Research Highlight The decision-making logics that accelerate or slow down start-ups
How likely is a new venture to flourish or flounder? One immediate yardstick for performance is gestation speed, or how fast an idea translates into an actual business. But development may be accelerated or slowed down by certain mechanisms of decision-making logics. New research identifies which ones act as brakes and gas pedals.
Business gestation speed as a performance indicator
In the same way as a tiny cell takes a full nine months to grow into a baby, from conception to official birth, a business venture needs a substantial amount of time to develop, from an idea scribbled on a napkin to incorporation. Hence the apt metaphor of “gestation period” in the domain of entrepreneurship.
But would-be entrepreneurs may need longer than nine months to launch a firm, depending on how fast they shape an idea, obtain financing, produce a prototype and so on. While speed does not necessarily translate into long-term success, many studies argue that high gestation speed improves the ability of nascent entrepreneurs to acquire resources, beat competitors and grow in the market. In a fast-changing environment, quicker entrepreneurs will capture a window of opportunity.
Indeed, gestation speed has received increasing interest as a metric of proximate performance. It offers a window into the very early stages of venture close to entrepreneurial action, long before measures like sales figures or simple survival become available. That's why a trio of researchers decided to study gestation speed as a way of “[opening] the black box of cognitions in new technology ventures.” ESCP Business School professor René Mauer and PhD candidate Simon Nieschke, along with effectuation ‘spiritual mother’ Saras D. Sarasvathy (Darden School of Business, University of Virginia), specifically examined how decision-making patterns in new technology ventures impacted their gestation speed.
Two competing decision logics
The researchers investigated the matter through the lens of effectuation theory. It differentiates between two decision-making logics: causal and effectual. In their study, Mauer and his co-authors examined how these two logics govern practical approaches to problem-solving (or heuristics). For instance, effectuation focuses on the risk of an investment (an acceptable loss) whereas causation emphasizes expected returns; effectual practice emphasizes creating an outcome based on existing means and resources (it's means-driven) as opposed to the causal practice that begins with pre-defined goals and derives the required means to achieve them (it's goals-driven).
But the two logics are not mutually exclusive. As the researchers note, “recent studies argue that entrepreneurs can switch between causation and effectuation heuristics and that their interplay improves results.” So how do these logical approaches influence gestation speed?
A clear pattern emerging
To find out, the authors observed eight new technology ventures that originated in two leading technological universities in Europe. They gathered data on 12 gestation activities, from the preparation of business plans, filing of patents and hiring of employees to the generation of sales income for all eight ventures, and code-named each venture after Saturn's moons.
What emerged from this broad study was a clear link between decision logics and gestation speed. Distinguishing between early- and later-stage gestation revealed that all ventures apply effectuation in the early stages, and favour more causal behaviour in the later stages. “However, the cases with high gestation speed (…) were more effectual in the early stage than were the cases with a medium or low gestation speed,” write the researchers, noting that in the latter stages, the “fastest” firms still retained a more effectual approach.
The mechanisms of decision-making logics and gestation speed
Next, using illustrative data from interviews, the researchers identified four mechanisms of causal decision-making that slowed down venture gestation. What they termed ‘causal brakes’ are:
- Investing time in market research and planning;
- Searching for specific resources, customers and partners (This, say the researchers, “required a lot of energy and often led into blind alleys”);
- Waiting for specific events to occur, for example for investors to commit capital;
- Investing time in rearranging previously developed plans to adapt to unexpected events.
A fifth “causal” mechanism, however, increased gestation speed: pushing for early investment.
One pattern the authors found striking was that the low performers (in terms of gestation speed) used the business plan a lot more for actual planning purposes than the high performers. Conversely, the founding team of one of the fast-gestating ventures primarily created a business plan in order to follow the rules of investors or competitions as a means to reach out to networks.
Regarding effectuation heuristics, their underlying mechanisms sped up the gestation process of the new technology venture. The ‘effectual pedals’ – which mirrored the effectuation principles of using existing means and viewing unexpected events as opportunities – were:
- Deriving immediate action: starting to build, relying on gut feeling rather than planning;
- Going with the flow, for example adjusting products to the existing demand rather than searching for suitable customers;
- Building on the first available partner – and here, the stakeholders are not middlemen, but co-create new environments in which firm and market are aligned.
In contrast, one mechanism did slow venture development: lack of focus, for instance in one case, where the founding group developed a product following their scientific interest over years without actually intending to start a business.
Interestingly, longer-term performance data showed that the positive effect of effectuation heuristics on venture gestation continued to hold more than 10 years later.
In conclusion, the authors recommend that entrepreneurs learn what an emphasis on one set of heuristics means for their early-stage gestation process, in which causation may rather slow down the process and effectuation speed it up.