How To Find Great Business Ideas Using Effectuation

What's up, everyone? Welcome back to another episode of Founders Journal. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew. Today we are going to answer a very simple question: How do I find great business ideas? There are, of course, many answers to that question, but I brought in a guest that not only has a non-obvious method for finding great ideas, but he has also used this method over and over to build several multimillion-dollar companies. My guest is Michael Girdley, an entrepreneur and content creator who has a holding company of 12 businesses that do $100 million in annual revenue. His businesses span from a fireworks retailer to a paid community for business owners. And today he is going to take you through a business ideation process called effectuation.

Let's hop into it. Michael, thanks for joining Founders Journal.

Excited to be here.

I finally met someone on one of these podcasts that has as good, if not better, of a setup as I do. So I'm— I feel like I'm in the presence of podcasting royalty right now.

Did you do your own or did you?

No, I can't take any credit. It was all the Brew team. A few producers came over one day and they put up like All of my paneling, gave me the lights, did the whole setup with the microphone. Um, so I didn't do it. Did you? Did yours?

This is 100%.

Yeah.

It's incredible. Yeah. I've watched a lot of YouTube videos. I've gone straight Dunning-Kruger on everything to where I'm like, you know, like, okay, I'm like a proficient intermediate now and I know a lot about nothing, but I can't help but like, I know the things that need to be a little bit better and I can't help but feel bad about them. Like I'm looking at my picture right now, I'm like, oh, there's a glare like right here. Like I need to change the warmth of that light. Like, it's a problem.

It's incredible. I mean, I feel like people already do this, but there is a business in just kind of like podcast in a box for people to do, especially just in this age of people recording from home versus at office or in studio. Well, maybe in the future we'll jam on podcasting and creator businesses, but I want to talk about something that you've thought a lot about, you talk a lot about, and it's kind of your way for finding business opportunities and kind of going through the idea maze, and you call it effectuation. And so I just wanna open the floor for you to talk about what this means and your process for going through the system of effectuation.

Yeah, well, the way I describe effectuation to people is it's like an alternative to Lean Startup or a classic, like, waterfall method of, like, finding business ideas and going through the idea maze that you talk about. So waterfall's really straightforward. It's like, Hey, like, we wanna change the— have a totally different paradigm for transportation in the future. We're gonna start and build like a global network of mobile phone connected taxis run by individuals, right? That's the Uber vision. And you try to— you set that vision and you try to incrementally get there. And that's the way all the VC-backed startups work. And there's some problems with that model, which a lot of people talk about. The founders end up not making any money, or the VCs end up, you know, being bad actors or good actors. And there's a high— there's, you know, big successes and a lot of failures. Then there's Lean Startup, which I used to do a lot when I would try to build businesses. Like, you go and, like, discover from customers, like, what their problems are. And, you know, every time I would do it, I'm sitting there and I'm just like, I would think of the old Henry Ford quote where it's like, you know, like, if we'd have listened to what our customers said, we would've given them faster horses, right? And it's like, oh, I think that's another thing where, like, I would run Lean Startup, and I ended up with these just, like, small-ass ideas.

Mm-hmm.

Like, and if you hear me, there's nothing wrong with small-ass ideas, but I wanna do things at scale, and I wanna change the world, and make things better for people at scale. So Lean Startup is not a good way if you wanna have maximum impact. So if you think about the perspective of it, which each one of those comes from, one comes from the perspective of a vision of the future, so the waterfall stuff. The other one comes from a perspective of a current customer's problem. There's a third perspective you can take, which is, I'm gonna start with the things that I'm incredibly gifted at in the world, and the change I can potentially make in the world, and then I'm gonna use that as a way to go affect change on the world and create something. And so that's this effectuation model. And I've used it going on like 8 or 9 different companies now. And it's just the way we build everything.

So can you walk me through what that process looks like? I guess starting with the things that you would consider your superpowers or like your unfair advantages and kind of how you sequence that into actually finding businesses, because also at least my thought is understanding problems that exist for people is important. So you're not just building ideas that are in search of a problem, but it sounds like to you, you wanna marry that with the things you're really good at, and then there's enough ambition to the idea as well. So what is your process for doing this? And even feel free to use examples of businesses that you've built.

Yeah, so I think it's exactly right. You can't, you know, Paul Graham's correct. Like you can't build things people don't want. Businesses are built on repeatedly solving people's problems. So, you know, for example, Earlier this year, we used the effectuation process to go build a CEO peer network. It's called ScalePath, doing very well, 6 months old now. And I have a co-founder in it. He runs the business, and I'm like sometimes the talent. And now we've brought on other talent, so the talent level is increasing. And, you know, the idea of ScalePath was we first looked at the things that we had as strengths for us, and then married that with observations about the world. And so like I built an audience on social media, I know a lot about how to run businesses, especially small businesses, and how to grow them. Like, I've done all that, like, I've studied it, I'm a nerd about it. So we had that kind of strength about it. And then we married that with realizing that we kept hearing these things and these hints. And this is one of the things that happens a lot in the effectuation process is you take your strength and you kind of hear these hints that there might be something interesting to go look at. And we would see these hints like post-COVID, everybody was much more comfortable with online communities, right? Which you and I are part of one, you know, in Twitter and beyond.

Yeah.

continually that in these communities, like small businesses were unable to figure out how to scale past $3 or $5 million. They were stuck in their business. And no groups like Vistage or YPO or EO or any of those folks were like, they actually taught you like how to run a business. Like there's no class that teaches you how to fire people. Like nobody teaches you that stuff. So we then went and we took some of the principles from Effectuation to go talk to people and see, okay, well let's validate that our hypothesis here is actually something. But notice we didn't start with going to talk to customers. We went to start with what we're really good at, then we went to go talk to customers. And so that's one of the core principles of this idea of effectuation. Yeah, you gotta build something people want, but you're gonna start first with like your magical ability and your strengths, and then you're gonna use that as your competitive advantage to go explore that space.

Interesting. And so just using the example you talked about, like your strengths included building an audience, having an audience, content creation, as well as knowing how to effectively scale businesses, especially small businesses. So then was kind of the way you thought about it, we should do something that helps small businesses scale and we should use me as distribution for this business? Was like that the thought you had? And then you were like, okay, let's go talk to small business owners now?

Yeah. And then exactly that. And the first thing we went to, we went and did like problem interviews with small business owners to get inside their head. And like Sam and I went and talked to like 50 of 'em and we'd have like call after call and understand what their problems were and all that stuff. We didn't really talk about what our hypothesized solution was. at that point because we wanted them to actually, we wanted to understand their perspective and be able to empathize with that. And we kept hearing the same things over and over again, like, I'm stuck in my business, I'm not ready for EO or YPO, but I want to be in one someday, I want to grow. So we started to then based on, okay, we picked the space that we're going to dig into based on what we're really good at. Then we went to go do customer discovery at that point and we did problem interviews with them.

Got it. And I don't know if this is where it comes into play. And so feel free to punt this until later in the conversation, but I know you've talked about there are kind of these 6 principles with the effectuation model. Where do those kind of fall into the process?

Yeah, well, I mean, so in this case, one of the principles is you build a— the person who has described effectuation, I did not invent this, by the way, it was a professor out of UVA, and I only actually discovered it because developed my entrepreneurial approach by watching really successful entrepreneurs. And I was like, I wanna do things their way. And then I described it on Twitter one day and like a Twitter reply guy was like, oh, you know what you just described? This research that came out of this framework in UVA. So like it's the old thing with Twitter, like just post the wrong answer and like you'll get the right answer immediately. I do that all the time. So like the post, you know, the post there pointed me to her research and I discovered like these entrepreneurs I had been copying had all been doing the same thing. And so, Anyway, long answer to get to the direct answer, but she described these 6 principles. So like one of the principles is this idea of a crazy quilt. And a crazy quilt is, you take and create basically an army, right? Or like a core team of people who are core missionaries around your idea to go work on it together. And your complementary skills together are ones that enhance and maybe even make that opportunity possible. So in my case, like I started first with, I knew I'm not the right person to go run that new business. So I started with one of my associates. These are people that come work with me, and then we work on finding a business to work on together. And like Sam was part of my crazy quilt. So like started to build this thing where I knew I didn't wanna be the CEO, and he wanted to be the CEO. And I knew I didn't wanna do a lot of the work that he does 'cause I've done it before, and it's not that exciting right now. And then together we're that crazy quilt that starts to work together. And then over time, we've expanded that crazy quilt where like we bring in these expert partners. Like there's other Girdleys in the network who come and do calls with the members and are like, answering questions in the Slack and all that kind of stuff. And like the crazy quilt starts to grow. But the idea of the crazy quilt, which I love a lot, is it's much more around missionaries than mercenaries, right? Notice I haven't talked anything about like contractors or anything like that. No, I won't. With a lot of what happens at effectuation, you get people bought into your mission and then they have skin in the game and they join the team and they're aligned with you. And like, I love working with that type of scenario.

Love that. And just so I understand, when you brought in your partner for this business and for, and the person to be the CEO. What was like— what— when did you actually bring them in in kind of this journey of creating Scalepath? Was it you hadn't done, you know, customer interviews yet and you just knew that you wanted to do something around scaling small businesses and kind of being, call it like the, the mouthpiece or the distribution for the business? Like, how clear or not clear were you on this business when you brought them on?

So my model is I bring people on pre-idea. Like, I go find co-founders first. So like, I'm a big believer in like right people, right structure, right mission, in that order.

Yep.

And so I start people first. And so my associate model has been historically, I hire a few of 'em at a time and I mentor them through the process of us finding something to work on together. And then there's a no-strings-attached agreement. I just pay their salary. And then we can start something together or not.

Love it.

And I like doing it that way because not only does it have them be part of finding the idea and be emotionally attached to it, it makes me audition to potentially be the partner they wanna work with, right? It forces me to be really good to support them through that process. So with Sam, he came in through the associate program. I didn't have an idea other than I knew I wanted to create more big ideas, more big business ideas and make them a reality. And I wanted people who could be all in as missionaries on those businesses. So I find them well before the idea.

So you've already talked about a few of these principles, right? You talked about the crazy quilt. You talked about another principle, which was like the first step, which is knowing your abilities, your personality, kind of your unfair advantages, which I believe is called the Bird in Hand Principle. So the next one that you've talked about is the Lemonade Principle. Can you talk about that?

Yeah. So the idea there is I think the best companies are all these amazing learning machines where you're out running experiments, you are trying to try things and see what works, and then you're iterating on them very quickly. And what accelerates that process is when you come in with a mindset that mistakes and errors and failures are not a bad thing. They're actually a good thing. And, you know, that's the inverse of the way most people are taught in school, right? What you're taught in school is you make a mistake, okay, your grade is lower.

Yeah.

But you make a mistake, you go learn something very quickly, and you iterate and you grow around that. The idea in effectuation is the eliminate principle. You see that as a gift. You see things going wrong as a gift. You grew, you learned, you got better, the company got better, the people got better, the customers are happier, everybody wins. And so that's what we, It ties back to that principle of launch fast, learn, see what's not gonna work, don't pussyfoot around it, go do it. And the lemonade principle came into effect very quickly for us, which is we skipped a step where we went next to go interview customers and talk about and do solution-style interviews and be like, we're gonna do this, would you pay for it? And some of 'em signed up on the spot, but then it was just like, let's launch. We launched 3 weeks later with a janky website. Let's get it out there, let's take people's money. And we had a debate about should Should we take people's money immediately? And I was like, definitely, like take people's money right away. Like, you know, this is, we're gonna give 'em a ton of value. It may be priced too low, but like let's get out there and make some mistakes and see what they think. And you know, let's start with 100 people and go from there. And so that was kind of that next phase of like, let's make mistakes as quickly as possible, which is counterintuitive to everything you're taught, you know, in school.

Just to make it tangible for the listener, are there any early mistakes within Scalepath come to mind for you that you made kind of decisions on how to iterate the product in a way that it has become more valuable? Do any mistakes come to mind?

For sure. I think that early on we were too slow to expand the Slack channels because we've seen Slack— we've seen Slack communities go bonkers, like in terms of having too many channels. So we were like too— we were too scared on the other side. I think we learned some stuff about the type of people that should come into the program. and we let in both on the member side and then also on the expert side. You have some experts that come in and like they're not— their heart is not in helping, it's in like, how do I promote myself a ton?

Yeah.

And so I think we've improved those processes a bit. Underneath the hood, you know, one of the unique differentiators of Scalepath is we produce these playbooks for people, and it's like a one-page recipe. Like if you're gonna bake a cake, here's a recipe, but if you're gonna like fire somebody, here's like a recipe. And that's what we what people wanted. Like, they're so busy, they just want us to tell them, like, do these 6 things and here's how to think about it. But don't— I don't want a marketing class. I, like, want to know, like, how do I run Twitter ads? And, like, show me, show me a 6-step thing. So we have this whole set of playbooks, and underneath it, we've learned a ton about how to produce those really well and make sure that they're, like, useful for, for the membership.

Love it. There's a few other principles that I've seen you talk about, and feel free to just choose any of them. So I've seen affordable loss principle, pilot in the plane and the backward cycle. Talk about another one that you think is really important. I'm sure all of them are, but what do you want to start with?

Yeah, sure. Well, in our story next, like, we launched quickly. Like, I think you've seen with a lot of these businesses, like, you don't need $1 million or $5 million to, like, launch the business. Like, yeah, you could spend that if you were stupid, but like, we choose not to be stupid. And you can take $100,000 or $200,000 and get an MVP out in the market and launch very quickly. And that ties back to this idea of affordable loss, right? And affordable loss basically says, as you build a business, the way you do it under effectuation is, you know, you don't go raise $20 million in VC, right? You raise enough, you generate some revenue, you raise, and then you— what happens is you as the owner, you as the entrepreneur, you're able to make incrementally bigger bets into the business as your conviction rises. And why does your conviction rise? It's 'cause you're running all these experiments, you're learning, and you're getting more proof points both for yourself and for the outside market to then increase your conviction. And sometimes it means you go raise money from somebody else, but then sometimes it means like you just like spend more of your time on it, or you invest more in the business, or you put more of your own capital into it. And so, you know, that's this idea of affordable loss. Like, I think everybody gets the idea wrong that like entrepreneurs are like these like gun-toting, like—

Totally.

Okay Corral, like betting everything all the time. Like, it's the opposite of that. If I have a risk of ruin, I'm totally screwing up. Right. And so it's these affordable losses where if things go wrong, you'll be just fine. You just keep going. And so we launched the business that way, you know, on a few hundred grand of capital. And, you know, the goal is, okay, well, like, yeah, we might lose money for a few months, but like, let's get profitable soon. And so anyway, affordable loss is my favorite one because it's totally different than what you're taught about, like how entrepreneurship works, you know, in most of the media.

Yeah, it's so funny. I went through a period of time where I felt very out of place and strange for being an entrepreneur and founder. Who I generally feel very risk-averse. Like, you know, I think it's, it's talked about a lot in the media of, you know, I look, I almost call them like, like founder cowboys, like these people who literally risk everything. Like, you know, I have so much respect in some ways for these people. Like, I think of like Brett Adcock, who took all of the money from his first exit, put it into his second company, which was an electric vertical takeoff and landing business called Archer. Then he took $100 million from that business and put it into Figure, the AI robotics company. And I just think about that. I'm like, I respect that so much, largely because that is not me. And I think to your point, it's actually— there's this spectrum of risk tolerance that entrepreneurs have, but for whatever reason, entrepreneurs are bucketed into a side of the spectrum that just isn't the reality.

Right. Yeah. And it's— the argument I always give there is there's risk on whether you have a W-2 job or you're an entrepreneur. The difference is, for me, like, 10,000 customers have to fire me for me to be out of a job. For other people, only one boss has to fire you when you have a W-2 job. So that's how I think about risk. And I don't know—

So funny.

By the way, most people should have a job. That's my— I believe that. I think they'll be happier. But it's also— it's definitely not as risky as, like, people think. That's totally— that's my opinion.

One more principle I want to talk about before we go, which is the pilot in the plane principle. Can you explain what pilot in the plane refers to and how that factors into the way that you run Scalepath or any of your businesses?

Yeah, it's the idea that the future is unknowable, right? Like, I think everybody— if you think about the waterfall methodology where you're building Uber, you're trying to predict the future that you're creating. Right? Like, the idea of affectuation is you say, like, that seems really hard, right? Charlie Munger, that seems like a really hard problem. I'm not gonna try to predict the future. I'm gonna have a vision of different paths it could go, but I'm not gonna bet my life or the whole business on one of those becoming a real thing. And really the idea of piloting the plane is you just narrow your focus down to things you can control, right? And it's like, do you spend a bunch of time worrying about what competitors are doing? Well, you can learn from them, but you don't worry about it. You focus on making things better for your company and you build it. And then I think that's a really cool principle from a just like, okay, let me just keep blinders on and stay focused. Having gone through businesses that have gone through the cycle of being viable and then suddenly not viable, it also just gives you a lot of peace, right? 'Cause you didn't bet your self-worth that this business was gonna be around forever and things change in the world and that's just the nature of capitalism. That attitude just is very liberating, I think. You just focus on flying your own plane and doing it the best you can. And then whatever comes, comes out of it. And as long as you know you did your best, like, like it's very peaceful. That's— yeah, it's perhaps my favorite principle of all of them.

I love the principle also because I think it's as applicable to life as it is to building businesses, which is just generally when you put intention and time into the things you actually can control versus creating stories around things that are not in your power at all. It actually— things become way clearer and provide a lot more focus. So any other thoughts on just effectuation as a process for our listeners before, before we hop?

Look, I love it. The one thing I will say is this is a stylistic choice of how to build businesses, and I don't want to come across as saying to anybody like, don't do Lean Startup or don't do, don't do waterfall or don't go get a job. Like, those are lifestyle choices. And like, for me, like, you live the life you want to live. This is how I'm gonna do stuff, and it works super well for me. And I think more people should be exposed to it because it's so sad that this is such a good framework and it's so terribly marketed. Like, I think we need that. Somebody needs to write the Lean Startup, Eric Ries book equivalent of this framework and popularize it because I think it would be transformative in our entrepreneurial community. And you see people like yourself, like your Plunge work was exactly this. Like when you started the Plunge.

Yeah.

Your business, which I thought was, I was like, I think I was in the camp of this isn't a great business idea, but like, it's a great idea that you're doing this. Like, I love that.

Totally.

But like, you did so many of these effectuation principles when you were launching it. Like, you had an affordable loss, like you launched immediately, you went out there and like understood what was going on. You were the pilot in the plane to say, well, I don't know where this is gonna go, but I'm gonna try it. Like, it was really beautiful to watch you do it. You know, as your friend, I was like, well, maybe there's a better idea out there for you, but it's good you're doing this 'cause you're getting some reps in.

Totally.

So I think more people doing that would be better for the entrepreneurial community, and the more diversity we can have The entrepreneur community, the better for America and the world.

I love that. Michael Gurley, thank you so much for joining Founders Journal, and we'll talk again soon.

Let's go.

I hope you enjoyed this episode of Founders Journal. If you like this new format where I curate world-class entrepreneurs, CEOs, and investors to answer the most important questions for early-stage founders, shoot me an email to alex@morningbrew.com to suggest a future question or challenge. That you want answered or a specific guest that you would love to see come on the podcast. As always, thank you so much for listening, and I'll catch you next episode.