A conversation with the associate professor of business administration at the University of Virginia.
Question: What kind of person becomes an entrepreneur?
Saras Sarasvathy: So I thought about this a lot and I am now convinced that there is no one kind of a person who can become an entrepreneur. A lot of people believe that there are certain characteristics that make someone an entrepreneur and that entrepreneurs are different from non-entrepreneurs or other human beings. So, almost as though entrepreneurs are a different species and I am becoming more and more convinced that it’s not a very useful way of looking at entrepreneurs. I think entrepreneurship is the proverbial inkblot in the sense that you can be a stick-in-the-mud person with a lot of routine, you know, just for the fun of it I would say the accounting type and you could go start H&R Block. Or you could be the ultimate flamboyant guy that you can think of Richard Bransonand start all kinds of things including trying to take people to space. Or, you could be a loud mouth like Ted Turner and start CNN.
So, I actually think I’m more and more convinced that everybody can be an entrepreneur, that entrepreneurship is much more a way of looking at the world and solving problems in the world. Like the scientific way. Everybody can learn to be a scientist. Not everybody can become an Einstein that’s not what I’m saying, but, everybody can actually learn to become more scientific in their reasoning. And in the same way I think everybody can become more entrepreneurial in their reasoning and on top of that, because this involves human beings first and foremost, unlike in science where you have to really understand nature and you know, maybe also understand the differential equations. Here, it’s much more something that human beings are very good at interacting with people in the social setting and that’s why you find millions of women around the world, many of them illiterate, who are entrepreneurs. So, I’m becoming more convinced and I’m beginning to embrace the idea that there is no one type that cannot become an entrepreneur.
Question: What are the characteristics of successful entrepreneurs?
Saras Sarasvathy: One is, if you never ever start a venture, right? You’re not going to be a successful entrepreneur. So that’s a sure thing. I can separate a successful entrepreneur from the unsuccessful one by seeing if they ever started anything or not.
The other one, I think, if you want the surest predictor of success is how people actually deal with failure. So, if you think about this people will argue that the success rate for ventures is very, very small: 1 in 10, people throw out these numbers. It’s actually not quite correct. But, whatever the number that you believe is the success rate, if you think about it for a moment just by being willing to fail once or twice and start again, you can increase the probability of your success. In respect about what the success rate is out there in the world, right?
So those would be the two things I would look for, somebody who actually acts with a bias for action, someone who will actually go out and try to solve a problem using entrepreneurial methods if you will and someone who is willing to do it over again if they did something wrong and by doing it over again, there’s one other thing that you gain and that is overtime you become very good at keeping your failures small and useful, keeping them smart, making them happen at early levels of investment. So, you actually are able to get more shots at the pot. So failure teaches you not only what not to do but also how to do things with a smaller footprints so if failure happens, it’s not disastrous. So that’s the way I would think about successful versus unsuccessful.
Question: How do entrepreneurs see the world?
Saras Sarasvathy: This is a large part of my research, looking at this notion of what does it mean to think entrepreneurially about a problem, to reason about a problem entrepreneurially and then most importantly to act entrepreneurially. So one of the first things about being entrepreneurial is being action oriented, that you’re actually willing to, as I call, “Do the doable”. So you don’t wait for the perfect solution, so you’re always working on version one point something because you’ve only jumped into version one, 1.0 and that may not be the perfect thing but you kind of always do the doable and then push it, and then push it. So that’s, in terms of action, that’s one of the things that entrepreneurs do and that is that they Do. And then if you start thinking about what they do, right? Then you start beginning to understand a little bit about what does it mean to be entrepreneurial. So one of the things that entrepreneurs are really good at doing, as I told you, especially the experienced ones, is to do things in a way that it is not going to involve huge, investment outlay.
Try to understand how the entrepreneurial worldview is different from other worldviews. Not necessarily from any non-entrepreneurial but say how is it different from scientific or the religious world view or maybe a sociological ethos or all these different ways that we could have of looking at the world. The fundamental thing about the entrepreneurial worldview is that you see a role for human action. For example, when you look at “Where does the future come from?” A lot of entrepreneurs, even if they may not state it in so many words, they behave as though the future comes from what you and I do, that what human beings do matters. So, they do not come from, say, some kind of inevitable trend, you know. There’s nothing that is deterministically or even probabilistically written that this is how it is going to go but whether it is in terms of a new technology, whether it is in terms of where we are headed as human beings, you know, whether it has to do with economic development or the social development of a human being. You take any problem the entrepreneurial world view would suggest that what we do matters and that what we do can make a difference. It may not be all that matters but it’s the first thing in a way that matters, that if you do not do something then nothing will happen. It’s something they understand very, very well. So, if you try something, you know, you may or may not succeed but if you do not try something, I can give you a guarantee, it ain’t going to succeed, right? So it’s that kind of a reverse view of success if you will. A lot of us wait and we think, if I think I could succeed at that I would try it. An entrepreneur just simply says, here is a problem I kind of know the first step would work if I take it and it looks like I can do it, so let me do it and then push it rather than, because what I do will make a difference to the odds. So I don’t try to calculate all the odds first.
Question: Can you give us an example?
Saras Sarasvathy: Here I would like to give you the example of Muhammad Yunus who started Grameen Bank in Bangladesh. People praised him as some kind of heroic visionary and actually he is, my hero in some ways. But, I also study early stage entrepreneurship and how a lot of entrepreneurs who have built these very successful enduring organizations, how they think and some of the things you find early on suggest that it was not really the vision that drove them to do. They were looking at something much smaller. In fact, when Muhammad Yunus visited Darden, he actually said this, he said, “When I was an economist, I thought big. I could see the big picture. I could see the sequence of events and how things would unfold and I had these general theories of the world and about human behavior. Now, I’m an entrepreneur. I have the worm’s eye view. I see very few things, very little things but I see them very, very clearly.” And, a lot of entrepreneurs are like that. So they see a little problem that is actually fixable and they fix it and then that opens up new avenues, perhaps new problems.
In Muhammad Yunus’ case he came across this village that was devastated and people had lost their livelihoods and he finds something, I think he mentioned something like 45 people who required a total of 27 dollars worth of capital. Well, he had 27 dollars, he gave it. So that’s the first step but that’s not, the key thing is not just that you and I might have given it too out of just empathy if you will or sympathy but he went the next step. He started asking if this is so easily fixable, why isn’t it fixed already in a big way. So that, the next step is the pushing, so he goes to a bank and he actually ask them, “Why don’t’ you lend this people money? These are really paltry sums.” And then they tell him that these people are un-bankable. They are poor. And then he pushes that and he pushes that so if you listen to the story, it’s that first step that you do the doable and then you push and you believe that the pushing is going to make a difference even though you may not have any guarantee that it will. I think that is the essence of the entrepreneurial worldview.
If you do not think entrepreneurially, it doesn’t mean that you’re not going to make any difference in the world. So I want to say it’s not entrepreneurial versus non- entrepreneurial. You could be a scientist and you could say that people are dying of small pox and what I really want to do is to solve that problem. And that problem obviously is not a question of giving somebody $27 and pushing. Maybe, you do need to spend years studying it and working on it. So, I want to make it very clear that I do not think of the world as entrepreneurial versus non-entrepreneurial but the essence of the entrepreneurial world view is this, “Believe that what we do makes a difference and that we can push it and that you keep doing the doable and keep pushing it and you work with a whole bunch of people and get them to work with you in interesting ways, in creative ways and all kinds of good things will happen down the road.” So that’s the entrepreneurial worldview.
Question: What method do entrepreneurs use?
Saras Sarasvathy: I presented the entrepreneurial worldview fully born, if you will. But in actual fact I had to understand that by looking at what entrepreneurs actually do in a micro level, if you will. So in my research, I talked to a whole bunch of, you could call them successful entrepreneurs, but success was only a part of their story. I call them expert entrepreneurs. These are people who had several years of founding experience, of multiple firms, often success and failures and they had learned to perform well overtime. So they had taken at least one company public so of course people see them as successful entrepreneurs. And, when you study how they think and I gave them a 17-page problem set of typical start-of-decisions that all entrepreneurs have to make in starting a company. So I got to see at the micro level the kinds of things that they do. Not just the whole world view of how they think but how they implement that world view in their practical day to day business problem solving if you will and I found the CDs of things that they do and I wrote about five of these, the five principles in my book but I suspect there are more. And I think, as I teach and I look at more histories of entrepreneurs and I talk to them I think there will be more. So I don’t want to talk about this, that there are only five principles, but I can give you some examples.
So, one of the things I always talk about to my students is about cooking. Now, I say there are at least two ways of cooking. One is to start with a dish that you want to make and when you have a great recipe, go get the ingredients and then you make the dish. The other way, the way most of us cook I think, is we stumble into the kitchen, open the refrigerator and find stuff and if you come into my house you would find brown powder that you might have to smell to know what it is because I’m making it in food. And so, you kind of look at what you have and then you try to make something with it. The interesting question here is what difference does it make whether you cook using a recipe and proper ingredients or whether you stumble into the kitchen and cook something. It depends on how good a cook you are, what you end up cooking. So, you can get away from the basic ideas that you need to understand about running a business, so you still need to know how to manage your cash flow and things like that; but, when you just stumble into the kitchen and cook, what happens is, assuming you know how to cook and you’re a good cook, you are much more likely to come up with a new dish that even you might not have actually planned to make. Whereas if you are cooking from a recipe would get that dish, right? You wouldn’t get some of the new dish and that’s the interesting part of it.
So it’s not really a question of this is better than that, it is just that the way entrepreneurs do it, they work with what they have and they look around and say, “What can I do with this?” And then, “What else can I do with it?” So it goes back to the idea of doing the doable and then pushing it. So they just look around at the resources that are available to them and by resources I don’t even mean money. A lot of the entrepreneurs I study started with things like who I am, what I know and whom I know. So they are looking at what kind of a person am I, what kinds of things turn me on, what kind of things that I just will not do because it goes against my values. So, they have a sense of self. They know what they know and very often they are very good at knowing what they don’t know. So they look at what they know and don’t know and they look at the people that they know and they start talking to the people almost immediately and they bring them on board very early on. So they work with what they have to create something new. So that’s a technique and there are lots of techniques connected with that that we can learn and teach. It’s very useful in the classroom.
The second thing that they are very good at doing is to think through in deciding what to do with what you have. They are not really thinking about where will I get the biggest bang from the buck, which one is likely to lead me to the most profit? Instead they constantly asked themselves, “Would I do this even if I know I’m going to lose what I am investing in it?” Which is a very different criterion financially speaking for example and I call that the “affordable loss criterion”. And, a great example of that is there are people who have good jobs, right? It pays 100,000 to 200,000 a year who leave and start a company. Now, the standard gut reaction is to say, “Oh, my God.” They are, you know, entrepreneurs are risk takers. They are just risk grabbing, you know. They like jumping off buildings or whatever. But in actual fact when you look at how a lot of these entrepreneurs make decisions, especially the experienced ones, they are not really saying, “You know what, I’m making 200,000 today but I believe if I do this, I will make 20 million and therefore you know, I’m just going to invest everything I have.” That’s not the way they think about it at all. They think, “You know what, this looks like an interesting thing to do. I think I would enjoy doing it. I always wanted to do this kind of thing. So I think I can put 50,000 into it and six months of my life. What is the worst that will happen? Maybe, you know, I have left the job and I’m back on the job market and maybe I don’t make 200,000, I make a 150,000. But, if I don’t do it now, when will I ever do it? I always wanted to be my own boss. I always wanted to build a heart monitor because my dad died of a heart, or whatever that thing is that is moving that makes, it comes from who they are and what they know and whom they know. It’s very close to what they already have on hand. So that’s kind of the second thing.
And the third and most important thing is that they work with people and they work with people in a very interesting way. They don’t go and say, you know, here is something I want to build. You know, Gadget G and this Gadget G is going to change the world so who do I need to bring on broad then I go and sell this and I’m so good, I’m so charismatic. I’m such a good salesperson. I bring people on board. No, no, no. What they really do is they are very good at getting you to tell them, you know, what would you want to do with Gadget G? They allow you to change their vision of Gadget G if you are willing to put skin in the game. So they build this network of stakeholders who actually put stake in the ground and each of them invest only what they can afford to lose. So the affordable lost works with this stakeholder thing in a very interesting way. So what happens is, since each person is putting real skin in the game and they are deciding what to put in based on something they care about so much that they are willing to lose.
So the affordable loss does two things: on the one hand if you fail, it keeps failures really small. Something I talked about earlier. But on the other hand it gives you a different way to evaluate an opportunity. A different way that does not depend entirely only profits, that you would do this for some reason, some reason that you have even if you lose the money you would do it whatever that motivation may be. It could be something as simple as I can’t stand my boss, as much as I want to. It could be something as simple as that or it could be very lofty saying that, you know, I really wanted to help women back home and I want to do this venture because it would help them and it’s okay in the process I try and fail. So the motivation can be anything but the logic is kind of the same in each case.
Question: Can you teach people to be entrepreneurs?
Saras Sarasvathy: I use to get this question a lot in the beginning not so much anymore because I think pretty much, at least academically speaking, people are coming around to the idea that entrepreneurship is teachable. Now, the question of whether this logic is teachable, I think this logic is even more teachable in the sense that it doesn’t depend on any particular set of criteria. So I don’t have to give you some kind of psychological test and say, “Here are 3 things you need to change about yourself before you can be an entrepreneur.” So I tell my students, “It’s something like a voice and I’m teaching you to sing.” There are aspects to it. You have to want to do it. If you never ever want to start a venture, I am not going to go try to motivate you to start a venture. It’s not about that kind of thing. But given that you want to start a venture there are lots of things that are teachable. There are lots of basic techniques like cash flow that you can teach.
But I think I am very fortunate to have found something that is teachable also at the worldview level. So there are ways to teach people to think differently just like you can teach people to think scientifically. It doesn’t mean they are not going to refuse to walk under a ladder. It doesn’t mean that they all become some kind of super rationalist like Newton but everybody can pause and think, “But let me look at that scientifically”. Maybe I shouldn’t be superstitious and that’s teachable. I think in that sense entrepreneurial thinking or this logic of entrepreneurship is very much teachable. I can’t force people to actually get out and do something, but if they want to do something I think there are lots of things that we can teach them about how to do it better that is more likely to lead to novelties, more likely to lead to a more satisfying kind of entrepreneurship, if you will. So there are lots of thing that are teachable.
Question: What is the first step to becoming an entrepreneur?
Saras Sarasvathy: Assuming people actually want to learn how to start a venture, one of the first things I tell them is “Start it!” And so people look at me like, “What?” The thing I ask them is, “Okay so you want to start a venture, what venture do you want to start?” And people would say things like, “Oh, I want to start a venture but I don’t have an idea.” or “You know, I have an idea but I don’t have money.” So I try to go through that list and take away their reasons for not doing it and it’s very easy to do that because you can come up with examples of entrepreneurs over and over again who did things without having an idea, without having any resources and with four kids, after a divorce which didn’t give them any money. I mean, the examples of entrepreneurs who have done it every which way that you can imagine and almost all the time and people think there are three things that you need before you start a venture. Almost all of them are always falsified in most great entrepreneurial stories. So I have lots of stories if you would like me to go into one or two of them.
So one of the stories is Google. Now, we think it’s like the greatest idea in the whole universe but then Google came along it was just another search engine. I don’t remember how many exactly, well like 65 viable search engines on the market, something like that. It was yet another search engine. Maybe a couple of tech-savvy people in Silicon Valley knew that there was something special about it. But when their first investor actually gave them a check, they didn’t have a bank account, they hadn’t incorporated. They gave a check on Google Inc. and they had to open a bank account later. So even they did not really, you know, believe that this is going to be the greatest thing. In fact, there is a story that they try to sell the company for 1 million dollars and luckily I say for them, there were no takers so they couldn’t sell it. So, they had to per force become billionaires. That does not sound to me like somebody who had this great vision for a good idea.
Another example is Pierre Omidyar and he gave a convocation talk at Tufts where he describes this, that people always tell me that you must have known that eBay had to be self sustaining otherwise it couldn’t manage with 40 million users or whatever it was at that time. And he said, “No. I built a system that would be self-sustaining because I had a life then.” So that, you know, eBay was not my only thing, I had a day job, I had a girlfriend and we wanted to go mountain biking on the weekends and so I had to build something that would just capture feedback and do everything on its own while we were away having a life. And he goes on to say that if I had gotten a lot of money from a venture capitalists I might have done something more complicated and it wouldn’t have work the way eBay has worked out. So here’s another person, but it doesn’t mean that they have no ideas. They’re just doing things that they know how to do and they are trying to push it. He has a day job but he is trying to build something, build a venture on the side too. So you can talk about these things people having ideas, resources.
And I also show video clips in class, Robert Rice who founded R&R. They had, they sold Trivial Pursuit over millions, right? So he talks about it and he has a very good way. He says that it’s like playing Scrabble. A lot of people think that you have to have some kind of a blockbuster idea. I’m actually quoating him now by the way. But he says, “It’s like Scrabble, you know. Most ideas are mundane you add a letter to a word and then you get the credit for the whole word.” So I play that clip in class and I talk about that a little bit.
And there are a whole series of exercises that you can do and one of them is I ask students to think about who they are, what they know and whom they know and to come up with a couple of possible venture ideas that they can start the next day. And then if nothing else, I tell them do something everyday about it. It could be something as simple as coming up with a name and getting a card printed. So long as you actually do something, it becomes real somehow and then people start doing things and then I get them to call people and talk to them, get advice and then all kinds of advice starts pouring in - you should do this, you should not do that and you should make it bigger, it should be like this, maybe you should add this chip or you should look at this technology. And then they started getting all this feedback and a lot of people even start picking up the phone and calling other people to introduce them and very soon it becomes very, very real. So there’s absolutely no substitute, I think, to actually getting people to start a venture even if starting a venture might be something idiotic like coming up with a name and print a card. It could be the starting point, but then the pushing is where I think the real learning happens. So what do you do next? I think is the essence of entrepreneurial teaching. So the first thing is to get them to do something and then you start looking into this problem of what do you do next. So in a way, I almost think about entrepreneurship now in terms of content in teaching as the art of the next step, that entrepreneurs are always about the next step because a lot of people do, you know, come up with an idea and a name and the business card and then they stop. But entrepreneurs are very good at going out and talking to people and then responding to all the suggestions and sometimes even the criticisms that they get with always another action that is doable and worth doing in the small and then they push it, and then they push it.
Question: Is the recession good news for entrepreneurs?
Saras Sarasvathy: Well, absolutely. In fact, if we have to come off the recession who is going to get us out of it? If entrepreneurs stay home and wait for the recession to end, right? The worldview on entrepreneurship is what you do matters and if you don’t do anything it is not going to change. So when things don’t go well, it’s even more the time to act. That’s part of the entrepreneurial worldview and this is something that seems very simple when you actually come to realize it, but it’s not intuitive to think about. Now, there are lots of articles written and stories about companies that started during recession but one of the things people haven’t written about as much is the idea that there are more opportunities than there are problems. For example, there are more opportunities today I would bet in sub-Saharan Africa than anyplace else just because that place needs so much because it’s simple economics that where does demand come from? It comes from needs, it comes from necessities, it comes from wants. It comes from people who have problems and that’s were opportunities come from.
I had a student from Nigeria who took a class with me in the first year and he had the same issue that a lot of my students have: “Oh, I would love to be an entrepreneur someday but you know, I don’t have any idea. I don’t think I’m the entrepreneur type”. And, by the time we finished the course and we had talked about this notion that ideas are a dime a dozen, opportunities are strewn everywhere, what makes something really a viable opportunity is you’re acting on it and you’re finding ways to kind of implement it. By the time we were done with it I think he was ready to at least try something so he goes back to Nigeria during the holidays and then he comes back with a book of 20 ideas all of which he absolutely are doable and he wants to do now! And so the problem became, you know, kind of what to do next or rather what not to do next because you cannot do all 20 at once. So from a person who thought that he didn’t have an idea, that opportunities are rare, he suddenly realized that he could see a lot of opportunity, that he could see a lot of opportunities back home where everything was new.
I have kind of the same experience when I go back to India. Everything is new there in some ways and the excitement of development is exactly that. That is a basic level of course if you are in the bottom billion or if you are really, really poor that you do not have food to eat, that’s a different story but the moment that we come out of that absolute basic necessity out of life, almost immediately life is filled with opportunities because now the human being has time to think and actually do something and human beings create things and human beings start wanting things which is a very good thing. So, I do believe that the environment for opportunities has to be, if there is a measure of it, higher today during a recession than we when we had all the money floating around on Wall Street. And just to give you one example, one of the classic examples of a company that started during a recession is Sony. And, Sony decided during the recession in Japan and they started trying to make rice cookers. And it’s amazing apparently if you go to Sony headquarters today, they still have these steamers on the wall because that was, that was the original business model for the company. So it goes to everything that we say A. You can start a company like Sony during a recession and B. You don’t need to know what the heck it’s going to be. It could be a bunch of steaming baskets and it turns out to be something very different down the road.
Question: Does the company structure stifle innovation?
Saras Sarasvathy: This is a tougher question for me to answer because I’m not really an expert in this area but there are lots of examples of people being entrepreneurial within a company and there are a lot of companies that actively try to encourage people to be entrepreneurial within a company. One of my colleagues and a co-author of mine also who had three or four people from Darden involved: Jeanne M. Liedtka and Robert E. Wiltbank and Sean Carr, and a couple of other people who actually looked at organic growth leaders, people who had created top line growth within companies, and they found that at least to some substantial extent they think like expert entrepreneurs. So, there’s a lot of overlap between how expert entrepreneurs think and/or how organic growth leaders inside larger corporation thinks. They also have to incorporate other kinds of mechanisms, for example, they have to know how to navigate the system within the corporation. So it’s not one-on-one match but there is some evidence, some recent evidence that shows that. There’s lot of other kinds of stories of entrepreneurs within companies. So I’m not sure that it cannot be done but it would be interesting to see what are some of the barriers to entrepreneurial thinking whether within a large corporation or in a country for example. So that would be a topic I think that would be really interesting to look at what comes in the way of people trying to be entrepreneurial in companies and then other people who study that too.
But, I am not quite an expert on that but given what I have actually looked at in terms of some people trying to be entrepreneurs within a company. One of the reasons is almost every decision on that what to do next question inside a company involves some kind of a trade-off that an independent entrepreneur may not have. For example, if I decide as an entrepreneur within a company, I want to develop a new kind of technology or a new product which might put my current product out of business, right? So now I had to think about when to develop it. Should I cannibalize my own product? So that’s this opportunity cost in a large corporation, I think, that makes the decision fundamentally different than for an independent entrepreneur. So that’s at least one thing I would point to as a difference, not necessarily as a bad thing, but it’s a difference. So when you make the decision on what to do next you have to take into account what you already have accomplished and interestingly enough this is a problem not only for large corporations, it’s a problem for very successful entrepreneurs too. So if you if you’re like Pierre Omidyar who started a company, who built it up and it’s growing, now when you want to do the next thing whatever that next thing is, you have to worry about this baby that you have grown into something and expert entrepreneurs have interesting ways to deal with that. Not all of them actually are good at solving that problem so what they do is sometimes they say, “You know what, it is time for me to sell this company,” or “It’s time for me to bring someone else to run this company while I become CTO or develop a whole bunch of other products that have nothing to do with the current one.” Or, you know, “I just resign, become chairman of the board and start other companies.” So the expert entrepreneurs solve the problem by doing other things for the most part but the problem remains. I think it is a fundamental problem. It’s not a problem that you can just get rid of in a large company. But given that you have that problem, I’m sure there are lots of things that you can do to allow people to be entrepreneurial within a large corporation and some companies have tried things like creating a venture capital wing where people actually come up with ideas and build it along a little bit and they can present it to the venture capital wing and the company can decide. So people have done this but it’s not really my area of expertise because I haven’t really studied that.
Question: What are some typical entrepreneur pitfalls?
Saras Sarasvathy: A lot of the time the early stage founding partnership is kind of like the courtship period leading to a marriage and nobody really wants to write a pre-nup and so a lot of the founding partners either don’t bother to sit down and think through how they will divide the pie, whether it is in terms of returns or in terms of responsibilities, or in terms of difficult decisions that might come down the road. So they just, you know, they are in this wonderful mood and they want to go, you know, if there are three of them it’s like the three musketeers, you know, “One for all and all for one.” So they go into equal partnerships. And, professional advisers that I have talked to, you know, lawyers and accountants who deal with early stage enterprises tell me that, that’s one of the reasons a lot of ventures go down the drain, not because the market was not there, not because there wasn’t enough money or the idea wasn’t good but because the partners just could not get along after awhile. And they also tell me that it happens more often when the companies are actually growing and doing well. When the two different partners or the three different partners have different views of how they want to grow it or what to do next and at that point in time because they have an equal partnership and they didn’t bother towrite down provisions on how to make decisions, the decision doesn’t get made or the partnership has to be dissolved and people have to start all over again and it becomes very difficult. So I would guess that that is definitely one of the mistakes a lot of novice entrepreneurs make.
The other one is this idea, this I can speak to with a little bit of authority and that is this idea that you can predict the future. So, you invest lots and lots of time and effort and money in writing a business plan or doing enormous market research and you analyze and analyze and analyze or you do some kind of statistical survey and you think that is how the world is going to go and then you put all your money because it requires that much money to make it. So this idea that the future is predictable and that there is this perfect plan that you can write a priory and then implement, I think that is a real dangerous way to think about it. And just because of the way we have been teaching entrepreneurship around the world now because people take their cues from the US for the most part on what they teach in their business school classroom, it’s become almost a de facto way of thinking about entrepreneurship: business plan competitions, and so people spend enormous amount of time and effort in writing business plans for business plan competitions and I’m not sure that is the best way to build an entrepreneurial economy especially as the expert entrepreneurs would say, “If you really start believing your own numbers and you think you can actually deliver on this particular plan that you wrote then you are in real trouble.” So I think that would definitely be a huge pitfall for a lot of novice entrepreneurs. In fact, some of the experienced entrepreneurs actually talked about trying to do that and failing and learning the hard way that the future is not really as predictable as they thought and that is because of that world view in a way. Because in a world in which a lot of people act and believe that their action matters, there will be more uncertainty. In fact, the future actually becomes less predictable and people actually start acting in innovative ways. So it works both ways. It is unpredictable because people are doing creative things but also your trying to predict it becomes useless because that way a great venture will be more creative and more active in the way you do things.
Question: What is a big challenge the world faces?
Saras Sarasvathy: One of the things that came out of my research is if you truly buy the idea that this [the entrepreneurial method] is a way of thinking about the world like the scientific method, it’s a way of dealing with the world and it’s a way of thinking about solving problems in the world, then you should be able to solve not only business problems with it. So, one of the things I started thinking about a lot more as I wrote about my research was, “How will I take this logic, this way of reasoning and apply it in a non-business setting like in a social setting if you will.” So I walked in to class one day and I asked people, “Why can’t I buy futures contracts in Rwandan prosperity?” So why is it that when we try to solve something like poverty or women’s progress or education we seem to think that we need to use a different set of tools than business. So that was one of the questions I had and I started thinking through how would an expert entrepreneur actually tackle any of those problems, and I gave you the example of Muhammad Yunus already who is a great example of somebody who thinks exactly like a lot of the expert entrepreneurs that I studied and ended up actually solving a social problem in some ways to a reasonable extent. Of course, there’s lot more work to be done. At least he showed the one way to solve the problem and for me, it solves two problems in one in the sense that it also lifts people out of poverty and it helps women do it, it empowers women. So I find that very, very close to my heart if you will.
So, if you start looking for people who have solved social problems and in a reasonably big way and you find the same kind of thinking then it begs the question as to why we would not use business tools, why would we not use entrepreneurial thinking to solve some of those problems and that line of thought has lead me to an interesting problem. I went to this pause and that is because a lot of entrepreneurs in the social sector think like entrepreneurs in the for-profit sector but somehow the funding part of it is so different that it makes the social center problems very different and difficult. And so one of the things I want to think about is, what would have to change in the way we fund problems in the social sector so that entrepreneurial thinking can actually do the kind of development that is being made possible in the for-profit sector in places like India and China.
So that’s one of the questions that I want to leave people with to think about what would it take to create something that is equally valid to all the different kinds of credit markets and innovative financial instruments that we see in the for-profit sector. I know this is a really bad time to talk about innovative financial instruments but I also think it’s a great time for that very same reason that, that same innovative mindset that you have in the financial sector, if you could actually take it over to the social sector I think some interesting things can happen and so I do want to give you just one example or maybe two on that because it’s close to my heart and you can decide what to do with it. One example I have is this company called Lumdi which has come up with a venture capital model for funding education in Latin America. Another instrument that I am looking at is a fixed income instrument to fund education in Pakistan. As I mentioned, these are education issues close to my heart.
Question: Can entrepreneurs use their business skills to solve social problems?
Saras Sarasvathy: What I want to talk about is the innovations and funding that are available in the for-profit sector that are not available in the social sector, and not even innovations, things that were innovations once upon a time but things that we take for granted now, they are just efficient ways of funneling resources into particular companies and matching up different investors with different companies. For example, let’s think about some thing like more fuel efficient cars. One of the ways you think about how do you want to think about buying a fuel efficient car, you can check out all the different models that are there and you can hear people pitch, “Buy the electric car which is so much better than the hybrid,” or “Natural gas would be even better,” or you can actually turn on CNBC or CNN to the technology section and you can listen to different people pitch you different thing and then and then you can take your pick. You can spend a little bit more time and do some more analysis or research if you want and you can say “Here is the kind of car I want to buy”. You can also think through which car company you want to invest in. But there is no channel that I can turn on and hear two guys from the Congo, say, talk to me about how they are going to solve the electricity problem in the Congo and I think through which one do I want to actually back and go home do a little bit of research and then a couple of clicks on the computer and I send the money to that one. We never think about social sector problems in the same way. That’s the kind of thing I mean. And, let’s say one of those two guys in the Congo has a really cool way of solving the electricity problem in such a way that the problems stays solved and it creates a financially self-sustaining model.
There’s no way we can just simply create a franchise of 1,200 of those kinds of schools that spread all over Africa or we can import into Brazil. We don’t think about social sector problems that way and we don’t have any of the channels, the infrastructure that exist that allow entrepreneurs to not just build ventures but to grow them and to spread them out and to create variations through competition. So a lot of those things and most us will recognize those as market mechanisms. They don’t exist in the social world. Really good smart people reinvent the wheel all the time in the social sector.
So my question really is that the essence of entrepreneurial thinking exists on the side of entrepreneurs building ventures in the social sector but it seems to be very much lacking on the funding side and that’s where I think I would like to do some work and some of my colleagues and I are beginning to work on it and we call those markets “In human hope”. I just wanted to mention that because I want to leave everything that I have talked about here on a “what to do next” problem and I think for those of us interested in innovative ideas in business and especially the logic of entrepreneurs that is going to be for me, I think, the next frontier to think through how do we bring entrepreneurial thinking to the funding side of the social sector? Lot’s of good stuff is happening on the ground both on the entrepreneur side that is a venture building side and the funding side but I think there’s a lot of exciting opportunities on the funding side for entrepreneurs to get in there and do it better.
Question: What has influenced you as an entrepreneur?
Saras Sarasvathy: One is there is a play by George Bernard Shaw called Major Barbara. When I was growing up in India, I grew up kind of lower-middle class, not poor by Indian standards, not poor at all but I didn’t have too many books or too much access to things but my grandfather had left, I think, 27 books that for some reason my mother had preserved. One of them was a Complete Plays of Bernard Shaw. And this play I think had a large influence on me because here Shaw is actually looking at this woman who is a Major in the Salvation Army and her father is an entrepreneur who makes arms and supplies it to both sides in the war and so they have this moral debate, if you will, and he wins and that’s an interesting one and it was almost the first story of an entrepreneur that I remember and a lot of it had to do with some of these ideas. At that time I hadn’t really thought of them as entrepreneurial ideas. It’s just that the play influenced me a lot and in a way led to another big influence in my life so when I had to go to college, my parents didn’t have enough money to send me to college so they suggested I should get a scholarship and I competed for a scholarship in India and part of the competition was to study the biography of one of India’s most famous entrepreneurs, Jamshedji Tata, and so that again influenced me.
So in a way, I learned my love of entrepreneurship as a method of social change, if you will, through these two things. It just turned out that that influenced the questions I asked as a researcher. I’m very fortunate that some of the beginnings of the answers that I found seem to point to details of how that method actually works. So in a way it had strengthened my preexisting inspiration, if you will, that entrepreneurship is actually a method for social change. It’s not only about somebody who doesn’t have a job starting a company, although there is absolutely nothing wrong with that because that is the essential seed of social change too, but I honestly think that that’s a method of social change and that idea came to me earlier on and I would like to leave my students with that idea that entrepreneurship is a method and is up to you. I cannot tell you what kind of social change is good or what kind of social change you should go for or what kind of aims you should have whether it’s “sell my company and go to the Bahamas,” and that is perfectly fine. So I don’t give people ends but I think entrepreneurship is the ultimate tool in human affairs. So that’s the message I’d like to leave people with.
Recorded on: May 19, 2009