Effectuation and Bootstrapping: How A Brewery Becomes Bankable

Sam Holloway Ph.D. and Mark Meckler, Ph.D., November 28, 2016

Abstract

Beginning in 2012, we began a process of interviewing small craft brewery owners (under 30,000 Bbls) to determine how craft breweries navigated the challenges from startup to bankability. {Note: For a definition on “bankability,” please read CAS White Paper: What Is Bankability?} We identified geographically dispersed craft breweries and gained access to their owners at the 2012 Craft Brewers Conference in San Diego, CA. We conducted over ten hours of interviews about bootstrapping and the table below summarizes what we learned. In short, we found that most craft brewing entrepreneurs start with one type of skills or means at their disposal: They start with technical, social, or financial means – not all three. The bootstrapping approach is to use as few resources as possible to gather the other types of means. Once all three means were achieved, then banks would listen and their business models could achieve scale.

Bootstrapping: A Formal Definition For Craft Breweries

Bootstrapping is a process where entrepreneurs aim to reduce the need for external capital while still sustaining the venture (Timmons, 1999).   By funding growth internally through cash flow, bootstrapping teaches an entrepreneur discipline, it fuels creativity (Bhide, 1992) and it also can be a source of great innovation (Winborg & Landstrom, 1999). Bootstrapping can include using credit, borrowing from your Aunt Sally; even borrowing from customers.  However, funding from cash flow is the most desired bootstrapping condition.

Effectuation: A Logic For Bootstrapping

Effectuation is a strategic logic where the entrepreneur focuses on the outcomes they can realize with the resources they already control (Sarasvathy, 2001). The core element of this approach is opportunity creation using the means at the entrepreneur’s disposal.  The means-driven strategic logic of effectuation is based on three fundamental assumptions:

1. The first assumption is that an entrepreneur’s “means” include social means (social capital, relationships, and network resources), technical means (essentially their expertise and prior experiences, both in making beer and in running a business), and financial means (access to family money, personal wealth, access to investors), and that each influences an entrepreneur’s strategic decision making in uncertain markets.  Sarasvathy (2001) framed social and technical capital as “What I know” and “Whom I know.” 
2. The second assumption is what Sarasvathy (2001) framed this as an ‘affordable loss’ decision process, in which entrepreneurs base decisions on what they are willing to lose instead of on anticipated return on investment. It is important to note just how different “Affordable Loss” thinking is from what most business schools teach. Business schools teach traditional business planning, which is based upon return on investment. This assumes that markets are stable, past performance can adequately predict future performance, and that firms have some level of bargaining power with wholesalers. We all know these conditions aren’t true for most craft breweries, so in the absence of these conditions, a new and different way of thinking is needed. Thus, when bootstrapping, replace return on investment with affordable loss.  For more information on how this works, read our white paper: Death of the Business Plan.
3. The final key assumption of the means-driven strategic decision-making process is that a series of affordable loss based-decisions comprise a recursive and iterative process of “fail cheap, fail fast” (Read, Sarasvathy, Dew, Wiltbank, & Ohlsson, 2011), with the entrepreneur making incremental resource commitments (often receiving commitments fro suppliers, customers, and even competitors) in order to further refine the opportunity and business model (Holloway & Sebastiao, 2010; Sarasvathy & Dew, 2005).  This iterative process of market entry, failure, learning, and market re-entry allows an entrepreneur to learn from small mistakes and discover opportunities that could not otherwise have been predicted (Whalen & Holloway, 2012).

How Does Effectuation Manifest As A Bootstrapping or Innovation Strategy?

I encourage our readers to position themselves as currently controlling one or two types of means, and then follow the path in the table (below) to learn how to achieve the type of means you are missing.

Even if your brewery has been successful and in business for ten years, it is likely that you face some uncertainty on what to do next. The bootstrapping approach also works for new innovations. Let’s end with an example:

When Oskar Blues decided to put craft beer into cans, there was no past research that could have supported this move. Their wholesalers likely discouraged such a move – because past data suggested all “good craft beer” was in six-pac glass. Had Oskar Blues had a ‘return on investment’ mindset; they likely never would have tried. Instead, I imagine the conversation went something like: “We all know cans protect the beer better, but we aren’t sure consumers will like it. Will it be like screw-top wine and just take a while, or will it be a disaster? Let’s buy three truckloads of cans and convince one of our wholesale partners to give it a try. If it doesn’t work, it won’t cripple the business, but if it works, we could be onto a whole new market opportunity.”  This is the affordable loss mindset at work. It can work for your brewery, no matter its size or expertise.

Crafting A Bootstrapping Strategy (Holloway, et. al 2014)

...

Works Cited

Bhide, A. (1992). Boostrap finance: The art of startups. Harvard Business Review, 70, 109-117.

Holloway, S., & Sebastiao, H. (2010). The Role of Business Model Innovation in the Emergence of Markets: A Missing Dimension of Entrepreneurial Strategy? Journal of Strategic Innovation and Sustainability, 6(4).

Samuel S. Holloway, Peter S. Whalen, Brian J. Adams, and Helder J. Sebastiao (2014). “Crafting a Bootstrapping Strategy: How an Entrepreneur’s Initial Means Affect the Pathway to Bankability.” 2014 Western Academy of Management Conference, Napa, CA.

Read, S., Sarasvathy, S. D., Dew, N., Wiltbank, R., & Ohlsson, A.-V. (2011). Effectual Entrepreneurship. New York: Routledge.

Sarasvathy, S. D. (2001). Causation and Effectuation: Toward a Theoretical Shift From Economic Inevitability To Entrepreneurial Contingency. Academy of Management Review, 26(2), 243-263.

Sarasvathy, S. D., & Dew, N. (2005). New market creation through transformation. Journal of Evolutionary Economics, 15, 533-565.

Timmons, J. A. (1999). New Venture Creation: Entrepreneurship for the 21st Century (5th ed.). New York: Irwin-McGraw Hill.

Whalen, P. S., & Holloway, S. S. (2012). Effectual Marketing Planning for New Ventures. Academy of Marketing Science Review, 2(1), 34-42.

Winborg, J., & Landstrom, H. (2001). Financial bootstrapping in small business: Examining smal business managers' resource acquisition behaviors. Journal of Business Venturing, 16, 235-254.