The Tao of entrepreneurship
By Robyn Eifertsen
News & Information
Successful entrepreneurs such as George Rathmann, founder of the biotech company Amgen, and Dennis Bakke, co-founder of the global power plant developer AES Corp., prefer a far different decision-making process when launching a company than typically taught in business schools, a UW Business School researcher has found.
Saras Sarasvathy, an assistant entrepreneurship professor, discovered the contradictory approach to starting a company while studying 27 founders of companies valued between $200 million and $6.5 billion in 1997.
Her study reveals that contrary to conventional teaching, successful entrepreneurs do not focus on trying to predict how a market will respond to a product or service. Instead they opt to launch a company in an unpredictable market and focus on the areas that they can control. That includes securing prior commitments with key stakeholders and strategic partners.
Sarasvathy's findings give important insight into how entrepreneurs make decisions in a field that some argue depends greatly on chance. While her study does not give a formula for a successful new venture, it does identify a new logic behind entrepreneurial thinking. Her study appears in the current edition of the journal The Academy of Management Review.
“We've always known that entrepreneurs think differently,” Sarasvathy said. “Now we have a name for it. I call it effectual reasoning because it inverts traditional causal reasoning that we teach in our classes.”
Conducting market research is among the first steps entrepreneurship and marketing students are told to take in college. But only four of the 27 entrepreneurs in the study said they would even consider using any of the traditional market-research methods. “Right in the beginning they would tell me that they didn't believe in it,” Sarasvathy said.
Some subjects chose even less conventional methods when starting a made-up company used in the study.
“Many of them tried to sell an idea before they even had a prototype,” Sarasvathy said.
Sarasvathy chose a wide range of subjects to ensure the main area they had in common was entrepreneurship. Other subjects included pacemaker co-inventor, Earl Bakken, of Medtronic, Inc., one of the world's leading medical technology companies, and Russ Berrie of Russ Berrie and Company, a $500 million company that manufactures stuffed animals, figurines and other gift items.
Study participants were selected from a list of the 100 most successful entrepreneurs from 1960 to 1985 compiled by venture capitalist David Silver as well as from Ernst & Young's national winners of the Entrepreneurs of the Year awards before 1996.
Each participant was given a test widely used by cognitive scientists who want to discover how a person's thought process works in any given situation, how a chess player determines his or her strategy, or how a doctor makes a medical diagnosis, for example.
Sarasvathy gave the entrepreneurs a 17-page, in-depth problem set consisting of 10 typical problems that occur when creating a startup. Each subject was asked to think aloud continuously and was taped while solving the problems. That way, both the decision-making and cognitive processes involved could be examined. The published article contains results from the first problem. Sarasvathy is compiling the rest of the problems into a book expected to be published next year.
The idea that entrepreneurs create firms in the absence of pre-existent markets is an idea that is recently gaining ground with researchers. Recent researchers have stumbled upon that concept. However, none has done more than interview entrepreneurs about their practices. Sarasvathy's research is unique because of the caliber of the study subjects and the technique.
Since embarking on her research, Sarasvathy has already begun incorporating less traditional exercises into her classroom. She hopes other professors do the same.
“I think this information is telling us that we need to change our teaching metaphors,” Sarasvathy said. “Students need to be encouraged to go out into the world and develop real relationships in the marketplace, instead of trying to develop the perfect market research plan or the perfect financial forecast. Learning to create lasting and productive partnerships, and failure management, rather than failure avoidance, ought to form the cornerstones of entrepreneurship education.”
UW Business School Dean Yash Gupta said Sarasvathy's research is prompting innovative thoughts on how to teach entrepreneurship in the classroom.
“We are now considering re-evaluating our entrepreneurship curriculum to be less business-plan driven and more business-creation oriented, particularly in the initial stages of launching a company,” Gupta said.
Sarasvathy's study was funded by the Ewing Marion Kauffman Foundation. For more information, visit http://depts.washington.edu/bapub/research/saras.html.