Social & Financial Capital: When to launch?

As is the case with all things entrepreneurial, there is not necessarily an exactly right or wrong time to begin a business.  However, that decision should be influenced based upon various factors that can affect the viability of the venture.

For instance, Wasserman (2012) goes into detail about social and financial capital and how there are benefits and consequences of either waiting too long to establish the business, even while creating social and/or financial capital versus starting the company too early without capital in any form.  This theory, which has been supported by research, implies there is something akin to a “sweet spot” in in between taking the time to establish social and financial capital while still starting early enough to avoid the various types of “handcuffs” that can hold a potential founder back from pursuing their business venture.

Grichnik, Brinchmann, Singh, and Manigart (2014) have researched the concept of bootstrapping, typically defined as starting a company with very little in the way of social and financial capital, and liken it more to an additional type of resource that newly established business can utilize during the critical early stages.  Additionally, their research also suggests that bootstrapping is not always a default choice for those who begin their companies without other means of capital but that some entrepreneurs choose to establish their company utilizing bootstrapping methods as a way of avoiding market-based resources and establishing higher levels of independence.

Interestingly, Grichnik et al. (2014) found that bootstrapping entrepreneurs preferred not to draw upon close social ties for resources.  Given Wasserman’s (2012) explanation that some new founders use friends and/or relatives to help fund their startups, choosing bootstrapping methods may be preferable to some who either do not have close ties for such resources, their close ties do not have the resources they need, or they simply choose to avoid using their interpersonal resources for their business venture.

Yet, while these bootstrapping entrepreneurs may be able to succeed in some cases and the idea of not having to wait until social or financial capital is sufficiently built up before launching a business may seem appealing, there are drawbacks that could possibly lead to business failure if not taken seriously.  For instance, if a founder is having to continue working in their day-to-day job while trying to establish their company, their personal resources and energy will be drained, leaving little left for the exhausting task of launching a startup.  Yet, even if a founder is able to leave their salaried position to allow time to launch their company, if there is little in the way of social capital, forging important relationships within the industry in a timely enough manner to help the company can be next to impossible.

For instance, anyone seeking to start a business within the equine industry cannot just decide to create the business and assume they have the necessary resources. Valuable relationships with farriers and veterinarians must be made in order to ensure that the horses remain healthy, thus securing the viability of the company.  Even more helpful are contacts throughout the industry that can help spread the name of the business and act as a positive force within a subset of society that unfortunately involves more deception than is desirable.  Within the equine industry, network connections that can back the company up as reputable and honest is equally important to financial capital.

In closing, while research has been done suggesting that entrepreneurs can use bootstrapping methods as an alternative to taking the necessary time for social, financial, and human capital, a startup has a much higher likelihood of becoming successful if the necessary capital is established prior to taking the “leap” and launching the business.  Yet, as Wasserman (2012) points out, any potential founder must find the right time to start their business after establishing the capital they need, as waiting too long can be just as deadly to a company as starting too soon.

 

______________________

Grichnik, D., Brinckmann, J., Singh, L., & Manigart, S. (2014). Beyond environmental scarcity: Human and social capital as driving forces of bootstrapping activities. Journal of Business Venturing, 29, 310-326.

Wasserman, N. (2012). The founder’s dilemmas: Anticipating and avoiding the pitfalls that can sink a startup. Princeton, NJ: Princeton University Press.

 

 

Can Control and Wealth Co-Exist within a Startup?

So, CAN control and wealth coexist within a startup?  The short answer is, well, it depends.

Research from various sources indicates that the majority of founders create businesses in industries unrelated to the industry of their previous work experience.  This, in itself, causes a fundamental dilemma, as these founders are immediately faced with the question of where their place is within the company the wish to establish.  They may be subject matter experts within a specific subset of their future company, but they may simply lack the knowledge to grow the company as it would under someone with more industry experience.

This forces founders to immediately face the idea that control within their start up may be outside of their grasp.  For the good of their company, “non-expert” founders in these situations should become aware of what they don’t know that will be pertinent to their company’s growth and defer to those who are experts within the other necessary areas of a startup.

Control becomes an issue for those founders that are knowledgeable of the industry in which they are establishing a company and whose knowledge may give them a false sense of security.  For instance, an IT startup company with IT experts as the founders will more than likely have founders who are not well-versed in matters regarding marketing, investors, human resources, and other areas that will become even more important as the company grows.  Yet, these founders may feel that their intimate knowledge of IT makes them the most important facet of the company.  In early days, that is very well going to be the case.  As the company grows and more employees are hired with expertise in the IT area, there will be enough knowledge to “go around”, so-to-speak, equalizing the founders’ importance with that of other areas within the company.

This brings our IT founders to the same dilemma that our aforementioned non-expert founders encountered, which is when to defer control.

What must be considered when making this type of decision is if these founders wish to become “King” or “Rich”.  “Kings” of startups will be able to maintain more control of their company, although they may experience less in financial gains. Founders who seek more financial gains and typically end up losing some of their control over their company are referred to as “Kings”. The all-important question of when these founders decide to either step into different roles and/or leave their start-up will be a major determining factor as to their role of either King or Rich.

Amit, MacCrimmon, Zietsma, and Oesch (2000) found that there may be a relationship between the desire for wealth among those who start new ventures and those who don’t based upon the founders’ primary motivation; the authors found that wealth appeared to be less important to those who actually started a new venture compared to those who did not.  In theory, this would mean that our founders should be (slightly) less concerned with monetary gains and more concerned with the success of the business and/or simply maintaining control.  This also has its downside, as it has been suggested that there are critical points within a business’s growth that the original founders may need to step aside for the good of the company to allow “professional” managers come in and use their expertise to assist the company in its growth.

Having the knowledge, forethought, and humbleness to know whether your presence within your new startup company, as it grows, will be help or hindrance is difficult to ascertain, yet every founder must do it or else face possible failure of the venture.  This also means keeping a finger on the pulse of your own motivations and desires for the company, most importantly whether wealth and control are of equal importance or if one is more important to you than the other.  Maintaining this awareness can help guide you through (or around) the inevitable road blocks to come.

__________________________

Amit, R., MacCrimmon, K. R., Zietsma, C., & Oesch, J. (2000). Does money matter? Wealth attainment as the motive for initiating growth-oriented technology ventures. Journal of Business Venturing, 16, 119-143.

Wasserman, N. (2012). The founder’s dilemmas: Anticipating and avoiding the pitfalls that can sink a startup. Princeton, NJ: Princeton University Press.