Perhaps you’ve wondered if it’s better to start your own company or work for someone else. There are many ways to consider that question but one of my favorite ones is to explore how entrepreneurs think. Once you know that, you can compare yourself to them and decide whether you share their approaches to the world.
Entrepreneurs may use two types of business logic for thinking about the uncertainty that confronts them: prediction, analyzing the past to forecast the future and plan accordingly, andcreation, trying out a solution and moving forward based on how well it works.
One of the exam questions I used for the midterm for my Babson College course Foundations of Entrepreneurial Management involved having students to define each of these types of logic and to say which approach is best.
It’s a trick question that most students get right. The answer is that each approach works. But the challenge is knowing which circumstance requires which style of thinking.
Using the past to predict the future. For example, if you are an entrepreneur in an industry that’s fairly regular, such as selling Christmas trees, prediction logic will work well. It is probably fairly easy to analyze previous years’ data of tree sales by species and size for each day of the year.
Odds are very high that you will start to see sales rise on Thanksgiving and perhaps peak 10 days before Christmas. And if you are trying to decide how many different trees to order, you can use historical experience as a first approximation of what to order this year, adjusting the numbers in case new competitors pop up or the weather is going to be very different than in the past.
In other cases prediction logic is a terrible approach and creation logic yields a better outcome.
When creation logic bears fruit. Consider the story of Max Levchin. He immigrated to the United States from Ukraine and attended the University of Illinois. He liked building operating systems for computers and after he graduated decided to co-found Confinity, a company that would build operating systems for the handheld Palm Pilots that proliferated in the 1990s.
He did that but had few buyers. So he decided instead to focus on building operating systems for another handheld device — the digital wallet. Levchin got a mostly tepid response from the market for that as well.
One feature of his software generated a huge amount of email traffic from people who were trying the product — its ability to use his software to pay for items that were being auctioned on the then fast-growing eBay.
Please, Max — the emails implored — make this online auction currency easier to use and have it run faster. For six months, Levchin ignored the emails because he just wanted to build operating systems.
Eventually he gave in to customer demand and built up the auction currency function. Confinity is merged with Elon Musk’s X.com, and called PayPal just like the digital wallet product. In 2002, eBay acquired PayPal for $1.5 billion.
Best use scenarios. Creation logic seems inefficient but it can yield excellent results in situations with great uncertainty as long as an entrepreneur is happy with the idea of doing frugal experiments, analyzing the results and then trying again based on the feedback.
If you are in that rare entrepreneurial situation where the past gives a fairly clear picture of the future, then prediction logic is a far more efficient way to figure out what to do.
If you can think both ways and know when each way is appropriate, you may well have what it takes to be an effective entrepreneur.