FOE Study Guide

Part 2: Lecture 6 – 9
Incl. LinkedIn Case
Table of Contents

Lecture 6: Managing Opportunity.......................................................................................2

A. Entrepreneurship = Map...........................................................................................2
B. Opportunities made or found?.................................................................................2
C. Transforming means................................................................................................4
Lecture 7: Stakeholders and Ownership..............................................................................6
A. The crazy quilt principle...........................................................................................6
B. Partnerships.............................................................................................................7
C. Stakeholder interaction & commitment...................................................................8
D. Ownership, equity and control..............................................................................9
E. Investors.................................................................................................................13
F. Family Entrepreneurship (article)............................................................................15
Lecture 8: Effectuation Process.........................................................................................21
A. The 5 principles of entrepreneurship.......................................................................21
B. The effectual process and the entrepreneur............................................................22
C. The lemonade principle / Leverage surprise in detail...............................................24
D. Cases..................................................................................................................25
E. The effectiveness of effectuation (article)...............................................................27
Lecture 9: Business Model/Growth....................................................................................30
A. Business Plans and Models.....................................................................................30
B. Venture Growth......................................................................................................32
ICEHOTEL Notes from book.............................................................................................35
Questions and Answers on LinkedIn Case (Tutorial)...........................................................37

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Lecture 6: Managing Opportunity
A. Entrepreneurship = Map

1. In what way does an entrepreneurial journey relate metaphorically to a

roadmap?
A map can be seen as a dynamic reflection of your activities with paths that are
constantly changing, and the destinations are shaped by your own actions. No 2
maps are alike, the number of paths/destinations is infinite which accurately
describes the journey of a start-up entrepreneur

2. What are the 2 misconceptions related to this comparison?

1) It suggests a clear destination: a map is used to show you how to get to your
desired destination but in this comparison, we do not consider a map something
static. An image of a fixed environment. We use the definition of Bellman (Q.1)
2) It suggests that there is an optimal way to arrive at your destination: we can use
maps to determine the shortest/fastest way to get somewhere but this is not the
case with entrepreneurship. Using the definition in Q1. We see that there are an
infinite number of paths/destinations and no optimal path in entrepreneurship.

B. Opportunities made or found?

3. Are opportunities made or found?

There is no right or wrong answer to this question which is why we will look at both
scenarios.

4. In what way can we view opportunities as discoverable? (Opportunities = Found)

The found view is where the entrepreneur starts by looking at existing markets and
tries to identify the growth and unserved segments of that market. They follow by
building a business plan around the unserved segments whilst doing extensive
market research and detailed competition analysis. Finally, the look into the
acquisition of resources and stakeholders required to implement the plan.

5. What type of environment best fits the found view approach?

This work best with stable environments where there is plenty of historical data
available. The environment has to sufficiently stable for past outcomes to be
relevant for future situations.

6. What is the “search and select” approach?

This is the term used when referring to the range of approaches used by
entrepreneurs to find opportunities. (MP3 example pg. 77)

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7. What was the Green Passenger case about and how does it relate to the “search
and select” approach?
He analyzed an existing market (that of taxicab) and introduced a new concept to it
by combining existing resources. He added bike racks on the back of the cab, he
offered water and magazines as extra’s, and his cars were environmentally friendly.
It is a new concept born out of the combination of existing resources.

8. How does “the search and select approach” relate to “the causal approach”
discussed in the previous lectures?
When you look at the way “the search and select approach (/the found view)”
approaches opportunities you very clearly see the trend of the causal approach.
They first identify the goal (I want to create a business for this specific unserved
segment in the market) and then try to find ways to implement their ideas (try to
find the resources and stakeholders needed to implement the idea). This is the same
principle as the causal approach.

9. In what way can we view opportunities as creations? (Opportunities = Made)

In this approach the entrepreneur creates new value from merely possibilities rather
than from historical data or identification of unserved segments of a market. In this
case the market does not yet exist or is highly undiscovered. You start with the
knowledge that demand can be created, you let your interactions help you identify
possibilities which you prioritize in agreeance with your self-selected stakeholders.

10. What type of environment best fits the made approach to opportunities?
Unstable or non-existing environments with little to no historical data. The
information is often incomplete and overwhelming meaning that the past cannot
predict the future. Markets cannot be defined, and consumers are unaware of their
future preferences.

11. What is the “create and transform approach”?

This is the term used to describe the practices used by entrepreneur who take the
“opportunity = made” approach.

12. How does “the create and transform approach” relate to “the effectual
approach” discussed in the previous lectures?
Here you start with what you have, what you can do and then self-select
stakeholders to help you. This is following the principles of effectual reasoning
(starting with your means instead of goals).

13. What is the pilot-in-the-plane principle?

This is the idea promoted by the effectual reasoning approach which argues that the
entrepreneur is central to the new venture creation; he/she is in control. It also
builds on the idea that you as the pilot is responsible for all the passengers in the
plane which essentially is all the stakeholders involved.

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14. What is the opposite of the pilot-in-plane-principle?
Discoverer-with-a-map principle

15. How do we define success/failure when taking on the effectuation approach?

Success is defined individually and changes as the process evolves. Success or failure
does not depend on how accurate the original vision turns out to be or how well the
strategies crafted to deliver that vision are executed. The relationships formed when
creating new value also influence how the outcomes look like and how success is
defined.

C. Transforming means

1. How do entrepreneurs transform means into valuable resources?

See Q 4.

2. What is the venturing experiment?

This was an experiment where people were asked to assume the role of an
imaginary entrepreneur for an imaginary new venture called Entrepreneurship INC.
with a product called venturing (=a video game about entrepreneurship). During the
experiment people were presented with uncertain business situations with a wide
range of possible strategies and outcomes. Participants were asked to talk their way
through how they would develop this imaginary venture. The participants consisted
of 3 groups: expert entrepreneurs, MBA students and expert corporate managers.

3. What were the findings of the venturing experiment?

The results show that expert entrepreneurs used strategies that strongly relate to
the effectual logic principle, and they were very creative in the way they used the
strategies to transform situations into opportunities. From this observation we were
also able to identify 4 transformation types that relate specifically and most
commonly with the expert entrepreneur’s transformation strategies.

4. What are the 4 (most common) transformation types associated with

entrepreneurs?
1) Deleting/Supplementing: This involves thinking of what features of a
product/service you may want to remove or add in order to increase its
attractiveness when starting a new venture. (e.g. Calyx&Carola  flowers)
2) Composing/Decomposing: This involves reorganizing existing material without
adding or removing anything from it. In a new venture this means recombining
your means in a new way. (e.g. Mr Manon  Chocolate magic)
3) Exaptation: This involves the use of something for a purpose for which it was not
originally designed for or intended for. In new venture creation this involves
using existing technology, products/services, or elements thereof for a use that
they were not intended to serve. (e.g. Asprin tablets  from painkillers to anti-
clotting agents and preventative treatment for heart attacks and strokes)

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 4) Re-weighting: This involves increasing/decreasing the features/attributes of a
product or market. (e.g. BMW  Driver appeal focus, Volvo  safety focus).

5. Explain the following concepts identified by Jacob Goldenberg and how they
relate to the transformation types.
1) Subtraction:
2) Multiplication: These are specific approach to Deleting/Supplementing
3) Division:
4) Task Unification: Making some aspect of the
artefact do more than one task Exaptation
5) Attribute dependency change: This includes changing
the linkage between an artefact and its environment

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Lecture 7: Stakeholders and Ownership
A. The crazy quilt principle

1. Explain how the causal approach to entrepreneurship can be metaphorically

referred to as a jigsaw puzzle.
Here you are a problem solver. You have a clear goal ahead and a clear vision of
what the end-result is supposed to look like. You have a box with all the puzzle
pieces in it and on the cover of that box you see the image that you are supposed to
make out of those puzzle pieces. This is a very causal approach because you start
with your goal first and build towards it by looking for the resources (picking the
puzzle pieces piece-by-piece, putting them together until you make the final
picture).

2. Explain how the effectual approach to entrepreneurship can be metaphorically

referred to as a quilt.
Here you start with what you have (which is the different pieces of fabric or left-over
textile) and you start to combine them to make something new, but you have no
idea what it will look like in the end nor do you have a clear goal or vision of how it is
supposed to look like. You just knit away until you run out of fabric or until you have
a quilt that is big enough for use (as maybe a pillowcase or blanket). This is exactly
how the effectual approach works, start with what you have and combine them in
different ways as you go along.

3. Explain how the approach to making a quilt (effectual entrepreneurship) differs

from the assemblance of a jigsaw puzzle (causal entrepreneurship). (4)
1) End-result is not pre-determined; When solving a jigsaw puzzle there is only one
solution whereas when making a quilt you can make many different patterns
that reflect your personal creativity based on the textile you have.
2) End-result changes with the contribution of others ; When making a quilt, the
contribution of others changes the way it comes together. Others might bring
their own unique fabrics and patches and they might combine them differently
from how you would patch them together which changes the result (the final
quilt). This is not the case when making a puzzle. When you add more people,
that means that the puzzle is solved quicker but the end-result (the picture
which the puzzle pieces form) remains the same.
3) The end-result is determined as the process goes on; when making a quilt, you
design as you go along. This means that you can see how the quilt will be after
each patch. The result changes as you go along. This is not true for when you are
making a puzzle.
4) The result serves more purposes and has more meanings ; when making a quilt
you have to take into account the purpose that it will serve at the end. It has to
be able to keep the human body warm and/or it has to fit the aesthetic of the
end-user. The result of a puzzle, however, is just a picture. It serves no other
purpose.

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B. Partnerships

4. What distinguishes effectual partnerships from causal partnerships?

The belief that those who choose to engage with the venture in some way, (those
who self-select themselves in some way), ultimately make the venture into what it is

 If you take the causal approach: you set your goal and select partners based on the
resources that they can provide based on what you believe to be necessary to
achieve the set goal.
 If you take the effectual approach: you map your means and then form partnerships
based on those means (what you have, who you know) and you let the venture
develop in its own way. There is not one set course of action, but it is a trial-and-error
process. Partners are seen as people with their own set of means that have the ability
to transform the new venture in ways that could not have been anticipated.
Furthermore, the effectual process involves interacting with any and all stakeholders
that are willing to commit to the project regardless of the resources that they have
and regardless of the fact that there may also be no commitment whatsoever in the
end.

5. What do we mean by “the ask” when discussing effectual approach to

entrepreneurship?
This is the part of the effectuation process where the entrepreneur of the new
venture reaches out to other people to obtain advice, inputs, knowledge or help.
Here we focus on the willingness of these people to commit to the new venture (and
not their fit/alignment with some preconceived vision as we do in the causal
approach).

6. What do we mean with bi-directional persuasion in entrepreneurship?

You as the entrepreneur needs to be persuasive (being able to convince others to
work and create with you) but you should also be able to be persuaded (you have to
be able to co-create with others).

7. What do we mean by intersubjectivity?

This is a term brought by Donald Davidson (2001) who argued that it is nearly
impossible to observe anything in isolation and that we as human beings make
sense of the world by developing shared understandings.

8. Why are effectual partnerships important when we take into account this
concept of intersubjectivity?
We need others to help us perceive the world (the markets) because we are
incapable of making observations in isolation, we need shared understandings.
C. Stakeholder interaction & commitment

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9. What are the 2 contrasting effects that stakeholder interaction has on the new
venture.
1) The means of the new venture increases with each stakeholder which enables
new possibilities for the venture.
2) On the other hand, with each additional stakeholder the commitments
accumulate, and the goal of the venture crystallizes. The direction of the new
venture becomes more specific regardless of the fact that new possibilities arise
with each additional stakeholder commitment.
10. What are the 3 main principles of effectuation on which the stakeholder
interactions are based?
1. Means: each interaction seeks to combine individuals and their means to create
something novel and valuable.
2. Affordable loss: stakeholders cannot use expected return as a criterion on
whether or not to invest resources because in the early stages this cannot be
predicted with accuracy. Which is why they use the affordable loss principle to
decide on what resources they are willing to lose when investing in a new
venture.
3. Surprise: each interaction contains unexpected contingencies which is why
interactions are not aimed at achieving pre-determined goal.

11. In what way can we view markets as co-creations born out of the interactions
between ventures, suppliers and/or customers?
The value of the services that ventures create (or the products which also provide a
service to the end-user) is realized through the interaction between the customer
and the service. Meaning that value is not created by firms alone but they are
created when customers interact with a service. Markets are therefor also not
created (only) by firms but they are co-created with customers (because without the
customers, there would be no value creation).

12. In what way does an increase in stakeholder commitment indicate an increase in

the validity and viability of the new venture?
- Validity: Each commitment steers the concept of the new venture to one that
more people have bought into. This increases the likelihood that the idea is one
that presents good validity (= the main extent to which a concept is well-
founded and likely corresponds accurately to the real world).
- Viability: Each commitment increases the means available to the new venture
which increases its viability (= ability to work successfully).

13. How does stakeholder commitments relate to the uncertainty in the

environment of the new venture?
Commitments of stakeholders are seen by the effectuation approach as a way to
manage, reduce and/or eliminate uncertainty in the environment.
14. How do investors learn about entrepreneurs and their new ventures during the
early stages of the venture before making their investments/commitments?

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 1) Referrals: investors will rely on referrals from people they know and trust for
some time to explain the ability and motivation of the entrepreneur before
making any commitments/investments.
2) Interactions: investors like to interact with the entrepreneur of any new venture
on multiple occasions to get a better sense of their intrinsic motivation and
persona (they often ask personal questions during these meetings).

15. How do investors approach the investment/commitment phase of a new

venture?
1) They take their time to analyze the progress of your venture, your commitment
to it and your effort over the course of 6 tot 12 months before fully committing
to the new venture to assess your drive and abilities.
2) During this time, they will take into consideration what other investors, partners
or other entrepreneurs believe to be true about the new venture. Do they
believe it will make it or fail and why.

16. Why don’t investors immediately buy entrepreneurs out of their ventures?
Although they want to capture as large a share of rewards as possible, they know
that it is more important that they maintain the entrepreneur’s motivation and
commitment.

D. Ownership, equity and control

17. What do we mean by “control” in entrepreneurship?

The ability to direct the use of any particular resource.

18. Explain the following claim “Ownership  control”.

This means that the common belief that ownership equals control in a firm is wrong.
Decision rights are negotiable even when a stakeholder owns more than 50% of a
firm. Ownership and control are connected but ownership does not equal control.

19. What are residual claims and how do they relate to the “ownership  control”
claim mentioned in Q15?
Residual claims are claims to anything that remains after all contractual rights and
obligations have been fulfilled. This means that you as a shareholder comes only
after all debts are paid and all contractual agreements are carried out. (p.e. in events
of liquidation, all debt holders and preferred shareholders get their paid before
common shareholders).

20. What are approaches that you as an entrepreneur can take instead of simply
selling the shares of your company (in other words, how can you use equity)?

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 1) You can use appropriate contractual provisions to ensure that shareholders get
shared ownership of financial returns without decision rights; this means that
you are entitled to get a percentage of earning while having no rights in making
management decisions (no control).
2) You can provide equity temporarily; here you agree to buy back your share of
the venture when a pre-determined milestone is reached (p.e. reaching a certain
amount of profit).
3) You can use equity to attract high-potential partners; you can increase the
return of shares or even extend some decision-making power through
contractual provisions to co-create with the shareholders.

21. What are alternatives to equity that entrepreneurs can use?

- For investors;
1) Fraction of revenue
2) Discounted products/services

- For co-founders (alternative for stock);

1) Sliding scale of salary (=salary that is proportional to the income of the
venture).

- For employees;
1) Better title
2) Nicer office
22. Explain how even if you own 100% of shares in a company that this does not
translate to 100% control in that company.
Even if you own 100% of the company’s shares, you simply have control over how
you will lead the venture but you still have to take into account the demands and
reactions of your stakeholders.

23. Fill in the following table which explains how different stakeholders enjoy
different types of ownership and control in exchange for their commitment to
the venture.

Stakeholder Control Ownership Explanation

Customers
A B C

Lenders
D E F

Investors
G H I

Answers

Stakeholder Control Ownership Explanation

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Customers A lot None Customers have no ownership (unless they become common
shareholders), but they have a lot of control (not managerial
control but in terms of influence and leverage) because they
highly influence and leverage organizations to design, re-
design, invent products that fit their needs and desires. This is
especially true in the beginning stage of a company.
Lenders Significant - None Lenders have no ownership, but they have significant control
complete over the use of cash in a company (and also little control over
anything else). However, they can gain complete control over
a company, should financial problems arise, without taking
complete ownership.
Investors differentiates Some Investors have a range in the extent to which their ownership
translates into control.

24. What are the 2 main things we derive from ownership?

1) It is about rewarding risk-takers that commit to your venture (it is essentially
about the past).
2) It is about providing incentives for success (it is essentially about the future).

25. Explain the agency theory.

The main idea behind the agency theory is that managers (which are the principals)
will strive to get the most labor/ productivity from their employees while keeping
the pay/ labor costs as low as possible whilst the employees (which are agents)
strive to get the most pay for the lowest level of input possible. These conflicting
aims of the principles vs. their agents is described as the agency theory. The solution
to this deadlock is to provide agents with incentives to work harder. This is also seen
in new ventures through equity. By offering equity to stakeholders, you provide
incentives that increase their productivity/performance without necessarily having
to always increase the financial rewards.

26. Explain the agency theory in regards to ownership and control.

This theory asserts that owners don’t explicitly control the operations of their
companies, but they hire (subcontract) others (agents) to control the firm (e.g. CEO)

27. How does an entrepreneur decide on the best way to divide equity amongst
shareholders?
The rule of thumb is to give 1/3 to the founding team, 1/3 to the venture investors
and 1/3 to the employees of the organization however this might not be the best
way to go about it if some partners or investors have brought more money, skills,
credibility or contracts than the rest to the company. In this case you have to divide
the equity in a way that satisfies the most stakeholders.

28. What are liquidation preferences?

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 Liquidation preferences are contractual agreements that exists between a venture
and its shareholders in which it is stipulated what to do, who gets what in the event
of bankruptcy and liquidation.

29. What are one-time and two-times liquidation preferences?

1) One-time liquidation preferences: this means that shareholders get the amount
that they invested paid first and foremost during the occurrence of a liquidation
event. (they are the first to get their money back).
2) Two-times liquidation preferences: this means that shareholders get the amount
that they invested two times over before the rest gets their cut of the left-over
capital. (they are the first to get their money back 2x).

30. How do you discuss the equity division with (potential) partners?
Step 1: Sit with them and mutually agree on the skills sets/factors that will be
needed to make the venture successful within 3 years at most (ex. technical
capabilities, sales, money, contacts).
Step 2: Weigh the factors on scale of 1 to 10 (if you disagree on something, discuss it
till you reach the point of consensus).
Step 3: Rate each other on your ability to bring the agreed-upon list of needed
skills/factors to the business on a scale of 1 to 10.
Step 4: Multiply each score on abilities with the weighted factor of each skill which
will give you the measurement of each person’s relative contribution to the success
of the business.
Note: If you can’t come to an agreement afterwards, you might need to reconsider
the partnership.

31. If your goal is to maximize profit for yourself, why would you agree to take on
partners (more people means less profit for yourself because you have to share)?
Sharing ownership with the “right” people (being people who have resources,
talent, connections) will increase the profit for the business entirely which as a result
could also increase your cut of the profit (depending on the amount of profit
generated but carefully assuming that it is a lot).

E. Investors

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1. What is pre-money valuation?
The value of the venture before the investor puts his/her money into the venture.

2. What is post-money valuation?

This is the sum that you get after adding the pre-money valuation with the money
invested by the investor.

3. On which valuation do we base the ownership percentages?

We use the post-money valuation as the denominator

Money invested
Formula: ownership % =
Post−money valuation

4. How can investors ensure that their ownership percentage remains the same
even after new investors join?
1) They can use anti-dilution protection; the right of first refusal or ratchet.

5. What is anti-dilution protection?

1. The right of first refusal (/pre-emptive rights/pro rata): this is the right of the
investor to invest before any new investor. However, in some cases this relates
only to the amount that it will take to make sure that their ownership
percentage remains the same. Any left-over amount is fair-game for new
investors. In other cases the rights may not be capped meaning that they have
dips on all investment rounds.
2. Ratchet: This ensures that the ownership percentage of investors remain the
same in the event of a down round (which essentially means that the value of
the firm drops over time), even if new investments are brought in at a lower
valuation.

6. How does the anti-dilution protection relate to control in the hands of investors?
Anti-dilution enables early investors to retain control as the ownership expands
meaning their ownership percentage is not compromised by the presence of new
investors.

7. What is the difference between an advisory board and a board of directors?

An advisory board is not involved with the day-to-day operations of your business
but instead they give you advice on strategic ideas or they give feedback on ways to
increase revenue and building your business. The board of directors on the other
and are very involved with the day-to-day operations and they give guidance on
those operations.
8. In what way can a large investment (post-money valuation), after the series A
investments have been made, be considered harmful to the new venture instead
of better?

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 If the series A investors paid $6 million and you find an entrepreneur afterwards that
is willing to invest $12 million, you have to take into account the effect that this
investment will have on the ownership percentage of the first investors. If they have
an anti-dilution protection in place, this would mean that the initial investors would
have to invest a large sum of money to maintain the same ownership percentage.
They could view the investment as overpriced and are more likely to just pull-out of
the investment. Leaving you with less capital that you expected.

9. Fill in the table below which explains which rights/agreements relate to

ownership or control.

Ownership Control

1) Ratchet 1. Board of directors

2) Right of first refusal 2. Information rights

3) Liquidation preferences 3. Voting rights

* Board of directors = this means you have the right to add another person to the
board in conjunction with an investment.
* Information rights = The right to view or get monthly/quarterly/annually
reviewed/audited internal statements.
* Voting rights = Preferred voting rights amongst common shareholders

10. Why is it advantageous (or not) to have angel investors invest in your startup
business as opposed to VCs?
Angel investors invest faster and can require less ownership percentage if you
compare them to VCs. On the downside angel investors are less attractive because
they initially invest smaller amounts than VCs.

Read pg. 218, 219, 220!

F. Family Entrepreneurship (article)

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1. What are the 3 scientific fields that we combine to create the concept of family
entrepreneurship?
1) Entrepreneurship
2) Family
3) Family business

Note: Family  Family business

2. Explain each dimension of the family entrepreneurship field briefly.

Dimension #1: Where entrepreneurship meets family.

This is where we combine entrepreneurship and

entrepreneurial behaviours with the concept of
family. We look at how family members choose
to engage in entrepreneurship, how they
influence each other to participate, different
types of family entrepreneurs, and conflict
resolution in these contexts

Here we identify the following theories:

- Family embeddedness perspective (FEP)
(See Q.4)
- The 2 models of career choice (See Q.5)
- The concept of copreneurs (See Q.6)
- The concept of family entrepreneurial teams (FET) (See Q.8.)

Dimension #2: Where entrepreneurship meets family business

This is where we study corporate family

entrepreneurship (CFE) which is the term we use
to describe this intersection between the field of
entrepreneurship and that of family businesses.
Here we study the organizational identity of
family businesses, value creation by these
businesses, the competitiveness and
performance of family businesses and resource
management

Here we identify the following theories:

- Organizational identity (See Q.11)

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 - Transgenerational entrepreneurship (See Q.12)
- The Resource based view (RBW) (See Q.13)
(Incl. The social capital theory + The model of resource management)

Dimension #3: Where family meets family business

This is where we acknowledge that family is

not to be used interchangeably with family
business because they are two different types
of partnerships. In this field we study the
determinants and consequences of different
types of family involvement in the firm, the
family ties in the business and how they effect
ambition and interest in the family member,
we look at the motivation behind the
entrepreneurial behaviors of family members,
and differences between men and women
when it comes to entrepreneurship

Here we identify the following theories:

- The stewardship theory (agency theory!) (See Q.14)
- Socioemotional wealth (SEW) (See Q.16)
- Work-Family-Interface (WFI) (See Q.17)

3. How does family play a role in developing or hindering entrepreneurial

behaviors?
This happens through the establishment and transmission of values between family
members through communication and information sharing processes which results
in the use of common symbols, rituals, stories, and heroes.
When you have positive role models within your own family (successful
entrepreneurs or family members who have known big success in the past), this
encourages entrepreneurial behavior whereas when you have a family member that
failed (negative role model) it discourages entrepreneurial behavior and created risk
aversion.

4. What is the family embeddedness theory?

This perspective tries to explain the dynamics between family and
entrepreneurship. It argues that there is a bi-directional relationship between these

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 two concepts being that the fact that people are embedded within a family allows
for the emergence of opportunity and organizations (If there is already a business in
the family or someone in the family had great success with entrepreneurship in the
past, it stimulates the creation of a family venture) but in turn the fact that the
family members are part of a family business, also influences the family (consider
the change in wealth, status but also the relationship between family members as
they assume leadership roles in the venture).

5. What are the 2 models of career choice?

1) The model of entrepreneurial event: indicates that if an individual experiences a
positive or negative event, this event will trigger his/her behaviors and
entrepreneurial intentions.
Examples;
Negative event = Divorce  This could lead to entrepreneurial intent because
money gained through the divorce settlement can be seen and used as the start
capital
Positive event = Child is born  This could lead to entrepreneurial intent when
the new parent identifies business ideas relating to parenting.

2) Model of career intention (Based on theory of planned behavior (Ajzen, 1991):

This model takes the planned behavior theory and apply it to career choice. The
theory itself argues that a majority of our planned behavior is a result of intent (I
want to go watch a movie/I intend to watch movie, result in you actually
watching a movie). The theory further explains planned behavior by introducing
3 factors that influence intentions (Attitudes towards behavior, Subjective
norms and Perceived behavioral control). Attitudes towards behavior are what
you believe to be true about something (e.g. do you believe being an
entrepreneurs is fun, exciting etc.). Subjective norms is the extend to which
someone believes the behavior is normal/acceptable (e.g. do you believe
entrepreneurship is a career choice that your family/friends would approve of?).
Finally, perceived behavioral control is the extend to which you believe you have
control over the desired outcome (e.g. do you believe you can be a successful
entrepreneur? Is entrepreneurship do-able for me?). Taking all these factors
together and you get a model that explains how people choose to engage in
entrepreneurial behaviors.

6. What do we mean by copreneurs?

Copreneurs refers to cohabiting couples who jointly run a business. (couples who
share a home and a workplace.

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7. What are the benefits of copreneurship when compared to other family
entrepreneurship forms?
1) Copreneurs have greater flexibility in their roles and structures meaning that
they have more control over the decision-making in the venture which leads to
higher satisfaction levels for both copreneurs.
2) They also are more likely to achieve first sales (=the right to sell, copy or
distribute the product).
3) Copreneurs experience less role conflicts because they develop a combined
identity at work and at home which allows them to use the strengths of their
relationship to build competitive advantages
4) They reach break-even faster and have a greater venture viability over time
because of their strong communication skills.

8. What do we mean by family entrepreneurial teams (FETs)?

This is a group of blood-related individuals who engage in entrepreneurship
(cousins, aunts, uncles etc.)

9. How can we explain the creation of FETs?

The creation of FETs are motivated by the commitment to entrepreneurial
stewardship of the family’s assets. Different members of a family find themselves
drawn to the venture to help the continuation and success of the venture.

10. What happens when a family member is excluded from a FETs after previously
being a member of the venture?
Exclusion from FETs are permanent, and the excluded individual often pursues an
entrepreneurial event independently from the FET.

11. What is the organizational identity perspective?

According to this perspective, family businesses can be seen as hybrid identity
organizations because they have at least two identities, business and family, which
can be combined into the family-business meta-identity. E.g. If your brother is a
manager in the family business you view him as your brother (family identity) but
also as your boss (business identity).

12. What is transgenerational entrepreneurship?

This is the study that combines entrepreneurship theory and family business theory.
Transgenerational entrepreneurship may simply be defined as two or more
generations of family members driving for new business activities, strategic
renewal, and innovation.
13. What is the Resource based view (RBV)? (Rau, 2014)
The resource-based view is a managerial framework used to determine the strategic
resources a firm can exploit to achieve sustainable competitive advantage. Rau
identified 5 resources that apply specifically to family businesses:

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 1) Familiness: this refers to the unique set of resources a particular firm enjoys
because of the interaction between the family, its individual members and the
business itself.
2) The 3P model: the 3Ps are Parsimony, Personalism and Particularism; this model
offers an understanding of how and under which circumstances the unity of
ownership and control can lead to rent-generating behavior of the firm.
3) Long-term orientation: indicates how family firms can build competitive
advantage on family specific resources and capabilities, in particular when they
capitalize on the long-term focus, something which non-family firms usually
cannot do.
4) Social capital: this builds on the social capital theory to clarify the role of family
specific resources in generating competitive advantage by distinguishing
between the structural dimensions (e.g., network ties and appropriate
organization), the cognitive dimension (e.g. shared vision and shared language),
and the resulting relational dimension (e.g. trust, norms, obligations and
identification).
5) Resource management for wealth creation: model of resource management for
wealth creation in family firms can be considered as the most encompassing,
including five distinct resources: human capital, social capital, patient financial
capital, survivability capital, and governance structure and costs.

14. What is the stewardship theory?

According to this theory family owners seek to fulfill both economic and non-
economic needs such as those of affiliation, self-actualization, generosity, and
legacy; this leads family owners to act as stewards in order to favor sustainable
value for all shareholders. Furthermore, according to this theory, the enlightened
self-interest of a founder and his/her committed family produce contagious and self-
reinforcing behaviors that are transmitted to the wider community.

15. What is the difference between the stewardship theory and the agency theory?
The Agency theory is also useful to understand the overlap of different
organizational and individual identities in family firms. Whereas the Stewardship
theory focuses mainly on the positive aspects and is solely dedicated to, for the
moment, the family business context. Agency theory also admits a wider array of
outcomes (positive, negative, mixed) and is also used in mainstream management
literature. The Agency approach sheds the light on a number of problems such as
the presence of family, economic and non-economic self-interest, parents’ altruism,
nepotism, and children free riding and the presence of possible intra-family
divergence of interests that can potentially inhibit entrepreneurship in family firms.

16. Explain the socioemotional wealth (SEW) perspective on the motivation of

family firms.
This perspective argues that family firms are motivated by non-financial aspects and
that family owners are committed to the preservation of their socioemotional

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 wealth (SEW) which refers to affective endowments that family owners consciously
or unconsciously establish with the firm. Cutting edge research based on SEW has
recently suggested that a family firm’s desire for trans-generational succession may
result in a unique emergence of habitual entrepreneurship occurring at the family
level (as opposed to the firm-level). However, consensus has not been achieved in
the scientific community about this.

17. What is the Work-Family-Interface (WFI) perspective?

This is the theory we use to understand the fundamental differences between men
and women entrepreneurs which focusses on two aspects:
1) The experience of the intersection between work and family
2) The strategies used for managing the role demands in both domains (work and
family)
This perspective focuses on the conflict side of combining these two domains (how
work interferes with family life and vice versa.

18. What is the Work-Family Enrichment perspective?

This can be defined as the extent to which resources generated in one domain, work
or family, are applied in the other domain in a way that benefits the other domain. It
focuses on the positive side of combining the two domains work and family. This
helps us understand why women are less motivated to become entrepreneurs for
reasons related to wealth creation but instead are more motivated to become
entrepreneurs for reasons related to family or lifestyle. They use entrepreneurship
as a career choice that provides flexibility to manage family obligations, especially
once they have dependents.

Lecture 8: Effectuation Process

A. The 5 principles of entrepreneurship

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1. In what way do novice entrepreneurs from expert entrepreneurs in their views
on the future and uncertainties?
Novice entrepreneurs think that we can control the future depending on the extent
that we can predict it whereas expert entrepreneurs believe that we can control the
future to the extent that we don’t have to predict it.

2. What are the 5 principles of the effectual logic of expert entrepreneurs?

1. Principle #1: Start with your means (bird-in-hand principle)
2. Principle #2: Set affordable loss (affordable loss principle)
3. Principle #3: Leverage contingencies
4. Principle #4: Form partnerships
5. Pilot-in-the-plane principle

3. What is the core idea behind each principle?

1. Principle #1: Start with your means (bird-in-hand principle)
This principle is about starting with what you have in terms of means. Means are
who you are (traits, abilities), what you know (expertise, experience, education,
experience) and who you know (social and professional network).

2. Principle #2: Set affordable loss (affordable loss principle)

This is about not betting on possible gains based on faulty prediction but make
decisions based on what you are willing to lose. This will make failure less
impactful and allows for a better learning process and ability to try again.

3. Principle #3: Leverage contingencies (the lemonade principle).

This is about turning surprising, unexpected turns of events into profitable ones.
With other words its not just about dealing with them but also about using them
to your advantage. The key is to not tie your ideas to any predictions
(preconceived/theorized markets), be open-minded. Anything and everything is
a potential surprise that can lead to a valuable opportunity.

4. Principle #4: Form partnerships (crazy quilt principle/effectual commitment)

This is principle argues that we do not need to focus on beating our competitors
but instead we need to focus more on making partnerships. The reasoning
behind it is that we cannot accurately predict the market for a new venture
making it also difficult to even identify all our competitors, let alone strategize
against those competitors. Thus, the best approach is to form partnerships and
let the market be created by the commitment born out of stakeholder
interactions.

5. Pilot-in-the-plane principle

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B. The effectual process and the entrepreneur

4. In what way does effectual commitments impact the creation process of a new
venture?
1) It allows the entrepreneur to focus on what is controllable about the future and
the external environment: start with what you have, who you know and find
others who are willing to commit what they have, who they know to your new
venture.
2) In this process the entrepreneur only commits what he/she is willing to lose (as
does his/her partners): making it an easier process for everyone by reducing the
impact failure (should it occur).
3) The goals of the new venture are determined/re-defined by each partner that
makes a commitment to the new venture and what they negotiate.
4) The key of the process is to not make any pre-determined paths to only after
trying to find the resources to follow it but instead it focusses on all the possible
paths that emerge from the resources that you already have. When the
resources that you have expand, new paths to follow are born.

5. Unpredictable markets often are the cause for the failure of many
entrepreneurs, in what way can it be seen as an advantage?
They are often an advantage for entrepreneurs because they believe that they can
shape the market through their own decisions and actions, while working with pre-
committed stakeholders and customer-partners to transform surprises
(contingencies found along the way) into opportunities.

6. It has been argued that entrepreneurs differ from causal thinkers in the way that
they view the world. Explain these differences.
1. They have an open view of the world: they see it as something still in the
making that can be influenced/changes through human actions
2. They do not see opportunities as given/found outside of their control: they
believe that their actions directly link to the creation/discovery of
opportunities. This ties into the markets are made not found idea.
3. They don’t believe in “pursuing what is out there in the world” instead they
see companies as tools that they can use to create novelties for themselves
and the world.
4. They view stakeholders as co-creators rather than customers/suppliers, they
are open to the idea of them somehow shaping the goal and market of the
new venture.
5. They do not work to avoid failure, but they view it as a part of the journey
towards success.
7. Explain each phase depicted in this diagram of the effectuation process

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 1 2 3 4 5

Phase #1: Here the entrepreneur identifies his means (who am I, what I know, who
know).
Phase #2: Here the entrepreneur starts to interact with people either by presenting
them with an idea or by presenting a situation and ask “what can we do”?
They brainstorm together.
Phase #3: Here we see if the people you interacted with in phase #2 actually
commit to the new venture. If they do you go on to phase #4, if not, the
opportunity/venture is put on hold.
Phase #4: Here we see that the stakeholders have committed to the new venture
which increases the means available to the new venture as well as shape
the new venture by crystallizing its goals (venture becomes more
specific).
Phase #5: This phase illustrates how at any time during this cycle unexpected
events, information and meetings (contingencies) can change the
environment that the venture is developing. Contingencies also increase
means as well as make the venture more specific.

8. Explain how one cycle of effectuation process almost naturally results into the
creation of new cycles.
While going through this process of effectuation the entrepreneur generates new
knowledge, aspirations, likes and dislikes for himself which can become means for a
new ventures or products (new cycle).

C. The lemonade principle / Leverage surprise in detail

9. What do we mean by contingencies in entrepreneurship?

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 Mere possibilities that may or may not happen in the future; a future event or
circumstance which is possible but cannot be predicted with certainty.

10. What are the 3 types of contingencies that we can categorize?

1) Unexpected people: this refers to accidental interactions with other people
(either meeting people unexpectedly or having unexpected conversations with
known people).
2) Unexpected events: turns of events that were very influential but could not have
been planned or predicted.
3) Unexpected information: one example is information that changes your
expectation about the market of a product (if you witness shortages you might
identify possibilities in that market).

11. What do we call surprises that initially look good (and those which look bad)?
Good surprises  Serendipitous
Bad surprises  Murphy’s Law

12. Name/explain 2 common ways of handling contingencies.

1) An adaptive response: this involves changing yourself to fit the contingency.
(in-the-box thinking)
2) A heroic response: this involves changing the world into a state that you prefer.
(outside-the-box thinking)

13. Name/explain an entrepreneurial way of handling contingencies.

This involves using contingencies as resources, as inputs for your entrepreneurial
endeavors. (realizing “the box” has changed and try to do something creative with
this new box)

14. What are different ways to prepare yourself for the unexpected (contingencies)?
1) Social networking: by deliberately engaging in social networking you open new
channels from which new information can reach you. (unexpected info)
2) Be open to experiences: studies of entrepreneurial psychology have found that
in general entrepreneurs score higher on “openness to experience” than
comparable managers. Which means that they have intellectual curiosity and
tendency to seek new experiences. Being more receptive to and welcoming of
contingencies helps you view them as opportunities. Furthermore, constantly
seeking new things increases the chances that you will find them.
3) Use opportunity framing: the way you frame things influences what you see as
important and whether or not you see contingencies as threats or opportunities.
4) Cultivate your self-efficacy: recognize and have confidence in your agency in the
world because then you will have less anxiety about your own ability to face the
unexpected in the future. (see also pg. 190 red box)

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15. How do you leverage contingencies?
Step 1: the contingency presents itself in the form of
unexpected people, information and/or events.

Step 2: the contingency changes the means of the

entrepreneur (this is in line with the view that
contingencies are resources).

Step 3: here the entrepreneur forms possible actions

based on his means as shaped by the contingency. This
also lines up with what we know from other research
about creative problem solving (because step 1 of
creative problem solving is to consider as many
solutions as possible which is what we do in this step of
leveraging contingencies).

Furthermore, by looking at the contingency as an

opportunity this lines up with the second important
aspect of creative problem solving which is to change
the way you view a problem.

Step 4: the novel outcome may be created as a result of

step 1 till 3.

D. Cases

16. Which effectual process was involved in the “Forgetful Gentlemen” example and
what can we learn from it?
We saw the affordable loss principle; they waited for customers to finance their big
production run, which meant that the entrepreneurs (Brett Nicol and Nathan Tan)
didn’t have to give up an equity position to a financial investor for capital. The
takeaway from the approach is that they made only affordable investments which
ensured that they:
1) They made room for direct feedback from the customers: They delivered their
products themselves directly to the customers which gave them the opportunity to
converse with them, receive their feedback and make improvements to their
product.
2) Their approach allowed for control, control in their finances because they kept
their costs within their affordable loss margin/as low as possible.

17. Which effectual process was involved in the “Innis&Gunn Beer” example and
what can we learn from it?

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 Here we saw both the bird-in-hand principle as the leverage contingencies principle.
They used a material that would have otherwise been labelled as waste which is
exactly what the bird-in-hand principle is all about- using resources that are cheap.
Furthermore this is a clear case of how a surprise is turned into an opportunity, they
sampled something that they had been throwing away for a long, without having
anticipated its potential as a product rather than waste (or its potential for success
on the market), but once they did know, they made a business out of it.
The take-away from this is:
1. Innovations are not created from scratch but they are born out the combinations
of things that we already have.
2. Many products that we know and love were born from accidents and unintended
results of completely different ideas.

18. Name 3 products that we know today that have been found by accident or as an
unintended consequence of an entirely different idea. (pg. 101)
1) Chips  soggy potato complaint, frustrated chef
2) Safety glass  accidentally broke a glass that had plastic liquid over it that was
left-over from another experiment
3) Viagra  intended as a heart medicine, side-effect

19. Vivek Wadhwa and colleagues looked into entrepreneurs and factors that may
have contributed to their success. They wanted to find common factors amongst
a large group of entrepreneurs. What were the findings?
1. 52% of the entrepreneurs studied (549 total) were the first of their
immediate families to start a business.
2. Only 25% were interested in entrepreneurship in college
3. The biggest predictor of success was education because it enabled a huge
advantage (the college was not important, ivy league or not).

E. The effectiveness of effectuation (article)

20. What do we mean by firm performance?

A firm’s degree of economic success

21. What are some benefits of using effectuation in a firm?

- Improved client services
- Faster initial sales
- Enhanced investment success

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 - Improved venture growth

22. What is a negative effect of using effectuation in a firm?

A negative effect can result from heuristic bias; Heuristic bias of effectual
entrepreneurs includes over trust of stakeholders, inefficient investment and
pursuit of low value opportunities related to the venture. Thus, effectuation can
lead to misperceptions that are harmful for venture success.

23. What is the overall effect of effectuation on firm performance?

Effectuation positively relates to firm performance

24. What is the contingency theory of entrepreneurship?

Contingency theory of entrepreneurship argues that the new venture performance
will be higher when entrepreneurial actions are better aligned with certain key
variables in organizational processes, industry conditions and institutional
arrangements of markets. In other words, the relationship between effectuation and
firm performance is not direct but it is moderated by other factors (development
stage of the firm, industry setting and emerging markets).

25. Name the 3 moderating factors of the effectuation-firm performance

relationship.
1) Development stage of the firm (See Q.26)
2) Industry setting (See Q.29)
3) Emerging markets

26. What do we mean by the development stage of a firm?

Its stage of evolution toward stable and typical patterns of organizational operation.
This is also identified as the “age” of the firm (a start-up vs. an established firm).

27. In what way is the development stage of a firm a moderator on the positive
effect of effectuation on firm performance?
The effect of effectuation on firm performance differs because firms face different
challenges throughout their life span. Compared to established firms, new firms are
faced with greater challenges stemming from the need to construct themselves into
organized actors in the marketplace and they are exposed to higher uncertainty and
have less access to information.

28. Is effectuation more impactful for new ventures or established firms?

Contrary to what we may believe to be true, effectuation is more beneficial for older
firms than younger firms because;

27
 1) Established firms have more slack resources accumulated from prior operations
by which they support effectuation.
2) Established firms have more formal structures and developed which limit the
cognitive bias of effectual practices and thereby mitigate the potential
drawbacks of effectuation and lead to better performance.

29. What do we mean by industry setting?

The specific industrial or business environment in which ventures are embedded.

30. In what way is the industry setting of a firm a moderator on the positive effect of
effectuation on firm performance?
Critical factors relating to customers, suppliers and other authorities vary by
industry and create different levels of uncertainty for firms. Seeing as the
effectuation approach that co-creates opportunities is expected to be more
effective in the context with high uncertainty, it explains why the industry itself is a
moderator. Effectuation offers flexibility that facilitate organizational learning and
brings prominent benefits for firms in dynamic environments (more uncertainty =
more benefits).

31. In what industry is the impact of effectuation the greatest?

The positive relationship between effectuation and firm performance is stronger in
high-tech industries than in other industries.

32. What is the institution-based view of firms?

The institution-based view of firms suggests that the institutional infrastructures
and development are determinants of the effectiveness of corporate strategies and
entrepreneurial success.

33. Is the effectuation effect on firm-performance greater in developed or emerging

countries? (and why?)
Emerging countries because emerging countries undergo economic transitions
that lead to unstable institutional environments and seeing as effectuation works
best to handle uncertainty it is natural that it is more effective in emerging countries
where this uncertainty is larger. The effectual approach is particularly suitable for
new ventures handling both technological and institutional complexity. Moreover,
effectuation helps address the problem of resource scarcity for new ventures in
emerging markets. Such ventures suffer from severe resource constraints due to the
underdevelopment formal institutions, which increases the new ventures’ failure
risk.

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Lecture 9: Business Model/Growth

A. Business Plans and Models

1. What is the difference between the use of a business model causally vs.
effectually?
The causal use of a business is more to present a clear and detailed plan of how the
business idea/goal will be reached. Whereas when you use a business plan
effectually it is not a plan, it’s a communication tool written over and over again as
the venture develops and it is written differently for different stakeholders.

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2. What do we mean by substance over form when making effectual business
plans?
This means that the content of your business is more important than the specific
form it takes. Its about knowing your audience and adapting your business plan to
appeal to them.

3. Even though it is counter-intuitive, why is it important to include risk and

potential downsides in your business plan?
Because in doing so you showcase your ability to deal with problems, change and to
consider risks. If you only communicate the upsides, you miss the opportunity to
influence the assessment of your audience and the opportunity to learn from their
honest feedback about the actual risks. The key is to know what risk is wise to
portray to which stakeholder.

4. What do we mean by bottlenecks when discussing business plans?

Restrictions placed by the limited amount you have of a certain resource.

5. A common presumed bottleneck in new ventures is cash, explain how this view
is misguided.
Because often the constraint is not created by the amount of money itself, you have
to dig deeper to find the underlying cause which often is that either your business is
not appealing to investors or that you don’t actually need money at all – you need a
person or distribution resource that will lower your costs.

6. What is the difference between the use of a business plan and that of a business
model?
Business plans are primarily useful for potential resource providers and business
models are primarily useful for guiding an entrepreneurial team into action.

7. What are the 4 components found in a business plan?

2) Revenue model: this component largely encompasses the generation and use of
cash in the venture
3) Operating approach: this component is about how you do things within your
venture to accomplish your revenue generation
4) People approach: this component highlights the needed skills and knowledge for
the venture and includes how you plan on gaining access to those
5) Differentiators: this component is about setting yourself apart from existing
businesses.

8. What are the 2 rules you need to keep in mind when making a business plan?

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 1) A business plan has to have all 4 components; leaving any component out will
make your business plan underspecified.
2) The map  the terrain; on a normal map you wont find the blueprint of all houses
just the streets, same concept applies to the business plan. You don’t need to
include every tiny detail of how everything is done but just the key intended
activities that are the primary drivers of your venture’s success.

9. Business plans include predictions, explain the 2 ways of building predictions.

1) Top-down forecasting: this is when you first estimate the overall size of your
market segment and looking at what might be feasible in terms of market share
and customer adoption.
2) Bottom-up forecasting: here you start with specific customers (by name) and
assess who your potential customers are and try to estimate the probability of
making them your customers and keeping them as loyal customers.

10. What do we mean by escalation of commitment?

This involves an emotional response to the material resource investments that
constrain your ability to change direction. This means that you become so fixated in
achieving the goal you promoted when presenting your business plan that you
longer allow yourself to pursue new opportunities. You believe you have to stay
fixated on that goal because of the investments and stakeholder that committed to
you because of the business plan.

11. What do we mean by boundary objects?

This term is used to describe objects (such as business plans) which are important
bridges across the boundaries between different professional worlds (e.g. banking &
entrepreneuring).

12. Name a few examples of boundary objects

1) Business plans 4) business models
2) Maps 5) Stories
3) PowerPoint presentation
B. Venture Growth

13. Explain what we mean by the “Business paradox”.

On the one hand entrepreneurs want to build big successful ventures whilst on the
other hand executives from big successful ventures want to become more
entrepreneurial.

14. Explain how some of the positive attributes associated with big firms are in
direct conflict with approaches employed by expert entrepreneurs.
1) Attribute #1 = Prediction

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 Large firms have historical data which encourages/enables the use of predictions
based on that historical data. However this is in conflict with the entrepreneurial
approach to the market because they do not rely on predictions.
2) Attribute #2 = Structure
Large firms have defined structures within their firms that separate decision-
making from action-taking (you have a management team and the operational
team that does the day-to-day work). However this is not what an entrepreneur
would want because this makes it more difficult to adapt, make changes and
implement them quickly.
3) Attribute #3: Process
Large firms have established processes (rules, policies and procedures) which are
often rigid, this takes away the flexibility needed to identify opportunities.

15. Fill in the following table which covers the differences between executives in
large corporations vs. entrepreneurs in a new venture environment.

Answers:

A = Defined, Narrow F = Diverse, Negotiable

B = Few, Restricted G = Many, Flexible
C = Impact on the bottom line H = Positive return
D= Supportive, measured in quarters I = Acted in moments, measured
in years
E = Offer infrastructure and build synergy J = Offer a network and build a
portfolio

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16. How do internal market function within large corporations?
1) Principle #1: open the market to all potential innovators : here you offer your
employees time, freedom or autonomy to see who has the drive to innovate as
well as create channels for proposal submissions (where any employee can
submit their idea for funding).
2) Principle #2: open the market to all potential investors : here you assign profit-
and-loss responsibility to some employees which allows them to manage a fund
through an application system.
3) Principle #3: encourage iterative opportunity development: here you come up
with the rule that an initial funder of a project is not permitted to exclusively
provide follow-on funding, other funders must participate. This allows external
funders to validate the idea, internal funders to be cooperative and quick to
compete for funding and limits the likelihood of escalation of commitment.
4) Principle #4: eliminate minimum investment sizes: this lowers the risk of
overfunding (because you would have had to invest an amount that you were
not comfortable with) and encourages people to fund projects that don’t impact
the bottom line (=the final total of an account or balance sheet).
5) Principle #5: make everything negotiable (within legal framework): this allows
for negotiations between creators and funders
6) Principle #6: support projects that compete with the core business: here you
allow for company resources to be used for new ventures, the idea is that it’s
better to get competition from inside than outside the company.
7) Priniple #7: embrace failure: this involves assuring the employees that there will
be no penalties for failed ideas.

17. How can you make a company more market-like?

By using the following elements:
1) Autonomy: Give employees the freedom to pursue what they perceive as
interesting ideas
2) Rewards: Make sure that whoever creates an innovation derives some benefit
3) Psychological safety: assure employees that they won’t be punished for failures

18. From the above-mentioned elements which is the most significant when it
comes to stimulating innovation?
Psychological safety

19. What effect does threat have on the creativity of people (Staw,1981)?
Researchers have shown that people differ in how creative they become or in how
many solutions they can think of depending on their view of the situation. If they
view the situation as a threat, they become more rigid and are less capable of
identifying opportunities whereas when they view the situation as safe or an
opportunity, they can see more possible solution options.

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ICEHOTEL Notes from book

1. Explain the effectuation diagram from lecture 8 applied to the ICEHOTEL case

1 2 3 4 5

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Phase #1: Here the entrepreneur identifies his means (who am I, what I know, who
know).
In this case his means were river rafting skills, ice from the Thorne river
Phase #2: Here the entrepreneur starts to interact with people either by presenting
them with an idea or by presenting a situation and ask “what can we do”?
They brainstorm together.
In this case he reached out to the tourist office, he spoke to the ice
sculptor in Japan, spoke to Sakata (northern express travel agency), he
reached out to Absolut (vodka brand), Virgin Galactic (space travel)
Phase #3: Here we see if the people you interacted with in phase #2 actually
commit to the new venture. If they do you go on to phase #4, if not, the
opportunity/venture is put on hold.
When at first Absolut did not commit to the partnership, the idea of
selling vodka was indeed on hold but the rest did commit seemingly
easily.
Phase #4: Here we see that the stakeholders have committed to the new venture
which increases the means available to the new venture as well as shape
the new venture by crystallizing its goals (venture becomes more
specific).
Partnership #1: tourist office  venture of rafting on the Thorne river
Partnership #2: Ice sculptor  created a new venture ICEHOTEL
Partnership #3: Sakata  which brought new clients to the ICEHOTEL
Partnetship #4: Absolut  which created new ICE bars
Partnership #5: Virgin Galatic  new excursion possibility for clients of
the ICEHOTEL
Phase #5: This phase illustrates how at any time during this cycle unexpected
events, information and meetings (contingencies) can change the
environment that the venture is developing. Contingencies also increase
means as well as make the venture more specific.
Unexpected event #1: tourist asks for a boat ride on the river
Unexpected event #2: meets ice sculptor while on travels which resulted
in a successful ice sculpting work shop
Unexpected event #3: it rains on the day of another work shop
Unexpected event #4: Sakata was introduced to him through friends
Unexpected event #5: Absolut turns down partnership request at first
only to accept after they see a picture of a giant
sculpture featuring an Absolut bottle.
Unexpected event #6: Virgin Galatic reaches out for partnership

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Questions and Answers on LinkedIn Case (Tutorial)

1. What were the important decisions around customers and partnerships that will
help in foundation of LinkedIn?
1) Former colleagues were used as co-founders (=network and connections). It helps
because you know the person very well and this decreases the chances for conflict
2) Business model was good because it ensured that customers paid for the services
which reduces the amount needed to found the company.
3) They started in Silicon Valley, amongst the first customers were acquired through
the network of Silicon valley which consisted mostly of other entrepreneurs. (start
looking for customers from the network of people that you know)
4) First investors from network which were people from their network (Paypal mafia)
5) Talent and employees were found from their network
6) Epochal system: they added the email feature (gives you the option to add your
email in your linkedin profile and it showed you who amongst your email contacts
also used linkedin and allows you to send an invite to them.) which increased their
users tremendously from 4000 to 20000
7) Sixdegrees.com  they bought the patent on it which was good because it saved
them time and money and also gave them access to an effective social networking
website.
8) They ignored competition in Europe (Xing, the viadeo group, Monster.com) and
entered the market anyway because they knew that although the competitors were

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 large, they were relatively local-based whereas linkedin was more diverse and
international (it included other languages).
9) Partnership with competitors (Twitter  when you change your profile on linkedin
it tweets it on twitter; twitter is also a social network and Google, New York Times)
10) Acquisition; they acquired the company Synergy which created the option to make
an account by scanning your business card. They buy the talent (founders) and not
the company.

2. How does the experience of failure in a previous start-up give serial entrepreneurs
an advantage? Can this experience also be a disadvantage? Answer the question in
general terms by referring to the LinkedIn case.
Advantages
- He started a company social (dating app) which failed because he didn’t have a
good business model. In that time the companies had bad business models
because they designed models that depended on payment of customers without
any other source of income. The business models were not solid because many
services offered on the internet are for free and there wasn’t much thought put
into the sources of income. (Dot.com bubble burst and market crashes in the
year 2000). Here he learned the importance of a good business model.
- Through failure he gained more knowledge about the domain, and it expanded
his network.
- Once you experience failure and enjoy the process you develop enthusiasm and
passion for it. (Found mostly in serial entrepreneurs)
Disadvantages
- Failure can make someone risk-averse
- It can become worst for the next venture if there is lack of reflection and learning
from past mistakes
- You may also get discouraged if you experience breach of trust in past failures
- You have the risk of bad reputation when getting involved in a new venture (and
when it fails)

3. What can you learn from the narrative about the unsuitable CEO who was brought
in from outside?
- Nye focused only on sales and lacked the knowledge of the product itself. Nye’s
operation style was much more focused on sales and business than product
development, Nye primarily came into the company for operations, but it turned

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 out that for a technology company like LinkedIn, where the product is central, it
was really important that the CEO have product experience as and lead the
company from the product rather than sales. “Product/market fit — the focus of
product management — mattered more than user experience or design” is the
basic attitude that Hoffman has kept since his days at Apple.
- Important was that they needed to make markets instead of trying to find them;
instead of trying to find more customers in existing or explored markets, it was
better to try to find new/unexplored markets to find new customers/ new ways
of delivering the product.
- The problem was that he was too managerial instead of entrepreneurial.
- Nye introduced many new features in attempt to find new users (LinkedIn Jobs,
Profile picture, company webpage, influences)

4. LinkedIn has not changed its original concept since they started their service. How
did this decision affect their business expansion?
- They found a market niche: a specific target group (professionals) and they had
a product which was very different from competitors and that was new (there
wasn’t a platform exactly like this one) and they found a niche market which was
big enough.
- The service is affordable for customers (free unless you want premium)

5. We use LinkedIn to find specific professionals, promote our careers, etc.

Furthermore, LinkedIn can be particularly useful for businesspeople, especially for
nascent entrepreneurs. Propose some specific ways for entrepreneurs to use
LinkedIn.
- Use it to find founders, partners
- Meet people with entrepreneurial experience
- For acquiring customers (promote product via promotion page on LinkedIn

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