Original article by Sean Wise published in the March 2012 issue of PROFIT Magazine.
When Ringo Starr sang, “I get by with a little help from my friends,” he wasn’t thinking about launching his own business. But that famous lyric is a potent reminder of one of the most valuable assets any startup entrepreneur can have.
When you get by with a little help from your friends, you are deploying social capital— the expectative benefits derived from the preferential treatment and cooperation among individuals and groups. Social capital represents the capacity of individuals to command scarce resources by virtue of their membership in networks or broader social structures. In plainer English, social capital is what you can get others to do for you or provide to you (e.g., actions, resources, information, advantage and opportunity), based on the relationship you have established with them.
As such, social capital is a potent form of currency that you earn through positive interactions. It’s exactly what all businesses need—none more so than unproven, underfinanced startups.
But before you boast about your 1,000- plus LinkedIn connections and Facebook friends, don’t confuse social capital with a social network. Social capital is the glue that binds the network; unless you’ve built equity with a member of your network through prior, positive interaction, you have nothing to trade in. Without social capital, a social network is nothing but an address book.
And social capital exists at both the individual and organizational level. When your accountant takes you to the hockey game using her company’s tickets, she is creating social capital. When a business invites its clients to weigh in on a new policy, the company is harvesting social capital. Of course, the notion of social capital isn’t new; “relationships” have long been valued and nurtured by people from all walks of life. But a growing body of research shows social capital is closely tied to startup success. For instance, when Luca Pirolo, a scholar at Rome’s Luiss Guido Carli University, examined the social capital and performance of almost 100 startups, he found that interorganizational social capital has a strong positive impact on startup success.
More specifically, social capital has been linked to many success factors, from lower employee turnover to accelerated alliance formation. Not only can social capital attract funding (e.g., a stronger network is more likely to lure potential investors), but investors can use their own social capital for the betterment of their investees (e.g., tapping their own network to find a CEO for the startup).
Often, the growth of a startup is due as much to its investors’ ability to leverage their personal networks as it is to the money they bring to the business. In that way, social capital is most impactful in the very early days of a startup. After all, once you have a customer base, distribution networks, cash in the bank and a great brand, you probably don’t need to worry as much about social capital.
Social capital also fuels innovation. Firms with high levels of internal social capital enjoy higher levels of trust among their employees. People who trust one another are more likely to share information with each other. So, when social capital is present among your employees, knowledge flows—leading to higher organizational efficiency and innovation.
Social capital also has been linked to a lower rate of employee turnover as well as accelerated alliance formation, among other success factors.
What’s more crucial to know about social capital is this: unlike other forms of capital, social capital can be depleted with non-use. Much like an unwatered garden will wither and die, losing touch with key individuals and firms in your network will diminish your social capital.
Similarly, firms need to maintain and enhance their internal social capital by providing employees with opportunities to engage one another in both formal and informal ways, from moving people among interdepartmental project teams to holding potluck lunches.
Serial entrepreneur Leonard Brody, who’s best known as the founder of citizen journalism website NowPublic, likens social capital to “the Force” from Star Wars. Using the “Jedi mind trick,” Jedi Knights can use the Force to make others do their bidding. Be a Jedi of social capital, and your new business will grow.
Sean Wise is a Professor of Entrepreneurship at the Ted Rogers School of Management. To view the original article in PROFIT Magazine, go here.
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