When I explain my views on business planning in workshops, I start by explaining how reasoning skills have evolved from causal to effectual. Then I present the class with two images.
The first is a general and his army about to lay siege to a castle. All the planning was already done: the troops, the supplies, the siege engines, the logistics.
The second is Christopher Columbus stepping ashore in what we now call the West Indies, convinced he’d reached southern and eastern Asia.
Both men had a plan. What separates them is what each one could do when his plan stopped matching the reality on the ground. The general was constrained by causal reasoning. Columbus was free to apply effectual reasoning.
Effectual reasoning rests on five principles: available assets, affordable loss, strategic partnership, leverage contingency, and shaping the future. I introduced them in The New Small Business Manifesto, and it all begins with the Available Assets Principle. You can’t decide what you can afford to lose, who to partner with, or how to use a surprise until you know what you’re starting with.
But to see why starting with what you have matters so much, you first have to understand the way most of us were taught to start a business. That starts with the castle.
Causal Reasoning: Taking the Castle
Causal reasoning starts with the goal. You pick the castle, then you plan backward. How many troops do you need? What supplies? What siege engines? How long will it take?
The general had the luxury of time. The enemy he wanted to conquer was ensconced inside the castle, going nowhere, waiting for the attackers to launch at their convenience. So, camped in front of the castle, he could take the time to make sure he had everything he needed before launching the siege.
Here’s the catch. Once you’ve used that plan to raise capital, whether to get a loan or attract investors, you’ve handed those people your road map. Your commission is to execute the plan as defined: “take that castle.” So what happens when you see a better opportunity along the way? You can’t really act on it. You’re accountable to the plan, not the new opportunity.
Effectual Reasoning: Columbus
Love him or hate him, Columbus’s expedition makes the point.
His plan was to sail west, reach the Indies of southern and eastern Asia, and open up the spice trade. When he made landfall, he believed he was exactly where he was supposed to be. However, he wasn’t able to find the spices he was looking for, including black pepper, cinnamon, cloves, and nutmeg.
That was a real problem. His backers had paid for an expedition, and a voyage that came home empty-handed would be considered a failure. If Columbus had been constrained by causal reasoning and had to stick to the plan, he would have kept searching for spices that weren’t there until the food and money ran out. Then he’d have sailed back to Europe a failure.
He was economically desperate. He needed something that would justify the expedition, so he took stock of what was actually in front of him. He saw gold jewelry on the people he met, and using effectual reasoning, he changed the voyage’s objective from opening the spice trade to finding the source of the gold.
Wherever he was, he could change the objective. That’s the difference between causal and effectual reasoning. You work from what you have, not from what the plan promised.
The Available Assets Principle
Saras Sarasvathy studied how expert entrepreneurs think. She called her first effectual reasoning principle the bird-in-hand principle, as in, a bird in the hand is worth two in the bush. I call it the Available Assets Principle.
It comes down to three inventories:
Who you are. Your traits, your abilities, and what you’ll actually do day after day.
What you know. Your expertise, education, industry experience, and the processes you’ve run.
Whom you know. Customers, former colleagues, suppliers, people who’ll take your call.
When you start with those inventories, the question flips. You stop asking, “What’s the best opportunity out there, and how do I get there?” and start asking, “What can I do with what I already have, starting now?” The goal grows out of your assets. You don’t go buy assets to chase a goal.
I’ve lived both sides of this. The clearest way to show it is with three of my own businesses, in the order they happened.
Story One: Invisible Fence
When I bought my house in Colorado back in 1986, I noticed the previous owners had kept their pet in the yard with an Invisible Fence. Apparently, they’d brought it with them from the East Coast.
I found the concept intriguing and did some research. Invisible Fence was an East Coast company selling mainly in Pennsylvania, and it was just starting to explore moving west. It had just signed its first distributor, who was out of Denver. I met with him, agreed this was a really cool product concept, and told him I’d love to be the dealer for southern Colorado.
Now run my inventory. I had a background in electronics, so I understood how the product worked. But that’s where my assets ended. I knew nothing about selling. I knew nothing about marketing. I knew nothing about running a business. I just thought it was a cool idea. It turned out that Invisible Fence wasn’t an electronics business. It was a sales and marketing business, and those were the assets I didn’t have.
I worked it nights and weekends, doing sales calls and installs. By 1990, after four years, I realized I couldn’t grow the business fast enough to justify replacing my full-time job. In the final accounting, it wasn’t successful for me because it wasn’t in my circle of competence when I started.
But that’s only half the story. I did learn a lot about sales and marketing, and that made my next business much more valuable. And because I kept my day job, it was an affordable loss. If you want the full story, I wrote about it in Challenges of Creating a New Category.
Story Two: Horizon Interactive
At Digital Equipment Corporation (DEC), a minicomputer company, I managed a documentation and training division. As PCs replaced minicomputers, DEC’s revenues began to plummet. Every few months, I was instructed to cut my staff, until I decided it was time to quit and start my own documentation and training company, Horizon Interactive. When DEC laid off the rest of my staff, DEC became my first customer.
Look at the inventory this time.
Who: me and some of the people from my former division. We already knew how to work together and had the capability to do the work. And I now had the sales and marketing experience I’d learned the hard way with Invisible Fence.
What: we had expertise in DEC’s products, we understood the industry, and we knew DEC’s internal processes because we came from inside the organization.
Whom: I knew the customer, and I knew my former colleagues. The company that had been cutting my division was now buying our work.
From that base, once we’d grown to about a dozen employees, Horizon Interactive began looking for other documentation and training customers.
Same founder as the fencing business, different starting point. The difference wasn’t effort. It was what I brought in the door.
Story Three: KSI Oil and Gas
After I sold Horizon, I was sitting on cash I needed to invest. I looked at tax-advantaged options and started investing in direct participation oil and gas programs. Before I put money in, I did my homework. I talked to managers and salespeople. I went out into the field and talked to roughnecks, tool pushers, and landmen.
Then I went to NAPE in Houston to find exploration and production (E&P) companies looking to raise private money. That’s where I had the epiphany. I was looking at my available assets.
Who: someone who knew how to develop training programs.
What: everything I’d learned researching the asset class.
Whom: the operators and people I was already investing with.
So I started contracting with the same companies I was investing with. From there, I went back to NAPE to find other E&P clients.
I’ll be honest about the weak spot. My oil and gas knowledge came only from research. Building the training materials actually deepened that research. The materials became something I could license to E&P companies, or package and sell to individual investors who were doing their own research on the asset class. To this day, it’s one of my most-attended online courses.
Circle of Competence
Your available assets draw the boundary of your circle of competence. Warren Buffett put it this way in his 1996 letter to Berkshire Hathaway shareholders: “You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
Inside the circle, you know the customers, the language, the costs, and the traps. You’re faster, you’re cheaper, and you’re believed. That was Horizon. Outside the circle, you’re a beginner competing against experts, and you don’t know what you don’t know. That was Invisible Fence.
But a venture outside your circle can still be tuition that widens it. What you learn out there can come home as a new asset. And the circle isn’t a cage. KSI Oil and Gas didn’t leap into a new circle. It attached a core asset, building training programs, to new knowledge and new relationships. It grew from the edge I was already standing on.
Why It Matters More Now: Speed
The world moves much faster than it used to. By the time a causal plan is researched, written, and funded, the opportunity may no longer be visible. Or it may be gone.
Take fidget spinners. On Google Trends, search interest in the US was 3 out of 100 in February 2017. By May, it hit 100, its peak. By July, it was down to 7. If it took you six months to write a business plan and get everything together, you would have missed the entire wave.
Available assets let you act on what’s in front of you now. AI makes moving fast easier than ever, but it gives everyone the same speed. When anyone can move quickly, what sets you apart is the assets nobody else can download: your experience and your relationships.
How the Principles Connect
Here’s why Available Assets has to come first.
Affordable Loss: what you can afford to lose is measured against what you have.
Strategic Partnership: “whom you know” is where your first partners come from. For me, that was DEC.
Leverage Contingency: a surprise is only useful if you have the assets to act on it. When the spices weren’t there, Columbus still had his ships and crew in place to go after the gold. When I walked into NAPE, I already had the skills and the relationships to turn it into a business.
Shaping the Future: you shape the future from where you stand, not from where the plan said you’d be.
Take Inventory
Write three lists: who you are, what you know, and whom you know. Circle the overlaps. What could you sell next month using only what’s on those lists? Then check the idea you’re chasing. How much of it sits inside your lists, and how much would you have to go out and buy?
Begin Where You Stand
Louis Pasteur said, “Chance favors only the prepared mind.” Your available assets are the preparation. NAPE was my chance, and I only saw it because of what I already had.
The castle is a destination. Columbus had a starting point. Founders begin where they stand.
What could you start this month with only what you already have?
