Monday, July 22, 2013

Entrepreneurial Expertise - on the Role of Rules in Startups

Life can only be understood backwards; but it must be lived forwards.
- Søren Kirkegaard
In a recent post Chris Dixon quotes American pragmatist William James on the reduction of conscious content when moving from being a student to achieving wisdom:
As the art of reading after a certain stage in one’s education is the art of skipping, so the art of being wise is the art of knowing what to overlook. The first effect on the mind of growing cultivated is that processes once multiple get to be performed by a single act. …
But in the psychological sense it is less a condensation than a loss - a genuine dropping out and throwing overboard of conscious content. Steps really sink from sight. An advanced thinker sees the relations of his topics in such masses and so instantaneously that when he comes to explain to younger minds it is often hard to say which grows the more perplexed - he or the pupil.
I haven’t been blogging before, but this got me thinking about the nature of expertise and, more specifically, the role of rules in entrepreneurship. I will probably turn these idas into an academic paper at some point, but for now a blog post seems to be the right format.
The lean startup literature is largely concerned with rules: state your vision explicitly, translate the vision into falsifiable hypotheses, design efficient experiments to test hypotheses, prioritize experiments, run experiments, evaluate results, decide wether to continue, revise or quit. The same focus on rules is found in many academic entrepreneurship theories, including Saras Sarasvathy’s popular theory of Effectuation.
Compared to the alternative approaches to entrepreneurship (just execute or just adapt), the introduction of rules and heuristics guiding an incrementalist and hypothesis-testing approach to entrepreneurship is a leap forward.
However, while rules are essential for novices they are seldom used by experts. And to help put the role of rules in startups into perspective, I find it useful to consider Stuart and Hubert Dreyfus’ five-stagephenomenology of skill-acquisition. This model describes in stylized fashion the qualitatively different stages (novice, advanced beginner, competent, proficient, expert) one goes through on the path toward expertise, and has been observed among chess players, air force pilots, army tank drivers and nurses to mention a few. I will briefly recapitulate these stages before discussing implications for entrepreneurship.
1) Novice
The novice is taught how to recognize relevant features in her task environment. These features are context-free and can be recognized without any previous experience in the task environment. The novice is also taught rules for determining what to do on the basis of these features, much like a computer following a program.
For instance, a student automobile driver learns to recognize speed (using the speedometer) and is given rules such as shift to second gear when the needle on the speedometer points to ten.
2) Advanced beginner
As the novice gains experience by engaging with real situations, she begins to note examples that indicate meaningful additional aspects of the situation besides those she was taught. After encountering a sufficient number of such examples, the novice learns to recognize these new aspects in the activity.
For instance, the driver uses (situational) engine sounds as well as (nonsituational) speed in deciding when to shift. She learns the heuristic: shift up when the motor sounds like it’s racing and down when it sounds like it’s straining. Still, learning is carried on in a detached, analytic frame of mind, as the action follows instructions based on rules and distinct situational elements.
3) Competent
With more experience, the number of potentially relevant elements that the learner is able to recognize becomes overwhelming. To cope with such overload, the advanced beginner starts (through instruction or experience) to devise plans that determine which elements of a situation are important and which ones can be ignored.
By devising such plans, both understanding and decision making become easier. However, it also introduces uncertainty, judgement and hence emotions into the process. Choices are no longer straightforward, and if something goes wrong, the competent performer can no longer blame inadequate rules but has to take personal responsibility for outcomes.
For instance, a competent driver leaving the freeway on an off-ramp curve learns to pay attention to the speed of the car, not whether to shift gears. After taking into account speed, surface condition, traffic, whether she is in a rush etc, she may decide that she is going too fast. She then has to decide whether to let up on the accelerator, remove her foot altogether, or step on the brake, and precisely when to perform any of these actions. She is relieved if she gets through the curve without mishap, and shaken if she begins to go into a skid.
The more emotionally involved one gets, the more difficult it is to retreat to the detached analytical or heuristic-following mode of the advanced beginner. This emotionality of judgmental action is critical to further learning.
4) Proficient
Only if the detached and rule-following stance is replaced by emotional involvement, is one set for further advancement. If this happens, the resulting positive and negative emotional experiences will strengthen successful responses and inhibit unsuccessful ones. With enough such experiences, the person’s explicit theory of the skill, represented in rules and principles, will gradually be replaced by tacit situational discriminationsOnly if experience is assimilated in this intuitive, embodied, atheoretical way will automatic reactions replace reasoned responses.
However, after spontaneously seeing the important aspects of the current situation, and what goals should be achieved, the proficient performer must still decide what to do to achieve these goals. The proficient performer is thus characterized by intuitive understanding followed by detached decision-making based on rule and heuristic-following.
The proficient driver, approaching a curve on a rainy day, may feel in the seat of his pants that she is going dangerously fast. She must thendecide whether to apply the brakes or to reduce pressure by some specific amount on the accelerator. While valuable time may be lost making a decision, the proficient driver is certainly safer than the competent driver who spends additional time considering the speed, angle of bank, and felt gravitational forces, in order to decide whether the car’s speed is indeed excessive.
5) Expert
The expert not only sees what needs to be achieved. Thanks to a vast repertoire of situational discriminations she also sees immediately what to do. Thus, distinction between expert and proficient performer lies inthe ability to make more subtle and refined discriminations. The expert has learned to automatically distinguish those situations requiring one action from those demanding another, which enables intuitive situational response.
The expert driver, not only feels in the seat of her pants when speed is the issue. She knows how to perform the appropriate action without calculating and comparing alternatives. On the off-ramp, her foot simply lifts off the accelerator and applies the appropriate pressure to the brake. What must be done, simply is done.
The Dreyfus model is arguably quite general, having been validated with chess players, air force pilots, army tank drivers, nurses, second-language learners etc. Still, it has some potential limitations in the context of entrepreneurship.
First, one may argue that the entrepreneurial situation is by definition so uncertain and endogenous (i.e. dependent on the actions of the entrepreneur) that expertise can never fully be a matter of intuitive situational coping. When experts in any domain face novel or unfamiliar situations (what Dreyfus, following Heidegger, would call a “breakdown”)they are jolted out of their absorbed state and forced to retreat to a state of detached analysis of the situation. It may be argued that in entrepreneurship, such novelty-generated breakdowns are the norm (either due to unexpected external events or the entrepreneur’s own actions), and that conscious and detached reflection must always be viewed as part of entrepreneurial expertise.
Second, one may argue that entrepreneurship rests on such a broad set of potentially relevant skills (e.g. consultative sales, product management, UX design) that any generic notion of “entrepreneurial expertise” misses the point. Specifically, an entrepreneur may be expertat some skills (e.g. consultative sales) but novice at others (e.g. product management).
Despite these potential limitations, the Dreyfus model can help clarify the role of rules among novice and expert entrepreneurs. This is nicely reflected in the following observations by Steve Blank and Marc Andreessen.
Novice Entrepreneurs
Steve Blank is well known for Customer Development/Lean Startup, which is essentially an set of startup rules (“The Startup Owner’s Manual- the step-by-step guide for building a great company”). However, when novices first try to apply such rules, they are likely to misunderstandthem (especially if the rule set is complex) and they are also likely to fail to adapt the rules to the messy realities of specific situations. Consider this conversation between Steve and a former student:
“We did every thing you said, we got out of the building and talked to potential customers. We surveyed a ton of them online, ran A/B tests, brought a segment of those who used the product in-house for face-to-face meetings. Next, we built a minimum viable product.”
I offered that it sounded like he had done a great job listening to customers. And better, he had translated what he had heard into experiments and tests to acquire more users and get a higher percentage of those to activate. But he was missing the bigger picture. The idea of the tests he ran wasn’t just to get data – it was to getinsight. All of those activities – talking to customers, A/B testing, etc. needed to fit into his business model
This novice entrepreneur was clearly trying his best to rigorously apply the rules he had been taught. However, by failing to complement his rule-based knowledge with more contextual and holistic situational understanding, he remained stuck in the novice or advanced beginnerstage. Steve then suggested the following:
“I offered that getting acquiring users and then making money by finding payers assumed a multi-sided market (users/payers). But a freemium model assumed a single-sided market – one where the users became the payers. He really needed to think through his Revenue Model (the strategy his company uses to generate cash from each customer segment). And how was he going to use Pricing, (the tactics of what he charged in each customer segment) to achieve that Revenue Model. Freemium was just one of many tactics. Single or multi-sided market? And which customers did he want to help him get there? My guess was that he was going to end up firing a bunch of his customers – and that was OK.”
Combined with continued experience, Steve’s advice above - on how to interpret situational contingencies, how to go beyond detached rule-following and instead device and prioritize among action plans that cut through the information overload - is very much in line with how novices may be helped to progress toward becoming competent performers.
Expert Entrepreneurs
Besides being a champion of Customer Development, Steve is also the first to admit that rules and tools are not enough and thatentrepreneurship is often more art than science, more synthesis than analysis, more intuition than rule-following. This is illustrated in a conversation with a CEO from an I-Corps startup:
“I’m feeling guilty because I was using Customer Development and the Startup Owners Manual until I had that insight. But there was nothing in your book that prepared me for what just clicked in my head. I just saw our entire new business model in a flash, all of it at once. I’m now having the company execute on what came to me in the shower. A small part of me is confused whether I’m doing the right thing, but mostly I’m just convinced it’s as right as anything I’ve ever done. But there’s no chapter in your book or anyone else’s on this.”
“What you had was no accident. You were collecting enormous amounts of data on one side of your brain, but it was the other side that recognized the pattern.”
This is clearly not a novice trying to apply a set of situation independent rules. These are insights afforded to a proficient performer or an expert, someone who has a deep holistic grasp of the specific situation at hand and simply notices what needs to be done without much analysis.
In a recent HBR interview, Marc Andreessen generalizes this point in an observation of the qualities of great founders. According to Andreessen, these individuals are deeply embedded in the relevant aspects of their domain of operation, which allows them to make good decisions without much cognitive effort or awareness.
“The best founders are artists in their domain. They operate instinctively in their industry because they are in touch with every relevant data point. They’re able to synthesize in their gut a tremendous amount of data—pulling together technology trends, their companies’ capabilities, their competitors’ activities, market psychology, every conceivable aspect of how you run a company.”
While I have been thinking about rules and expertise in entrepreneurship for a while (e.g. here and here), I have not yet had time to systematically relate the Dreyfus model to the discourse on entrepreneurship as process (e.g. Customer Development, Lean startup, Effectuation). Based on the above discussion, I do however believe the following to be true.
  • Valuable aspects of what entrepreneurs do can be summarized in rules. Indeed, this is exactly what Customer Development and Effectuation has done.
  • Such rules are extremely valuable to novice and advanced beginner entrepreneurs, both directly to guide venture development and indirectly to guide the entrepreneur’s personal development toward expertise.
  • However, the experts themselves do not use “their own” rules to guide actions. Instead, they rely on holistic situational awareness that cannot, even in principle, be fully described using rules.
  • This means that theories and pedagogies that focus solely on rules and heuristics can only deal with a limited and quite simple part of what constitutes entrepreneurial knowledge.
  • Pedagogically, this can be dealt with through experience-based pedagogies and mentoring.
  • Theoretically, the limitations of rule-based theories of entrepreneurship need to be acknowledged.
[revised june 3 2013]

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