Before a business idea can become an actionable plan, an entrepreneur must evaluate his or her social and financial capital. Having the right combination of both will not guarantee the success of a startup, but certainly will make the road to success less complicated. The obvious question then becomes, what exactly does “the right combination” look like? As with many other entrepreneurial dilemmas, it depends… Both types of capital are complementary, yet difficult to compare against each other. Thus, it is up to the founder to determine the appropriate mix that will propel the business to success.
Social capital is by nature an abstract concept and it poses a variety of challenges when determining how much is enough. For starters, it is not easily quantifiable and even when able to quantify it, then you can debate about its quality. Noam Wasserman defines social capital as “the durable network of social and professional relationships through which founders can identify and access resources” (Wasserman, 2012, p.47). The durability aspect mentioned by Wasserman speaks to the need to continuously work on developing and improving one’s network. The importance of social capital is further demonstrated by a recent study finding a direct link between social capital and a startup’s survival and generation of employment (Bosma, 2004). If entrepreneurs envision their startups as a growing successful business bringing jobs to a community, building a robust social capital will help pave the way.
When it comes to financial capital, cash is king! An entrepreneur will need more than enough financial capital to cover necessary expenses and initial investments until the startup begins generating income. While cash will not solve all the entrepreneur’s problems, it will certainly provide options. The entrepreneur should consider the startup financial needs, as well as his or her personal needs before launching a startup. The startup’s financial capital needs can be partially addressed via social capital. A study in the Journal of Business Venturing found that “human and financial capital are at least partial substitutes” (Chandler, 1998, p. 363). This finding would be in line with Noam Wasserman’s inclusion of investors as part of one’s social capital as a vehicle to access resources (Wasserman, 2012). Personal financial needs should be carefully considered as to not interfere with the startup’s financial needs. An entrepreneur should have the ability to be financially self-sufficient or be conscious of his or her financial limitations. An entrepreneur who has taken the time consider all financial capital needs will be able shift his or her attention to other pressing matters related to the startup.
A thorough understanding of the connection between social and financial capital will allow the entrepreneur to find a satisfactory balance. While financial capital might capture significant attention, the importance of social capital cannot be overstated. Entrepreneurs who are able to realistically evaluate their pool of financial and social capital will have an easier time identifying any capital shortcomings. This information should help to craft a solid plan to close any gaps.
References
Bosma, N. & van Praag, M. (2004). The value of human and social capital investments for the business performance of startups. Small Business Economics. 23 (3), 227-236.
Chandler, G. N., & Hanks, S. H. (1998). An examination of the substitutability of founders human and financial capital in emerging business ventures. Journal of Business Venturing. 13 (5), 353-369. doi: 10.1016/S0883-9026(97)00034-7
Wasserman, N. (2012). The founder’s dilemmas: Anticipating and avoiding the pitfalls that can sink a startup. Princeton, New Jersey. Princeton University Press.
Great blog. The information and perspective you provide is very helpful and insightful. “Cash is King” is true in so many ways. I feel the most challenging aspect of entrepreneurship is the financial piece. Your comment, “While cash will not solve all the entrepreneur’s problems, it will certainly provide options.” is great. I feel that statement reflects a healthy approach to available funds.
I do feel social capital is the greatest asset for entrepreneurs. I came across an article you may find of interest (https://www.forbes.com/sites/chriscancialosi/2014/09/22/4-reasons-social-capital-trumps-all).
Tony,
I concur with your assessment on social capital. It takes people to get necessary resources, including financial capital. As you can see from the study I quoted in my initial post, there is data suggesting social and financial capital are somewhat interchangeable. I think one of the great skill of entrepreneurs is to be able to find the right combination for his or her specific needs. I think this Forbes article speaks for itself. I like its viewpoint on providing guidance, since I feel we tend to focus mostly on obtaining it. Thanks Tony!
-Jose
“Social capital is by nature an abstract concept and it poses a variety of challenges when determining how much is enough”. As soon as I read that statement I realized that you cannot spend social capital, but you can certainly mine it and make the effort to find investors, or at least customers or referral sources. And you are right when you say “Cash is king”. A new business owner must have the ability to separate personal needs from those of the company. The owner must feed the business before the business can ever feed the owner.
Michael,
You are absolutely right with your last comment. I remember reading a while back about this practice in Japanese culture of approaching a business like a child. It basically follows the idea of spending years of effort, patience and dedication into your ‘baby’ before it can be self-sufficient and start giving back. With regards to your earlier point, I would say social capital is one of those concepts that are best appreciated when you see them in motion. Thanks for your input!
-Jose F. Saavedra
Hi Jose,
Wasserman makes a compelling point that many entrepreneurs ignore: Getting a business off the ground is often very dependent on who you know.
Arguably, having the cash to get a business off the ground relieves the financing aspect, but a social network can still help you identify other resources, including vendors, potential customers, possible partners, and other entrepreneurs with whom you might build an offline learning network. In my opinion, social capital must always be front and center.
David,
I think the best approach would be a good balance between social and financial capital. Each form of capital provide you with a different set of options and leveraging power.
-JFS