The 5 Principles of Effectuation: A New Way of Problem-Solving for Veteran Entrepreneurs

FedEx founder Frederick Smith, a Marine Corps veteran who kept the company afloat by any means necessary. (Courtesy of FedEx)

What makes an entrepreneur entrepreneurial? This was the question posed to participants at the 2023 Veteran EDGE Conference, hosted by the D'Aniello Institute for Veteran and Military Families. The research around this question can help not just business owners, but all people, mitigate or even avoid failure.

The answer is effectuation, a method of problem-solving that involves using available resources and networks rather than setting a future goal and following a planned process toward it. Dr. Saras Sarasvathy, the theorist behind it, likens the idea to the difference between cooking from a recipe and creating a meal from the ingredients available in your kitchen.

Sarasvathy published her theory of entrepreneurial effectuation in 2001 after talking to a number of successful business people, whom she calls "expert entrepreneurs." They were people with years of experience who had founded multiple firms, experienced a number of successes and failures, and taken at least one company public.

She was able to see at a granular level the kinds of things they do when building a new business, how they think and how they implement their views in their problem-solving. She discovered five key principles that were common among them.

Sarasvathy notes that entrepreneurs still need to be able to function as businesspeople. Knowledge like cash flow, legal concerns, inventory and the like is still necessary, but effectuation can help entrepreneurs sidestep the common causes of business failure.

1. The Bird-in-Hand Principle

Borrowed from the phrase "A bird in the hand is worth two in the bush," the Bird-in-Hand Principle means entrepreneurs start by taking stock of their means, beyond money. They look at their tastes, abilities, education, expertise, and their professional and social networks.

This allows the would-be entrepreneur to think about the possibilities in creating an enterprise and take small steps toward creating it. With each move, the entrepreneur gets closer and closer to forming that business as they create the next achievable goal on-the-fly and plan their next goal. Before long, a string of small victories appears to create a large win.

2. The Affordable Losses Principle

Effectuation thought means successful entrepreneurs don't think about creating an efficient product and maximizing their return. Instead, they consider the maximum they can afford to lose as they build their project and bring others on board.

This often means there is some intrinsic value to their new operation. Maybe it's something they always wanted to do, or they have a personal reason for creating a new product. No matter the motivation, they consider how much they can afford to lose in giving their business a shot. It also keeps failures very small.

3. The Crazy Quilt Principle

Entrepreneurs work with people. Many companies gauge success in beating their competition. The effectuation mindset is focused on building partnerships. Sarasvathy's expert entrepreneurs started without knowing their market or their competition, so trying to beat the competition would be fruitless.

Instead, they build on their ideas by bringing others (often early adopters of the business) on board to contribute their time and money to the operation. New stakeholders bring legitimacy to the venture, as well as an influx of resources while providing input on what the product or service can be.

4. The Lemonade Principle

When life gives you lemons, you make lemonade -- everyone knows that. Expert entrepreneurs are no different. When problems arise in the creation of a business, successful entrepreneurs turn the surprise into something profitable.

In traditional business startup thinking, anything that causes a hiccup anywhere in the predetermined plan can be catastrophic to the entire venture. Effectuation entrepreneurs don't have a plan that can be upended, so surprises can sometimes be an opportunity -- or even shape the business itself.

5. The Pilot-in-the-Plane Principle

Entrepreneurs are flying their own plane, and that's the way they like it. This is one of the reasons why the habits of CEOs, entrepreneurs and other famous business leaders are so interesting: They do what they want, how they want and when they want -- and they are willing to do what it takes to keep it that way.

This desire for control of their own course means they value their personal freedom and the time spent working for themselves more than they ever could working for someone else. This kind of motivation for personal control inspires them to take the risk of starting the business, and they are driven by the experience of doing it every day.

-- Blake Stilwell can be reached at He can also be found on Twitter @blakestilwell or on LinkedIn.

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