Effectual Reasoning: The Little Known Method Entrepreneurs Use to Figure Out What They Want
Man has suffered another loss in his more recent development inasmuch as the traditions which buttressed his behavior are now rapidly diminishing. No instinct tells him what he has to do, and no tradition what he ought to do; sometimes he does not even know what he wishes to do. Instead, he either wishes to do what other people do (conformism) or he does what other people wish him to do (totalitarianism).”
Viktor Frankl, Man’s Search for Meaning
One of the most common questions I get asked is “What do I do if I don’t know what I want?” It’s a question I’ve asked myself before.
“What do I want?” can be a paralyzing question. We most often answer by looking for someone to tell us what to do (totalitarianism) or doing what we see others doing (conformism).
When people have a vague goal “I want to earn a living helping people be healthier,” but lack a clearly defined goal, they fail to pursue any route.
In the moment, my desire is always to shake them and scream “just do anything! Anything is better than nothing!”
This doesn’t seem to help. It certainly wouldn’t have helped me.
There is a different way to approach the problem. It is the process Steve Jobs alluded to when he said “you can’t connect the dots looking forward; you can only connect them looking backward. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.”
Assuming you have some vague goal or sense of which direction you’d like to move like “earn a living helping people be healthier,” ask:
“What do I have?”
If you start by assessing “what are the means that I have readily available”, then determine “what are the ends given those means”, the problem changes from figuring out what you want to imagining future possibilities given existing means.
What Do I Want vs What Do I Have?
The way most people approach the problem of “I don’t know what I want” is what UVA researcher Saras D. Sarasvathy calls Causal Reasoning.
Using a causal reasoning approach, you start by picking a vague goal first, then clearly define it, then generate the means to achieve that goal.
Let’s walk through an example starting with the vague goal of having a business to help people be healthier.
The way most people would approach this is to immediately jump into defining the goal more clearly. They do market research. Then they figure out a product based on on some clear point of differentiation from other products in the market.
You have a friend running a business in the health food industry telling you that veganism is becoming more popular. You see that it’s a rapidly growing, underserved market. You also know that people are busier and eat on the go more. You decide to combine the two and sell vegan snack bars. You’ve now clearly defined the goal — build a business selling vegan snack bars
Now it’s time to generate the means to do that. You go design your vegan snack bar packaging to appeal to vegans. You order the first production run from the factory. Once you get the shipment in, you start marketing the snack bars.
You decide to run a Google Adwords pay-per-click marketing campaign to market those products. You discover that you are actually quite good at Google Adwords, because you have a very analytical mind. You’re great at identifying and exploiting Google’s algorithm. You start to generate profitable sales through pay-per-click but eventually hit a ceiling.
You can’t use it to grow your snack bar company like you used to.
So you start to look at other channels like content marketing and trade shows, but it never really takes off. You continue to fixate on how to grow your snack bar company.
What Dr. Sarasvathy discovered in her research of over thirty successful entrepreneurs (they ran companies ranging in size from $200 M to $6.5B) is that to think entrepreneurially is to look at the means before determining the ends.
If you make means the second step, you no longer have to generate them, you just have to see which ones you have available. Based on those means, you set a clearly defined goal.
Sticking with our example of starting a company which helps people get healthier, let’s see how to approach the problem entrepreneurially.
Instead of starting the market research and making snack bars right away, you start with making an assessment of your available means:
- Who are you — What are my natural strengths, traits, and abilities? (e.g. — You are a very analytically minded person).
- Who do you know — Who are in my social and professional networks? (e.g. — You have one friend that runs a food company similar to the snack bar company you’d like to start).
- What do you know — What is my training, expertise, interests and experience (e.g. — You have read a few articles on Google Adwords Pay Per Click (PPC) Marketing and find it interesting).
You convince your friend to let you put your knowledge to the test and try a pay per click marketing campaign for their already proven product. You discover that you’re really good at pay-per-click marketing, and you find it interesting.
You see a Meetup.com meeting the next week for people running food companies and decide to go so you can learn more about how to manufacture snack bars, the business you are planning on starting.
You get there and are talking to someone else running an artisanal quinoa company. You mention to them how you’ve figured out how to run a profitable pay per click campaign for your friend and are going to use pay-per-click as your first marketing channel when you get your snack bars launched.
They ask if you would be willing to do a pay per click campaign for their artisanal quinoa company. You agree, thinking it will be good experience. It does very well yet again.
At this point, you evaluate your means again:
- Who are you — You are still a very analytically minded person.
- Who do you know — You now have two clients that are in an industry that you are interested in.
- What do you know — You realize that pay-per-click marketing is a really easy service to sell as a consultant, because it’s an easy to quantify sales channel. If you can show a business owner a spreadsheet where he pays you $5000 and you give him back $10,000 in profit, that business owner is going to continue doing that deal for a long time.
Because you are evaluating your means before clearly defining a goal, you realize that you could achieve your vague goal of “earn a living helping people be healthier” in a way you hadn’t imagined before. It would take months to get the snack bars to market and start making money when you are already running a profitable PPC consultancy. Instead of starting your snack bar company, you now start a PPC consultancy targeting health food brands.
A year into running PPC consultancy, you meet a guy at a party that manufactures vegan health supplements at a really high quality facility that he would be happy to introduce you to.
The next day you read an article about how Amazon’s third party seller marketplace is getting more popular and now is a great time to start selling on Amazon. You also read a thread in a vegan forum you’re a member of about a special blend of herbs that people are making themselves at home and is working really well.
You do the evaluation again.
- Who are you — You now have a combination of PPC expertise and branding experience, gained from working with your clients.
- Who do you know — You now have a connection that can put you in touch with a high quality facility that manufactures vegan health supplements.
- What do you know — You now know that Amazon’s third party seller marketplace is blowing up right now, and that there are people creating their own blends at home so there is a proven demand for a product.
That combination of means gives you a strategic advantage over almost anyone else.
You can imagine a new clearly defined end — a supplement company for vegans.
And it doesn’t stop there…
You can see the difference between the two approaches in a short time period, but it’s more compelling if you see the progression of an effectual reasoning approach repeated over time.
Six months into running your supplement company, you realize that Amazon’s pay per click service is very young and growing rapidly like the rest of the market place.
You have clients that are doing Google Pay Per Click, and now your supplement company has taught you how to work with Amazon’s Pay Per Click, so you start offering that service as part of your Google Pay Per Click agency. You quickly become the expert in the Amazon PPC market.
Then you have a complete change of heart. Your vague goal shifts dramatically.
You decide that you really want to write a book. During your time running all these business you’ve spent hours reading books about productivity and developing your own productivity practices. So you write a book about how people can be more productive.
You leverage your marketing and branding expertise and cash flow from your other businesses to promote the book. It takes off and becomes a New York Times Bestseller. You start getting invitations to be a keynote speaker. You start speaking.
At one of the speaking engagement, a hedge fund manager approaches you to do productivity consulting for his hedge funds. He has a billion dollars under management, so even small productivity gains can have a huge impact for his firm.
You start to do productivity consulting for other hedge fund managers. In the process you learn a lot about investing and how businesses are valued. You realize that even though you’d never considered it, businesses get bought and sold all the time and you can sell your PPC agency supplement company.
You use that knowledge to sell your two existing companies.
In the process of selling your company, you meet a lot of people in the private equity industry. You meet them initially because they are interested in buying your company, but end up becoming friends. You now have relationships with investors.
You start getting access to investment opportunities that most people don’t hear about through your speaking contacts. You have proprietary deal flow and you have cash lying around from selling your company. You become an angel investor.
Five years earlier you were trying to build a snack bar company. At that time, you didn’t even know paid speaking and investing was even an option. It was an ends that you could never have foreseen.
Plan Your Life Ninety Days at a Time
This is a mashup of a number of real life paths I’ve seen.
What in retrospect looks like a carefully calculated path, is often just an iterative process of re-evaluating your available means and imagining new potential, clearly defined ends.
Often the issue here is having a malleable identity. If you are a snack bar company owner, why would you start a Pay-per-click consultancy? You wouldn’t. It pays (in cash) to keep your identity small and your options open.
6 Steps of Effectual Reasoning
1.Determine Vague Goal
If you were looking back at your life three years from today, what has to have happened in your life, both personally and professionally, for you to feel happy with your progress?1
2. Identify Means
- Who am I — What are my natural strengths, traits, and abilities
- Who do I know — Who is in my social and professional networks
- What do I know — What is my training, expertise, interests and experience
You start by taking inventory of who you are, who you know, and what you know.
In the example above, you know you are analytically minded, you already have a contact in the health food industry, and you know a little bit about pay per click marketing
3. Imagine Clearly Defined Ends
Once you have that list, start imaging potential, clearly defined ends that could lead you in the direction of your vague future goal. This often leads to opportunities you never would have imagined. When you started doing pay-per-click for your friend above, you never even considered being a pay per click consultant. It was only months later when you realized that was a viable option that you could imagine a new end.
I find that 90 days is a good time frame to pick a definite goal for.
Next, figure out the expected value of your existing opportunities. You do have to focus, but only for short time periods. Work on one thing for 90 days, and then re-evaluate.
In the example above, you might have prioritized pay per click because it scales more quickly than a snack bar company. For a snack bar company, the amount of profit you earn on each product is relatively low. This means you will need to sell hundreds (or thousands) of units in order to make enough to live on. If you start the pay-per-click consultancy, you could make thousands of dollars from each client so just a few clients will make the business viable.
This is an example of the above two steps for marketing objectives last year in which I rated opportunities on four criteria to prioritize them.
I brainstormed all the possible marketing opportunities I could think of in the left column. Then I determined four criteria to estimate ROI (How promising, Time required, Cash required, Customers Available) and then prioritized them based on which ones had the highest potential payoff with the lowest investment.
5. Manage Risk
The next step is to manage risk and protect your downside.
Are there any options you’re considering for which there is a true possibility of an irreversible, negative outcome? How can I manage or mitigate it?
What’s my contingency plan for if I want to switch plans in 90 days? Start a podcast and commit to doing one season of eight episodes. If you don’t like it, no sweat! This creates a tremendous amount of freedom and an increased ability because you can start something new knowing that you only have to stick to it for 90 days, not for decades.
Richard Branson negotiated to be able to return all the planes when he originally purchased them for Virgin Airlines. Downside protected. Even if the business flopped, it was a relatively low risk proposition.
In the example above, you might know that even if you spend $10,000 to buy inventory for your supplement company, you can always liquidate that at cost. You won’t make a profit, but you’ll protect your downside.
While much of the popular press around entrepreneurship implies that it is risky, this doesn’t match up well with real world data.
In his seminal work Innovation and Entrepreneurship, Peter Drucker had this to say on risk and entrepreneurship:
A year or two ago I attended a university symposium on entrepreneurship at which a number of psychologists spoke. Although their papers disagreed on everything else, they all talked of an “entrepreneurial personality,” which was characterized by a “propensity for risk-taking.”2
A well-known and successful innovator and entrepreneur who had built a process-based innovation into a substantial worldwide business in the space of twenty-five years was then asked to comment. He said: “I find myself baffled by your papers. I think I know as many successful innovators and entrepreneurs as anyone, beginning with myself. I have never come across an ‘entrepreneurial personality.’ The successful ones I know all have, however, one thing — and only one thing — in common: they are not ‘risk-takers.’ They try to define the risks they have to take and to minimize them as much as possible. Otherwise none of us could have succeeded. As for myself, if I had wanted to be a risk-taker, I would have gone into real estate or commodity trading, or I would have become the professional painter my mother wanted me to be.”
This jibes with my own experience. I, too, know a good many successful innovators and entrepreneurs. Not one of them has a “propensity for risk-taking.”
6. Ready, Fire, Aim
Once you’ve managed risk, then you move into ready, fire, aim mode where you start doing tests of all these things. You can do this quite safely, because you have already identified the major risks and managed them so everything really is an experiment.
A key difference here is that when unexpected things happen, they are not obstacles between you and the defined end, they simply suggest a different imagined end.
Let’s say at the same time you start offering Amazon pay-per-clicks services, Google ads get much more expensive. Instead of seeing this as “my Google PPC consultancy is doomed” you can say “advertisers on Google are going to feel margin pressure and look for new channels, I should re-position my agency as a specialist in Amazon.”
The fact that the future is unknown and unknowable doesn’t actually matter. You’ve mitigated the risk so nothing irreversible is going to happen. Unexpected occurrences indicate new opportunities, not existential threats.
In The End, Re-Evaluate Vague Goal
This is a cyclical process.
It’s why I never plan more than ninety days at a time.
In a 90 day period you will:
- meet new people
- develop new skills
- gain new and better insight into your strengths and weaknesses
- Change your long-term goals
There are many ways to “earn a living helping people be healthier.” The majority of them, you’ve never even heard of. It’s more advantageous to start with the an assessment of your available means (what do I have?) and imagine the clearly defined ends.
This is how I designed my planning system. If you’d like a simple set of questions to help you go through the process, click below to download a free template.
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- Source: The Dan Sullivan Question by Dan Sullivan
- Drucker, Peter F. (2009–03–17). Innovation and Entrepreneurship (p. 139). HarperCollins. Kindle Edition.