When implementing plans to start a new venture, founders must take inventory of all the possible resources available to them. Noam Wasserman, author of The Founder’s Dilemmas ascertains that if individuals have the financial capital to adequately and efficiently get the startup through the initial (often murky) stages, then they have a higher probability of succeeding. Since financial capital pertains to money or other tangible resources that can be used in the funding process, knowing definitively where funding will come from is a preliminary battle that many lose. Nearly 51% of individuals who want to become entrepreneurs do not do so because of a serious lack of financial capital.
On the other hand, there are many instances where individuals lack financial resources, but are still able to fulfill their dreams of being an entrepreneur solely because of their social connections. These connections, whether from childhood friendships or work relationships, translates to big bucks if the individuals commit to the longevity of the venture. Furthermore, they must not only commit to their roles, but must also satisfy job requirements and achieve milestones within the company. Wasserman asserts that, “larger founding teams, which arm the organization with additional resources, have higher organizational growth rates and rates of survival.” This social capital, or the benefits derived from one’s place in information and communication networks, can easily push a business to top tier levels without ever having a physical dime. As Kevin Costner so eloquently states in Field of Dreams, “If you build it, they will come.”

Now, this brings me to my next point…Which is more crucial to the movement? Social capital or financial capital??? Again, just as in my last blog…there is no definitive answer. In my opinion, it depends on the venture and the resources available to the founder. Let’s take the first scenario where we have the financial capital to fund the venture but may be lacking the social capital to take necessary steps (and know when to execute them) to facilitate the business in being successful. One could argue that with sufficient financial resources there is no need for social capital. Money is a resource in itself that can easily acquisition the elite human capital (i.e. advisors, team members, co-workers, employees etc.) essential to managing a fruitful company. Yet, Wasserman points out that, “each additional person also adds more nodes to the communication network, slows things down, and weakens incentives.”

Conversely, those who start out with ideas, no capital, and several connections are seemingly at the mercy of an investor who has confidence in their idea, is willing to fund it but, will want a considerable amount of compensation and control in the end (think Shark Tank). In the overall scheme of things, is this worth it? Since there are too many variables and outcomes to consider, it is simply best for the founder to assess and evaluate their own personal circumstances and determine what will be most advantageous for their company in the long run. Part of being a CEO is having the capacity to make educated decisions that will assist the company in furthering the brand. If individuals can’t make these initial assessments, they may want to rethink their plans to become an entrepreneur.

References

Wasserman, Noam. The Founders Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton Univ Pr, 2013.

4 thoughts on “Social Capital vs. Financial Capital

  1. Great post! “There is no definitive answer.” I think that is a very wise statement that is applicable to almost all entrepreneurial endeavors. It is nearly possible to simply copy-and-paste some business strategy and expect it to manifest success in every situation. So often the decisions that face founders are loaded with complex nuances, the kind that broad generalized rules simply can’t address. The very best CEOs are capable of making objective top-down assessments and crafting unique remedies against difficult odds. In light of this, I agree completely that those who struggle with the initial nuts-and-bolts assessments and planning may need to re-consider if such a position is right for them.

  2. Jeramy Hooper says:

    Great post as usual! I was also thought provoked by Wassermans stat of “nearly 51% of individuals who want to become entrepreneurs do not do so because of a serious lack of financial capital.” The point that I derived is that we must fill the remainder of the void with social capital. I am certainly in that boat!

    I do see however how those with lower amounts of capital can use their social capital in place and get creative to compensate. i.e. if your friend is a plumber and your faucet breaks they are more likely to fix ti for free. So to make sure that you do not get leveraged it is important to utilize your social capital.

    Thanks!

  3. Joseph Stover says:

    “. Part of being a CEO is having the capacity to make educated decisions that will assist the company in furthering the brand.” I believe this is the key to any CEO that needs to adapt as the company grows. It’s no longer about you as an individual, but your workers, your board members, the investors, the Public. It’s hard sometimes to adjust to this mindset that your baby, your idea, has grown and it’s no longer about “you”. I know this is a leaderhship principle I see a lot of younger supervisors struggling with. A few months ago everyone was best friends and hanging out on the weekends and now they have to lead them and improve the work center, even if they have to stay a little late. A few months ago they would have been complaining with all of their friends about how stupid this.

    -Joseph

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