Social Capital, Financial Capital and the Constraints of Business

01 Sep Social Capital, Financial Capital and the Constraints of Business

The author of The Founder’s Dilemmas proposes two forms of capital that each entrepreneur must take into consideration.

1) Social Capital consists of the following potential business connections:

• Employees – hiring the A+ talent with industry specific experience
• Customers- companies or people ready hire and your organization
• Advisors-also known as your support team- lawyers, accountants, IT professionals and industry experts
• Investors – those people or business that believe in your start up idea enough to invest in your company’s future often with an equity share in the future earnings of your business

According to The Founder’s Dilemma “Research has shown that people who accumulate more social capital before founding are able to attract more human capital (such as cofounders) and financial capital (such as seed capital) with which to launch the startup, and to do so more quickly”

2) Financial Capital consisting of the founder’s personal or corporate nest egg of funds that will sustain the company through its startup period. This fund can be from money that the founders have saved from their regular full time jobs at another company or they can come to you by way of investors. According to the book The Founder’s Dilemmas “The size of this cushion can largely determine the amount of time the founder is able to give the startup, the amount of stress and urgency he or she feels to become cash-flow positive, and the decisions he or she makes to build the startup. One founder described how he first had to attain a “walk-away” level of savings-enough to feel secure walking away from his current job to found a startup.”

So this leaves an entrepreneur to wonder “When is the right time to make that jump”. We all know that there is no perfect time to make the shift. But any prudent person will certainly take steps to be as careful as possible to make sure that they have the highest chance of success.   The Founder’s Dilemma reference a study (Evans DS, Jovanovic B. 1989. An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy 97 (4):808-827) that indicated “startups survive the longest when founded by people with midrange prior work experience, estimated at 25 years”. If we assume that someone is starting a startup after 25 years after college graduation then the ideal entrepreneur will be approximately 47 years old. He or she will have the right balance of experience, connections, personal savings and youthful energy.

In addition to capital constraints The Founders Dilemmas book also highlights personal constraints to becoming an entrepreneur:

1)      Psychological constraints such as a high comfort level with his or her present company, job and prestigious job titles

2)      Financial constraints also known as the “golden handcuffs” which offer such a financially rewarding salary and benefits packages that it makes it difficult for key employees to leave

3)      Legal constraints such as a noncompete agreement or intellectual property licenses

4)      Physical constraints such as physical fitness level and energy level it takes to start up a new business. Starting a business is work, real physical work.

5)      Family constraints which factors in age of children, financial responsibilities (mortgage, car payments, college tuition) and ultimately the support of a spouse.

In the end, there is no perfect time nor perfect idea for starting up a new grass roots business. However, if someone does take the time to consider all of the above listed capital and constraints then they will be prepared for the challenges and rewards of owning their own business.