Last month, I started telling you all about Effectuation with its first principle: “The Bird-in-hand principle“. But there is more to effectuation than a simple but innovative way to make dinner… Since that first post, I completed and passed the MOOC exam (yay me!) so I’m “officially” good to tell you more about this theory.
There are five principles to effectuation, each of which I will try to illustrate with one of my favorite entrepreneur’s story: Miss Gabrielle “Coco” Chanel. Today, let’s talk about the idea of affordable loss.
The Affordable Loss Principle
I’m sure you’ve heard before: “you need to love taking risks to become an entrepreneur”, or “I’m going to take a gamble but in five years, I will have tripled my revenues” (typical mistake made by many wanabee-entrepreneurs). There are two ways to look at risk taking:
The classic way:
Put it all on the table and focus on what the future (potentially) has in store for us. Make 5-years forecast income statements to feel better about what we’re investing.
The effectuation way:
Invest only what you can afford to loose. Don’t look into what you could be getting, but make sure that you’re not putting on the table more than what you would allow yourself to be losing. Live in the present and not in the future, in the real-life and not in Excel spreadsheets; and be smart about money.
Never buy new what can be bought second-hand. Never buy what you can lease. Never lease what you can rent. Never rent what you can borrow. Never borrow what you can salvage.
—Ian C. MacMillan, professor of entrepreneurship at Wharton’s Snider Entrepreneurial Center
The story to prove it
Still think you need to invest thousands of dollars to get started and start looking at what tomorrow would be like? Let me serve you a (very indulging) spoon of “romanced-reality” and take a couple of hours to watch Coco Before Chanel.