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  • Starting Your Business

    In this section we deal with all the aspects of starting a business.

    In this section
    Business Idea Generation
    Value Proposition

    Help with business idea
    Market need

    Business Idea Generation "The Idea"

    Use this if you don’t have a business idea yet and need help choosing the right business for you.
    Please follow the recommended question template.

    How this section fits into your business plan: 

    Value Proposition
    A one-sentence description about your business.
    Question to answer: What value will your business bring to your customers? What are you going to do?

    Help with Business Idea

    Use this if: You don’t have a business (yet). But have an idea and need help refining and executing idea. 
    Please follow the recommended question template.

    Refining The Idea

    How this section fits into your business plan:

    Market Need / Problem worth solving

    The “problem” your product is responding to by being in the market.

    Why do people need your product / service? Do they really?

    Market need and your solution (proceed to next section)

    What do you do

    What problem does your business solve for your customers? If you aren’t solving a problem for your customers, you are going to have a hard time building your business.

    Interdependence Tip 
    A summarised version of the above components can be used in the following way:

    On your business card
    On a brochure
    On your websites "About" page
    On your business profile

  • Pilot-in-the-plane Principle

    Pilot-in-the-plane is the fundamental worldview of effectuation theory which describes the future as something you can influence by your actions, i.e. you can create your own opportunities.
    By focusing on activities within their control, expert entrepreneurs know their actions will result in the desired outcomes. An effectual worldview is rooted in the belief that the future is
    neither found nor predicted, but rather made
    In this phase you use all other principles together focussing on what you can control, like a pilot in a plane, use the effectuation thought process to avoid problems but don't shy away if problems happen.
    Effectuation Theory
    Bird in Hand Principle
    Affordable loss Principle
    Crazy Quilt Principle
    Lemonade Principle
    • By Ken

    Lemonade Principle

    Mistakes and surprises are inevitable and can be used to look for new opportunities.

    Leveraging contingencies is the idea behind the Lemonade principle. Effectuation helps in fighting uncertain and unpredictable environments, using the Lemonade principle you see these contingencies not as negatives but as opportunities and new sources of profit (when life gives you lemons you make lemonade).

    Lemonade principle is about using "what if" scenarios to deal with challenges that you face both in opportunities and challenges (the worst case scenario). This could either lead you in a somewhat different direction or a very different direction also known as a "pivot".
    The Lemonade principle also helps iron out any problems in your business model, you will often here investors say they don't fund startups because they don't want their money to be used while a business is still figuring things out. That is why this principle is used, that by the time it is a medium size business it has already figured a lot out.
    • By Ken

    Crazy Quilt Principle

    Entering into new partnerships can bring the project new funds and new directions.

    The crazy quilt principle is about finding partners to get your startup off the ground. In this context it does not mean you going to enter into a joint venture it means that by working with larger, established companies and getting certain commitments from them you can get traction faster and cheaper than if you had to go it alone.

    Another way of getting traction for a startup is to have "offtake" agreements. An offtake agreement is an arrangement between a producer and a buyer to purchase or sell portions of the producer's upcoming goods. While it is popular in farming in mining a derivative can be used in many industries. 

    This is why the "who you know" in the "Bird in Hand" principle is so important.

    sb2sb.com proposes another option that can be used. In our marketplace (listings and trade leads) we allow both buyers and sellers to stipulate whether they need, a complete product, only the raw material, only labour or a combination. This means that a buyer can provive the raw materials and you can provide the labour and equipment needed to manufacture the goods.
    One of the ways of cooperating with a partner is to go to existing companies in your industry, companies that would be considered competitors and ask to supply them with niche products that they are not able to produce efficiently themselves. You can then do the smaller tasks that the company does not do themselves.
    When starting out it is hard to compete with existing, more established companies unless you have something special. Niche products are another one of the ways to compete. 

    Read Focussed Low-cost Provider & Focussed Differentiation for niche strategies. 

    Partnerships with existing companies provide a safety net, reducing uncertainty because they have existing clients and you don't have to go out and find new clients. It also provides a way to prolong your Affordable loss with guaranteed income.
    • By Ken

    Affordable loss Principle

    You should only invest as much as you are willing to lose.
    Affordable loss is about not risking more than you can afford. To be successful and not end up homeless is about taking calculated risks. Effectuation theory tells you not to focus on the upside but on the downside, focus on what is your maximum loss. What you can lose and what you can get out. Affordable loss is guided by the following: Your time, your effort and your money that you can afford to lose.

    The time
    This is the amount of time that you can afford to lose by investing it in your startup. If you work and run your startup after work, then that time you are giving up is your affordable loss. Time can be just as important as money because if you have a family, the time with them is what you are sacrificing by spending it on your startup. 

    The effort
    All the effort you are putting in your startup or small business is effort that was taken away from somewhere else, if you were spending your time watching TV then your affordable loss isn't very high but if you were spending it more productively like studying, the effort you put into your business is worth more.

    The money
    If you saved up some money that is your affordable loss. If you put your family home up for collateral to fund a startup that is not an affordable loss as if you lose your property will get sold and your family will end up on the street. Now many people have made a lot of money by doing just that, but many more have ended up bankrupt. South Africa is not a country to have an "all-or-nothing" mentality and risk everything, there is a greater chance you will end up with nothing. In South Africa you have a macro environment: government, trade unions and even workers who are openly hostile to business. It is one of the most difficult places to do business with onerous regulation and high taxes. You are very likely to lose your shirt. 
    If you want to be successful, you need to think on those terms. What could you lose and still come out in a position where you can start again. It doesn't help you if you were to lose the roof over your head, that will be very hard to start again from.

    From the beginning to the end you need to know what you will lose and where you will end up. Yes, you can change your course (lemonade principle) but still stay within the affordable loss. If you lose what you considered your affordable loss, then you lose it and exit. You have designed your exit plan from the beginning.

    The affordable loss is similar to a "stop loss" in trading which means that you will only take on a loss till a certain limit. The same thing applies in business, as a startup you need to know this is how much money you will lose, your time and your effort till a certain limit. 
    Make planning for failure part of your business planning, it does not have to be on your business plan, but you need to be able to say, this is my affordable loss and this is the end. Have an affordable loss, a stop loss from day one. This is what you are able to lose and nothing more. And that is how you will ultimately succeed. You cannot just have an open ended loss; if you fail you need to be able to be in a position to bounce back. It does not help you if you lose your house (money) which will make it harder to start again and it also does not help if your wife leaves you (time, effort) because you were too busy with your startup. If you retain both, you can restart easily again, a roof over your head to work from and your wife for support and even to sustain the household.

    With startups it is impossible to predict the future and make accurate predictions, something that can be done with a medium or large business with a history of trading. What you think will happen in a small business often doesn't. The best way forward is to understand affordable loss.

    Watch the video below from the 9 minute mark to the 16 minute mark to see the need for an affordable loss:
    • By Ken

    Bird in Hand Principle

    You have to create solutions with the resources available here and now.
    Entrepreneurs start with what is available; whatever is available right now is your bird in hand. This is also part of designing your failure and affordable loss: looking at what you have because that likely what could be lost.

    The bird in hand principle is guided by the following: Who you are? What do you know? Who do you know?

    Who are you?
    In order to be successful the first thing you need to find out is who you are, which will guide you on the right path. If you are a great thinker you will design a great product but if you are a great salesman you will be looking how to sell the product. So basically you need to find out who you are, your strengths and weaknesses. Are you a salesman, designer or a management person. Who you are is important. As an example, if you are an introvert or anti-social then you probably not going to want to knock on doors the whole day in which you should not at a not contact strategy such as doing business over the internet.

    What do you know?
    A very important question is what do you know, in what industry (or hobby do you have experience)? Because that knowledge can be used to make money.

    One of the best ways to get skills is via work experience. Work experience will also give you product and industry knowledge. 

    What you know is not just limited to work, another way to develop contacts is via hobbies or clubs which can hone your abilities but may also give you the tools required to start a business.  What you know also makes it easier for people to help you as you require less effort to be helped.

    Who do you know?
    The people you know can help you with advice, skills, introductions or referrals into industries. These people can help you understand if an idea is for you or not. If they tell you x is wrong, you can correct x, then you can get feedback and they will tell you y is wrong as wrong which you can correct. And this will help you prevent costly mistakes. 
    The people you know can help you with experience and connection. But there is another part of who you know that can also help you in your business: friends, family and fools. Friends, family and fools are usually where entrepreneurs will get their first funding from or their first clients from. These are the people most likely to support you before you gain traction. Less than 1% of startups raise venture capital and the "three f's" are often an entrepreneurs lifeline starting out to get the idea off the ground.
     One of the best ways to leverage who you know is contacts you have gotten via work. 
    Tip: You can use our community to get this kind of help.
    As you can see from this, entrepreneurs don't necessarily start with a given goal; they start with who they are, what they know and whom they know.
    The bird in hand principle is considered the foundation to build your new business on. If it is built on a solid foundation it will be far more sustainable. 
    • By Ken

    Effectuation Theory

    Effectuation Theory is a set of principles to starting a business and entrepreneurship developed by Saras Sarasvathy. 
    Effection Theory describes an approach to making decisions and performing actions in entrepreneurship processes, where you identify the next, best step by assessing the resources available in order to achieve your goals, while continuously balancing these goals with your resources and actions.

    Effectuation differs from the causal logic, where there is a predetermined goal and the process to achieve it is carefully planned in accordance to a set of given resources. Sarasvathy argues that the causal logic is not suited for entrepreneurship processes that are inherently characterized by uncertainties and risks.

    The fundamental world view for effectuation is called the Pilot-in-the-plane, which describes the future as something you can influence by your actions, i.e. you can create your own opportunities.

    The four principles of effectuation are:
    Bird-in-Hand: You have to create solutions with the resources available here and now. Affordable loss: You should only invest as much as you are willing to lose. Lemonade principle: Mistakes and surprises are inevitable and can be used to look for new opportunities. Crazy Quilt: Entering into new partnerships can bring the project new funds and new directions.  
    Bird in Hand Principle – Start with your means. Don’t wait for the perfect opportunity. Start taking action, based on what you have readily available: who you are, what you know, and who you know.
    Affordable Loss Principle – Set affordable loss. Evaluate opportunities based on whether the downside is acceptable, rather than on the attractiveness of the predicted upside.
    Lemonade Principle – Leverage contingencies. Embrace surprises that arise from uncertain situations, remaining flexible rather than tethered to existing goals.
    Crazy-Quilt Principle – Form partnerships. Form partnerships with people and organizations willing to make a real commitment to jointly creating the future—product, firm, market—with you. Don’t worry so much about competitive analysesand strategic planning.
    Pilot in the Plane Principle. Control the controllable. The four specific principles above represent different ways entrepreneurs interact with the environment to shape the environment. Of course not everything can be shaped or controlled, but effectuation encourages you, as the pilot of your venture, to focus on those aspects of the environment which are, at least to a certain degree, within your control.

    The world view and the four principles are used in entrepreneurship processes to plan and execute the next best step and to adjust the project’s direction according to the outcome of your actions.

    Effectuation Theory is a way of thinking that entrepreneurs use to identify new ideas, opportunities and ventures. It uses a set of decision-making principles that can (even) be used in uncertain situations, in scenarios where the future is uncertain and it's difficult to make good choices. 

    These principles will help you think and reason like an entrepreneur rather than the pipe dreams / pie in the sky and castle in the sky logic that is caused by causal reasoning.

    Effectuation vs. Causal Theory
    Causal theory is described as the "normal" theory that people use to plan, whereas entrepreneurs use effectuation to guide their next steps. Effectuation Theory is based on heuristics which is defined as "any approach to problem solving or self-discovery that employs a practical method that is not guaranteed to be optimal, perfect, or rational, but is nevertheless sufficient for reaching an immediate, short-term goal". 

    A simple example:
    Causation theory: You want to build a block of flats and go looking for investors (something you may never find).
    Effectuation theory: You look at the resources you have (Bird in Hand) and make your next move from there.

    Causation theory is the opposite of effectuation theory, effectuation theory is used when the future in uncertain, as a startup your future is always uncertain and predicting the future is difficult. 

    Whereas causation theory is used when the future is predictable, like once you have grown to a medium or large business and you need to grow it or turn it around. Then you can look at causal reasoning and determine goals to achieve and find the resources to do it whereas effectuation is the opposite as you determine goals based on the resources at hand. 

    It is important to take a step back here, and ask why? Here is why:
    Small business: limited resources surviving day by day. 
    Medium & Large business: existing clients, cashflow this will give you access to finance options to grow, you may also have assets to put up as collateral if needed. 
    As you can see with a medium and large business things are far more predictable.

    In effectuation if you have the resources to only buy and rent out one flat, you will do that, you will not think of building a block of flats because you don't have the resources. Whereas in causal reasoning you determine the goal to build a block of flats then you go find the resources to do so.

    It is very important to take another step back and ask why again. In the movies you see people use causal reasoning all the time going office to office pitching to investors and eventually they get funded. That is in the movies and in a western country. In South Africa if you do not have the resources to start your "dream" business it will stay just that a dream. Banks don't lend to startups and there is virtually no government assistance. 

    The person that developed effectuation theory Saras Sarasvathy comes from India where there is a similar macro environment in South Africa: poverty and little government support. It is a better suited framework to use than causal reasoning.

    Having worked with small businesses, in South Africa most people without the resources will often have lofty ideas to start a business but will never get off the ground because they use causal reasoning. Why causation does not work in small business is that you don't have those resources and you do not qualify for bank finance.

    But in effectuation you look at your resources and then decide. This is what successful entrepreneurs and small business owners do because they know what is available in the hand and that's what will have to do. So if they want to build a portfolio of rental properties starting with 1, grow it to the point where there is sufficient income and collateral to finance the building of a block of flats then fine. But if they plan to build a block of flats in a year they will fail due to the lack of resources, in causal theory the requirements are so high that they might not be able to start at all, as projections will say that you need R10 million for build a block of flats but you don't have it so the work will never start. Whereas in effectuation you will say, I have R1 million. What can you do with R1 million? / Effectuation theory will tell you that you have R1m, start what you can do with R1m.

    Using effectuation your thought process will look this:
    * You can buy one nice apartment and rent it out adding another one every x years. As the apartment is paid off, and its value increases it can be used as collateral to buy another one and so on.
    * You can buy two cheaper apartments, that maybe need some work done, fix it up adding another one every x years. As the apartment is paid off, and its value increases it can be used as collateral to buy another one and so on.

    * You can still aim for a block of flats by forming a syndicate by saying I can look for 9 more people with R1 million each and we can build a block of flats, when you cannot find 9 people then the "Lemonade principle" can lead you to the above 2 scenarios.

    Designing Failure
    Failure is part of entrepreneurship and cannot be ignored. Effectuation theory proposes that you understand and "design" your failure. You should know what can fail you, what you can do about it and when to throw in the towel. Effectuation proposes "Affordable Loss" in which you establish what the "stop loss" in your business venture is. In other words you accept you can fail and will therefore stop your losses at a certain point. Do your best but accept that you can fail. So even if you do fail you don't end up homeless on the street, putting you in a position to plan your next startup in a position to better succeed with the lessons you learnt from failing. This is the concept from affordable loss: pack what you can carry and don't be stubborn to realise that you can fail and when you are failing at that is part of the risk taken in entrepreneurship.
    What is effectuation?
    Saras Sarasvathy 
    Saad T. Hameed 
    • By Ken
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