5 principles of successful entrepreneurship

Sometimes the optimal journey doesn't follow a straight path.

Not so long ago, the usual approach for wannabe entrepreneurs starting a business consisted of writing a business plan with a 5-year top-down financial forecast that no one in their right mind would believe. The more meticulously the business plan tried to chart the future actions to take, the better it was considered by the venture’s stakeholders (investors, employees, management...). Then you either started the business based on the plan, or you went to business school where you topped it with more fantastic subjects like strategy, management, human resources and the like. Today, that path would make some sense if you were to inherit your family business, or by some chance you landed a top executive job at a large corporation. But for launching a new product or service, it's a recipe for disaster.

After a lot of pain, people started to realize that this approach was fatally flawed. Some entrepreneurs took a step forward and came up with better ways to attack the realm of entrepreneurship, and thus popularized ideas like Customer Development, the Business Model Canvas, and the most popular of them all: the Lean Startup methodology. All these approaches improve the likelihood of launching a successful business, by trying to reduce the associated risks. The biggest risk being creating something that nobody wants, and wasting your time and resources on it.

All these modern approaches propose different processes to create new ventures. But are there some universal aspects of successful entrepreneurship? If I find myself in a domain where I can't directly apply Lean Startup principles, are there still some guidelines that I can use in order to know what to do?

It turns out that some very clever people (note: people at reputed business schools who don't match the traditional MBA thinking) have studied this problem, and in fact have found out what a large number of successful entrepreneurs (and their ventures) have in common. Originally developed by Professor Saras Saravathy, from the University of Virginia's Darden School of Business, this theory is called Effectual Entrepreneurship, and it unveils that successful entrepreneurs usually follow 5 basic principles:

Bird in hand principle:

Arguably the most important of the effectual principles, it means that a successful entrepreneur must focus on what is currently available to her at any given moment, and use it to imagine possibilities that could become a reality by using those means. Imagine you want to prepare a meal: would you plan what you want to eat, check if you have all available ingredients and then go to the supermarket to buy what's missing? What if they're out of stock for a given ingredient? What if you run out of gas on the way to the supermarket? An Effectual entrepreneur just opens the fridge, checks what is available, and just cooks a dish with whatever he has. This way the likelihood to end up with an edible meal greatly increases.

A real-life example of this is Amancio Ortega. You might not have heard of him (he has given 3 interviews in his life and very little is known about his private life). But you may have bought clothes in his store, Zara, in any of the 7,000 locations they have in 91 countries worldwide. Oh, and in 2016 he was the #2 wealthiest individual in the world, according to Forbes. He got his start by making shirts as a teenager in a small city in northern Spain. Then he started creating his own designs. Then he saved to build his own small factory and started selling bathrobes. Then he created the initial Zara. I'm certain he had the ambition to build something as great as Zara the whole time, but he did all of this one step at a time, with what he had available and what he was learning along the way.

Affordable Loss principle:

This principle is about guiding your actions when under uncertainty: Always take the path that causes the least loss in case things don't turn out as expected. For instance, you should spend as little money as possible when trying to launch a product, as opposed to having a budget that you will use for the traditional steps of product development, like marketing, production, etc. Or, you shouldn't really externally analyze a market that you want to enter (spending time and money), just go and speak with your potential customers. Even better, try to start selling without even having a product.

This is exactly what Drew Houston did with Dropbox: he just posted a video to Hacker News and Digg where he showed the prototype that he had put together. He got thousands of people interested and signing up to the product. He probably won a spot in YC because of it. A huge upside in comparison to a modest downside things had not worked out (the time wasted putting together the prototype and the video).

Crazy-Quilt principle:

Successful entrepreneurs don't really worry about competition, because they know they have no competition... Now you're pulling your hairs because what I just said, and you’re picturing me in front of a row of investors telling them "I have no competition" and getting roasted. But if you consider competition to your product anything your customers will do instead of buying from you, most times they will just do nothing, which includes not even buying an alternative. That's what I mean by having no competition. In real life of course there will be many other companies that do something similar to you, so instead of being paranoid about this, successful entrepreneurs do just the opposite: they're open to form partnerships basically with anything that moves, because usually good things happen when sharing with others, helping out and getting help.

Lemonade principle:

Everyone that has been into entrepreneurship would agree that it constantly feels like an emotional rollercoaster: There are constant unexpected events that sometimes feel like a setback. But what if surprises weren't a bad thing? What if something that looks negative, is just a change of direction that could yield better results? This is what this principle is all about, that successful entrepreneurs leverage contingencies, and they use them to shape what their businesses eventually become.

A perfect example of this situation is how Twitter got funded: Originally Evan Williams and Biz Stone were working on Odeo, a podcasting platform. Then they suddenly "got sherlocked" by Apple when they integrated podcasting into iTunes, and made their product totally irrelevant. As the successful entrepreneurs that they are, they realized this and instead of fighting back, they just decided to change direction and create a new product. They loved Jack Dorsey's idea of the primogenial Twitter, and the rest is history.

Unique worldview:

Finally, effectual entrepreneurs just have a special (somewhat contrarian) worldview of things: they believe that the future is neither found nor predicted, but rather made. You shouldn't focus on planning, but doing.

Effectual versus Causal thinking

Can you see the difference between the way things have been done in entrepreneurship (and in business in general) as I laid out at the beginning of my post, compared to how effectual thinking works? You can call the former "causal thinking", in which you start picturing a goal in your mind, and then you plan ways to reach that goal by making a plan. The problem is that plans are very bad dealing with uncertainty and risk (you can't plan against what you don't know), and as a result, this approach doesn't usually end well. On the other hand, effectual thinking embraces the opposite strategy. You start with your current means (what you are, what you have, what you know, who you know), and imagine possible ends. Then, fundamentally, start doing according to your means, and modify your strategy and actions along the way.

In summary, the bottom line is that effectual thinking embraces how counter intuitive entrepreneurship feels in real life. Whether you go and use specific methodologies like the Lean Startup when launching a new business or not, you can always use the principles of Effectual entrepreneurship to guide you when uncertainty and risk are high. Now, maybe Effectual Entrepreneurship is not enough to explain the success of the types like Elon Musk or Steve Jobs, but I believe it's a valid model for the rest of us.

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Written by
Luis Muñoz 20 Feb 2017

I'm an experienced software developer who has grown an equal passion for business and technology.

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