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Thursday, June 12, 2008

More on Lawyers and Entrepreneurs

In comments to my last post about Bill Henderson and the ISBA small firm workshop, Hillel Levin and "PA" pose questions about what you can teach in a law school classroom.

"Law and entrepreneurship" is a nice place to explore what you can reduce to process capable of being replicated, much less taught.  Over at Conglomerate, it happens Gordon Smith reported in a few days ago from a conference in Madison entitled "Technology Entrepreneurship and Institutions," which University of Wisconsin INSITE Executive Director (and Professor) Anne Miner kicked off by asserting "there is no secret sauce" to entrepreneurship. 

This has macro and micro implications, and hers appears to concern the former.  Certainly the last two places I lived (Ann Arbor and Indianapolis) had the usual government plus industry plus university triads seeking to turn those communities into Silicon Valley-like hotbeds of entrepreneurial development.  Josh Lerner at MIT has commented on the foolishness of letting politics, rather than the merit of the business, dictate the disbursement of governmental or other seed money.  Entrepreneurial communities are clusters, and even if wanting it to be so could make it so, then you have to concentrate the effort in, say, Indianapolis, and not give into the desire of Fort Wayne, Evansville, Gary, and Muncie to get in on the gravy train. Wanting it to be so doesn't make it so, and Professor Miner's observation seems wise to me.  There is a lot of serendipity in the creation of new industrial centers, whether it's Silicon Valley in the 1980s, or Detroit at the turn of the 20th century.

My particular interest is in the micro view, particularly the exploration of my intuition that private law (versus other norms or the "rule of law") is not a particularly powerful force in entrepreneurship (as I observed in the thought piece Why the Law of Entrepreneurship Barely Matters).   Or to put it another way, not only is there no macro secret sauce, there's not much micro secret sauce either, at least for lawyers.

I've been intrigued by some empirical data on this subject, particularly that gathered by Professor Saras Sarasvathy at Virginia's Darden School about what she thinks might be the derivable and teachable micro secret sauce, at least for the entrepreneurs, and more follows the jump.

Professor Sarasvathy wrote a paper called "What Makes Entrepreneurs Entrepreneurial?" based on research she undertook with thirty successful entrepreneurs (their companies ranged from $30 million to $6.5 billion in sales), giving them each an identical seventeen-page business problem to solve. Her conclusion was that there was a teachable set of principles involved:

This set of principles, when put together, rested on a coherent logic that clearly established the existence of a distinct form of rationality that we have all long recognized intuitively as “entrepreneurial”. For reasons that will become clear in the next section, I have termed this type of rationality “effectual reasoning”.

* * *
The word “effectual” is the inverse of “causal”. In general, in MBA programs across the world, students are taught causal or predictive reasoning – in every functional area of business. Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal – fastest, cheapest, most efficient, etc. – alternative to achieve the given goal. The make-vs.-buy decision in production, or choosing the target market with the highest potential return in marketing, or picking a portfolio with the lowest risk in finance, or even hiring the best person for the job in human resources management, are all examples of problems of causal reasoning. A more interesting variation of causal reasoning involves the creation of additional alternatives to achieve the given goal. This form of creative causal reasoning is often used in strategic thinking.

Effectual reasoning, however, does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with. While causal thinkers are like great generals seeking to conquer fertile lands (Genghis Khan conquering two thirds of the known world), effectual thinkers are like explorers setting out on voyages into uncharted waters (Columbus discovering the new world). It is important to point out though that the same person can use both causal and effectual reasoning at different times depending on what the circumstances call for. In fact, the best entrepreneurs are capable of
both and do use both modes well. But they prefer effectual reasoning over causal reasoning in the early stages of a new venture, and arguably, most entrepreneurs do not transition well into latter stages requiring more causal reasoning.

If what MBAs normally do is causal reasoning, then what lawyers do is causal reasoning par excellence.  This particular comparison struck home:    "While causal reasoning urges the exploitation of pre-existing knowledge and prediction, effectual reasoning stresses the leveraging of contingencies."  In short, the usual business lawyer's job is to use past circumstances to predict and minimize the risk in a contingent future; the entrepreneur views that very contingency as stock in trade.  Again, to plug a piece of my work:  Contingency and Contracts:  A Philosophy of Complex Business Transactions, 54 DePaul L. Rev. 1077 (2005).

What is intriguing about this theory is how it further divorces law from the creative process.  In the "Why...?" essay, I speculate that entrepreneurs simply have a different orientation to rule-following practice than lawyers.  Professor Sarasvathy is suggesting it's more than that:  causal and effectual reasoners aren't even processing the same data. 

Posted by Jeff Lipshaw on June 12, 2008 at 08:46 AM in Corporate | Permalink

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Comments

I’m impressed by Professor Sarasvathy's special report based on her research of thirty successful entrepreneurs, it's inspiring. If anyone gets a chance, you've got to read it. I found a site that offers law firm conference call service at: http://www.24conference.com. This is a great tool for entrepreneurs. Great blog!

Posted by: Adame | Feb 5, 2009 12:01:34 AM

Thanks for this blog post. I'll read your papers and Sarasvathy's paper this month.

I'm a former (and probably future) entrepreneur (or corporate intrapraneur). I’m also a 2L. Suspecting an M.B.A. education wouldn't do much for me, I chose the J.D. education. I believed the J.D. would challenge me more and add more value to the entrepreneurial skill-set I'd already developed. Once finished, I’m confident I’ll have picked up a few lawyerly tools that will make me a more effective, defter entrepreneur. But during my 1L, I rejected some of the least entrepreneurial aspects of our "learning how to think like a lawyer" training. Some of the curriculum encouraged me to invest too much time pondering far-fetched "what-ifs" that I'd rarely or never encounter as the leader of a fast-growing company; to shun creative problem-solving or advantage-gaining tactics that might bend, stretch, or cost-effectively break rules; to analyze issues in almost paralyzingly or absurdly balanced, cautious, or nitpicky ways.

"In the "Why...?" essay, I speculate that entrepreneurs simply have a different orientation to rule-following practice than lawyers."

Based on my experiences, this rings true. Entrepreneurs leading fast-growing companies, similar to corporate officers leading slow-growing or shrinking companies, are limited or empowered by our relationships, our resources, and the rules. But entrepreneurs leading fast-growing companies tend to deal with rules differently. For example, my goal for the day, the week, the month, or the year would be to get X done. The company would need X to get done in order hit our growth targets, or to get the big contract, or to meet payroll, or to package and deliver the product on time, or to keep the lights on. X had to get done, or we’d shut down. Focused on getting X done, I’d survey our relationships, our resources, and the rules, and then develop a course of action to get X done. This is where I envision good entrepreneurs leading fast-growing companies might deal with rules differently than good business lawyers who’d never led fast-growing companies through very competitive markets.

Good entrepreneurs wouldn’t want too many smart people in the war room whose first or only contributions would be to inform us of all the rules that might prevent us from getting X done. We’d want people who would instead tell us which rules, if followed in certain sequences or simultaneously, would enable us to get X done. Or which of our relationships or resources could be used to negate the rules that might prevent us from getting X done. If no relationships resources, or rules would enable us to negate the rules that might prevent us from getting X done, we’d want people in the war room who would tell us how we could use our relationships or resources to create new rules, so we could get X done. If we couldn’t afford to create new rules that would enable us to get X done, we’d want people in the war room who would tell us what it might cost us if we broke some rules in order to get X done. Then, we’d execute the best plan to get X done or we’d shut down because the likely costs of breaking the rules we’d have to break to get X done would be too high.

Perhaps most good business lawyers wouldn’t be ready to use a similar algorithm to keep the company in the game, or to help the company take the lead, or to just get X done. But most good entrepreneurs leading fast-growing companies through tough business competitions probably would.

Posted by: E.C. Hopkins | Jun 13, 2008 1:07:33 AM

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