Here’s a new word to add to your repertoire: effectuation.
Effectuation is a set of decision-making principles entrepreneurs use in situations of uncertainty. It is the exact opposite of making a decision based around predicting the outcome based on investment, which is at the heart of every business plan.
It’s not about taking risks. So much literature pegs entrepreneurs as being those who take the risks that others won’t.
But, that’s not what entrepreneurs are about. Not at all.
It’s about knowing what you know. And, doing what can be managed within those parameters.
This video explains how entrepreneurs make calculated decisions based on what they know and what is acceptable. It’s called the affordable loss principle.
Business done this way calls into question the infamous hockey-stick financial projections or ramp, that just about every business plan I’ve ever read includes. You know, the bit where someone invests heavily and, suddenly, millions of dollars are generated in revenue.
This video from IMD business school explains how managers are different to entrepreneurs. It also showcases a business that has grown because its entrepreneur founder naturally followed the principle of affordable loss.
The business in itself is pretty amazing — it turns dumped plastic waste back into crude oil. Texas tea…