Making do with what you have
Professor Miguel Meuleman on step-by-step entrepreneurship, entrepreneurial bricolage and bootstrapping
Going
into business means preparing sound business and financial plans, putting
together sufficient financial resources, developing a good product and then
choosing the right market segment, armed with a solid marketing plan. At least,
that is the theory. In practice, many entrepreneurs start with whatever personal
talents, private resources and contacts they have. And it appears they succeed.
Doing business is not just about marketing. “Most marketing manuals are based on the idea that the future is predictable,” explains Professor Miguel Meuleman of the Innovation & Entrepreneurship Competence Centre. “According to the theory, entrepreneurs have to choose the market segment where they want to operate. Factors affecting their choice are region, age, income and profession. This principle of segmentation, choosing a target and carving out a position, also called STP (segmenting, targeting and positioning), is found in every marketing manual.”
For Miguel Meuleman, entrepreneurship usually comes about in a totally different manner. “Entrepreneurs often start opportunistically. Everyone has their own perspective on the world. Innovative companies spring up because people see things differently and become entrepreneurs. Many such companies start out in this way: step by step and with limited resources.”
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Causation: classic entrepreneurial strategy that relies on a reasonably predictable future, an established objective and a competitive environment in which transactional relationships are developed with customers and suppliers. The entrepreneur takes into account an expected return, calculates the upward potential, chooses the best opportunity, avoids unforeseen circumstances and can control the future as it becomes more predictable. Effectuation: starting a business with available resources and armed with the answers to questions like “Who am I?”, “What do I know?”, “Who do I know?” and “How much can I afford to lose?” In this strategy, an entrepreneur looks for cooperation and commitment from stakeholders and transforms the unexpected into opportunities. Entrepreneurial bricolage: doing business with limited resources, which are used very creatively and supplemented with cost-free but profitable resources such as partnerships and exchange agreements. This strategy involves refusing to consider generally accepted rules as facts of life, reorganising available resources for new purposes and creating a market for your product or service by cultivating a variety of different contacts. Bootstrapping: creative approach to financing, which involves gathering as much money as possible at the lowest cost and mobilising alternative sources of financing, such as grants. |
Expert entrepreneurs
The above findings are based on research into the behaviour of expert entrepreneurs, who usually set to work in a different way from what the manuals prescribe and what many large companies actually do, i.e. setting up committees that carry out thorough analyses, write sound business plans and adopt a highly rational approach to the market. This is a typical example of “causation”, a management approach that relies on rational market analysis. Causation amounts to predicting the future then developing the best strategy based on the future predicted.
Expert entrepreneurs, by contrast, often start from their first customer and try to rely less on predictions of future market developments. They develop a product or service for their first customer, then determine how they can create a market and develop their own segment of that market. Miguel Meuleman: “Saras Sarasvathy, a PhD student of the American winner of the Nobel Prize for Economics, Herbert Simon, listened to these entrepreneurs and found that people who start multiple companies don’t follow the typically prescribed theory. They take other considerations into account, such as ‘Who am I?’, ‘What can I do?’, ‘What do I know?’, ‘Who do I know?’ and ‘What resources do I have?’ Depending on the answers to these questions, they decide how they can develop their market. In this way they try to control their future without having to make accurate predictions. What these expert entrepreneurs are doing is a typical example of ‘effectuation’: making do with what you have.”
Cooking
For Miguel Meuleman, “causation” and “effectuation” can best be compared to the way cooks plan a menu. “One cook chooses a recipe and then carefully purchases all the ingredients, preferably the very freshest produce. That’s ‘causation’. Another checks out what’s available in the kitchen then tries to put together a unique but very tasty meal. That’s ‘effectuation’.”
It is not difficult to find examples of companies that have thrived on effectuation. Listed media company Alfacam is one. It started opportunistically with short filmed reports, but now records major sporting events. The renowned and very popular Icehotel did not spring from a brilliant marketing brain but is the opportunistic result of a stopgap solution that turned the person who thought of it into an entrepreneur.
According to research, business angels operate like expert entrepreneurs and often adopt an effectuation approach. Research has also shown that business angels who do proceed in this way have fewer bankruptcies in their portfolio of start-up companies than do other investors. There is a growing tendency for experienced venture capitalists to work in the same way.
Miguel Meuleman gives good advice to students who want to set up their own business: “Start from who you are, what you know and who you know. Don’t set out with grand strategic plans. Opportunities often appear out of the blue and you can also go a long way with a bit of creative financing.”
Creative use of resources
Young entrepreneurs can achieve a lot with limited financial resources. Miguel Meuleman does not think that this approach – called bootstrapping – fits the classic picture, but it is completely consistent with the concept of effectuation. Entrepreneurs who can substantially reduce their need for financial resources by obtaining grants, using second-hand products and accepting lower salaries often have much less to lose if they fail.
“Effectuation isn’t synonymous with improvisation,” Miguel Meuleman warns. “It means taking a step-by-step approach, using what you have to respond to a specific demand opportunistically. Many opportunities are so uncertain and vague because no well-defined market exists and entrepreneurs have to create one. In such a scenario there’s little point in making a detailed prediction of the future market. Besides, often they don’t have the resources for large-scale market analyses. Collaboration with potential clients and partnerships can help eliminate uncertainty. It’s all about being creative with the resources you have available.”
Entrepreneurial bricolage
Poppunt, an organisation that protects the interests of young artistes, found that it did not have sufficient financial resources to construct a very complicated website. A company saw the project as an opportunity to showcase what it could do and did the job for a modest fee. To give young artistes a chance to perform at a rock festival in Werchter, Poppunt signed a cooperation agreement with brewer Stella Artois. The creator of a new computer game could not hope to compete with the retail market position and might of established computer game producers and chose to distribute his game for free on the Internet in order to provoke an automatic demand. He was subsequently able to sell the second, updated version. “As in the two previous examples, this unusual approach to the market is an application of the ‘entrepreneurial bricolage’ principle,” Meuleman comments. “Entrepreneurial bricolage is a very creative use of scarce resources by entering into partnerships or exchange agreements. These are solutions that cost the entrepreneur very little, but can have massive returns.”
NomaDesk, a successful example of entrepreneurial bricolage and bootstrapping
Filip Tack and his two partners started a business in 2004 with €18,600 in seed money. For five years their company, NomaDesk (formerly Aventiv), which now has 17 employees, worked on developing NomaDesk software, which allows a company’s employees to work electronically on the same dossier and to share documents without expensive investments in a virtual private network (VPN) or firewalls – and all offline! Aventiv initially did not pay its founders any salary and relied on limited income from a trial contract with Johnson & Johnson, a prototype grant from IWT (the Institute for the Promotion of Innovation through Science and Technology in Flanders), cooperation agreements with 3G modem manufacturer Option, amongst others, and exchange agreements with broadband technology company Siruna. Thanks to the IWT grant, four business angels came up with capital, which paved the way for the arrival of venture capitalist GIMV in 2007. The whole process was a series of successful applications of bootstrapping and entrepreneurial bricolage. After five years of product and market development, NomaDesk software is ready for a broad-based market launch, and can look forward to notching up its first major sales.
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Tips
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More information:
Miguel Meuleman
Tel: + 32 9 210 97 70
miguel.meuleman@vlerick.be