Affordable Loss Principle – Reaching Markets with Minimum Resources

Previously, we looked at how the startup landscaped has changed and that even though effectual reasoning is required by most startups, most business advice is still based on causal reasoning. In the next three posts, let’s explore the three principles practiced by founder entrepreneurs and how these principles will lead to the successful launch of your business.

Manager entrepreneurs use their causal reasoning skills to focus on the “expected return” while founder entrepreneurs use their effectual reasoning to focus more on “affordable losses.” To be more specific, manager entrepreneurs have been taught to analyze markets and choose a market segment with the best possible returns. Founder entrepreneurs look for ways to reach markets with a minimum expenditure of resources (e.g., time, effort, and money) and with minimal risk even if they may not produce the best returns.

Since founder entrepreneurs rely less on upfront planning, they are not sure their approach will work. Thus, they make their decisions based on how much they can afford to lose if their idea does not gain the desired traction.

Founder entrepreneurs have a “just do it and measure what happens” attitude while manager entrepreneurs insist on a thorough, upfront analysis before launching.

Market research for a founder entrepreneur starts with small scale experiments or minimally viable products (MVP) to test the waters with real customers. Often, they do not even assume the expense of developing an MVP. Instead, they may use mock-ups or try to sell products or services before actually developing them to make sure there is a market willing to pay for their solution.

Therefore, founder entrepreneurs approach their business development from the prospective that it may take several tries to reach a successful offering. As a result, capital preservation takes a prominent role in their planning process.

All too often conventional business advice discourages founder entrepreneurs from practicing the affordable loss principle of pursuing a series of soft micro launches or experiments as a way to settle on the best business and economic model for the business with minimal risk and expenditure of resources. Instead, conventional business advice recommends extensive pre-planning and aiming for the highest returns even if the risk of failure is greater.

Is your tactic for starting your business focused on conducting extensive offline research to define an expected business and economic model or is it focused on experimentation with capital preservation in mind, based on the affordable loss principle?

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