Training entrepreneurs on how to make decisions following a scientific approach – establishing hypotheses and testing them – can help nascent entrepreneurs to accelerate the ideas exploration process and established businesses to improve their performance.
What’s the rationale behind this?
Entrepreneurs and firms must make decisions about new business ideas or products under growing uncertainty. In these situations, the way entrepreneurs collect and analyse information influences the conclusions they draw, the decisions they make and ultimately their firms’ performance.
It’s common for entrepreneurs and managers not to have solid routines or methods for making decisions under uncertainty and to use intuition, search heuristics and decision-making processes that tend to confirm their apriorisms. An alternative is to apply a ‘scientific approach’ to decision-making consisting of:
- Formulating problems clearly
- Developing a theory about why the business idea is likely to become a profitable product or service
- Explicitly formulating the hypotheses underlying this theory
- Collecting and analysing data to rigorously test these hypotheses
The scientific approach to decision-making is thought to have the potential to help entrepreneurs and managers make better decisions through the following channels:
- Firstly, by reducing entrepreneurs’ over-optimism. In the United States, more than 80 per cent of startups fail within seven years. Despite that, entrepreneurs tend to be overconfident about the viability of their own business ideas. By enabling entrepreneurs to make more realistic (i.e. less over-optimistic) predictions about the profitability of their idea, the scientific approach is expected to help entrepreneurs to avoid expending extensive resources developing and launching unprofitable businesses.
- Secondly, by uncovering superior business ideas. By imposing a more structured exploration process, the scientific approach is thought to facilitate the identification of alternative business ideas that have more potential than the original and to which entrepreneurs can quickly pivot. This makes the process of refining business ideas more efficient.
Early stage startups and young microbusinesses
Outcomes of interest
Exits, pivots, business performance
Does it work? Here’s what we know so far…
- Training entrepreneurs on a scientific approach to decision-making seems to make nascent entrepreneurs more likely to stop developing their business ideas when they’re deemed unprofitable and to make this decision earlier.
- This evidence is consistent with the scientific approach helping entrepreneurs to realise more often and earlier that they’re most likely pursuing an unprofitable business idea.
- Scientific approach training seems to make entrepreneurs more likely to pivot to a new business idea once, while it reduces the probability of not pivoting at all or pivoting several times.
- This is suggestive evidence of the scientific approach enabling entrepreneurs to make more decisive and accurate pivots.
- For businesses that already had significant revenues (about US$50,000) before the training, the scientific approach training seems to increase firms’ revenue and value added.
- However, within the first 18 months, the scientific approach training doesn’t seem to raise nascent businesses’ probability of seeing revenues, and the effects on average revenues are unclear for them.
Who benefits the most?
- Although both early stage and more established businesses seem to benefit from the scientific approach to decision-making, there is suggestive evidence that it might work better for more established businesses because their higher stage of development enables them to apply it in a more focused and contextualised way.
Ideas worth trying
- If you’re running a training programme for established microbusinesses that need to make important business decisions under uncertainty, consider including specific content on how to use a scientific approach to decision-making.
- If you’re interested in accelerating nascent entrepreneurs’ process of discarding unprofitable business ideas or pivoting to better ones, give thought to training them on how to use a scientific approach to decision-making.
What to avoid
- Avoid expecting scientific approach training for nascent entrepreneurs to impact their probability of seeing revenues within a few months.