Much like the process of human development, a business venture requires a significant amount of time to progress from its conceptual stage to official incorporation. This parallels the concept of a “gestation period” in the realm of entrepreneurship.
However, the duration needed for entrepreneurs to launch their ventures can vary, depending on how swiftly they shape their ideas, secure financing, develop prototypes, and undertake other essential steps. While the speed of the gestation period does not inherently guarantee long-term success, numerous studies suggest that rapid progress enhances the capacity of nascent entrepreneurs to acquire resources, outperform competitors, and establish a foothold in the market. In rapidly changing environments, swift entrepreneurs can capitalize on fleeting opportunities.
In recent times, gestation speed has garnered increasing attention as a proximate performance metric. It offers insights into the early stages of ventures, well before conventional measures like sales figures or mere survival statistics become available. As such, we sought to examine gestation speed as a means to illuminate the cognitive processes at play in new technology ventures. Our study specifically delved into the influence of decision-making patterns on the gestation speeds of such ventures.
Effectuation theory
Research from ESCP Business School, Germany, used effectuation theory to explore the matter. This differentiates between effectual decision-making logic and causal. The authors examined how these two approaches govern how we solve problems.
Effectuation primarily centers around assessing the risk of an investment as an acceptable loss, whereas causation places greater emphasis on anticipated returns. In effectual practice, the focus lies in creating outcomes based on existing means and resources, following a means-driven approach. On the other hand, causal practice starts with predefined goals and subsequently identifies the necessary means to achieve them, following a goals-driven approach.
However, it is essential to note that these two logics are not mutually exclusive. Recent studies propose that entrepreneurs have the ability to switch between causation and effectuation heuristics, and the interplay between the two can yield improved results. The question then arises as to how these logical approaches impact the speed of gestation in entrepreneurial ventures.
The researchers analyzed eight new technology ventures originating from prominent technological universities in Europe. The study encompassed 12 gestation activities, spanning the creation of business plans, patent filings, employee recruitment, and revenue generation for all eight ventures.
A clear link
The investigation yielded a distinct correlation between decision logic and gestation speed. Analyzing early- and later-stage gestation, it was observed that all ventures initially applied effectuation, shifting to a more causal approach in later stages.
Notably, ventures with high gestation speed exhibited a greater inclination towards effectuation during the early phase compared to those with medium or low gestation speed. Even in the later stages, the “fastest” firms continued to adopt a more effectual approach.
Further analysis, employing illustrative data from interviews, revealed four mechanisms of causal decision-making that hindered venture gestation, termed as ‘causal brakes’:
- Devoting time to market research and planning.
- Engaging in the search for specific resources, customers, and partners, which often led to unproductive paths.
- Waiting for specific events to occur, such as investor commitments.
- Spending time on rearranging previously developed plans to adapt to unexpected events.
In contrast, one causal mechanism emerged as a positive influence on gestation speed: pursuing early investment.
Heavy reliance
The authors found a noteworthy pattern wherein low-performing ventures relied heavily on business plans for actual planning purposes, while high-performing ventures primarily used them to comply with investor or competition requirements as a means to build networks.
Regarding effectuation heuristics, which significantly accelerated the gestation process, the researchers identified the following ‘effectual pedals’ that mirrored the principles of effectuation:
- Taking immediate action, relying on instincts rather than extensive planning.
- Adapting products to existing demand instead of seeking specific customers.
- Partnering with the first available partner, fostering collaborative environments aligned with the firm and the market.
However, one mechanism emerged that slowed down venture development: lack of focus. In a particular case, the founding group pursued product development based on their scientific interests for years, without intending to establish a business.
Notably, the study’s longer-term performance data demonstrated that the positive impact of effectuation heuristics on venture gestation persisted even after a decade. Consequently, the researchers emphasized the importance of entrepreneurs understanding the implications of emphasizing certain heuristics during their early-stage gestation process. While causation may slow down the process, effectuation can significantly expedite it.
