The Effectual Entrepreneur in Action
Bruce Flohr is one of Saras Sarasvathy's original CEO subjects, and he recognizes in his story many of the traits her research identified. Certainly his company followed the opportunistic trajectory of a business run on effectual principles. Flohr, a brakeman turned executive at Southern Pacific, started San Antonio-based RailTex in 1977, renting hopper cars to quarry owners who needed to transport crushed rock to construction sites. By the time the company went public in 1993, it was a leading operator of short-line railroads. Flohr talks here about conducting business without a playbook.
We didn't need to look hard at the competition when we started out, because there wasn't any, except for trucks. Some companies were financing leases on railcars. But we were renting them, and no one else had ever done that. So competition wasn't a problem.
We did do market research, because we needed the validation of "experts" to raise money. But personally, I didn't need it. I knew this was a good idea. In those first years, we made a lot of decisions because we knew they were good ideas. We once had 80 railcars coming off of a rental agreement, and Arthur Andersen, our auditor, was very uncomfortable that they weren't going to be generating revenue. I thought there was an opportunity for our cars to be used in Alaska, hauling crushed rock from Wasilla to Anchorage. I was somewhat familiar with the state, because I had been in the Army there. We did not have a single customer or signed agreement. But I believed that if we got the cars up there, the shippers would see the benefit. So we sent all 80 cars to Alaska, and a railroad ended up renting them.
In 1981 and '82, interest rates got up to 21 percent, and most of the construction industry died. At that point we said, Do we want to look at doing something different, because we didn't have enough cash flow to make our debt payments. We had a lot of industry expertise within the company, so we decided to try consulting. We would help small railroads solve their management problems. That move turned out to be lucky, because we found that a lot of these lines were very badly run. We thought we could do better. So when the San Diego and Arizona Eastern Railway came up for bid, we bought it. We made it profitable—partly by using refurbished engines.
We ultimately ended up acquiring 32 lines in the U.S., Mexico, and Canada. By 1987, our railcar leasing business and our railroad operation business were about equal. Our CFO came to me one day and said, "Bruce, I think we should sell off our railroad lease fleet." My first reaction was, "Gosh, are we going to throw out the baby with the bath water?" But after a 10- or 15-minute discussion, that just made a lot of sense. We didn't do research on whether we could get the full asking price we wanted. We didn't test the market to see who might be the buyers or whether there would be a lot more opportunities to buy railroads going forward.
Since I sold RailTex, I've been investing in start-ups. I wish I'd known this stuff about effectual and causal when I started. I wouldn't have made my first three investments. The founders of those companies are all causal thinkers. Only one of them is doing really well—up to $15.5 million from $4 million in 2009. I've been working closely with that founder to try to make him more effectual. For example, he was going to institute a bonus plan for key managers, and he wanted to bring in a consultant to put together a point system for allocating the money. I said, "No, no, no, no, no. Do what we did at RailTex. Have the top people write their own performance evaluations talking about their successes and what initiatives they plan to work on in the next year. You won't get anything extraordinary if you have people performing to a checklist."
When I talk to entrepreneur classes, I like to use examples to explain the difference between effectual and causal thinkers. Genghis Khan was causal. Christopher Columbus was effectual.