional economists, in my view, have a class interest in obscuring this. One that is as powerful as the class interest of entrepreneurs in conflating luck and skill.

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