Human capital is one of the key determinants in a new venture’s competitiveness and success.
As research has indicated: “firms with high level of human capital and low levels of initial financial capital perform similarly to firms that have low levels of human capital and high levels of financial capital.” This is a very interesting statement. It implies that a startup company needs a fine collection of resources - knowledge, talents, skills, experience, intelligence,… to pull this off
It’s not about raising money, but having the wits and hustle to do without it.
- Amar Bhide
This all starts off with the background of the founder. A Korean study of 1996 has indicated that relative profits tend to be higher when an entrepreneur has benefited more of an education and experience in the line of the business.
A similar effect is shown in the growth of the firm.
In line with human capital we can state that knowledge is a basic principle that significantly heightens the odds of succeeding. Within new ventures, the human capital of the entrepreneur can be considered as a key resource.
In this case, we are referring to knowledge that is not easily appropriable and which yields competitive advantages.
When we link human capital with financial bootstrapping.
There is a possible explanation of success when we link human capital with financial bootstrapping. This success is found in academic research. The research states that the use of financial bootstrapping could be a mechanism that founders with high levels of human capital use to compensate in cases where less financial capital is available.
The underlying assumption here is that a high level of human capital is a prerequisite to successfully use financial bootstrapping techniques.
Thus, following the logic of resource-based perspective that the new venture’s capabilities and financing decisions are closely related to the entrepreneur’s human capital.
We argue that the entrepreneur’s human capital will influence success to the extent to which the four financial bootstrapping types are used.
How can this be applied by new ventures
The resource-based perspective can quite easily be applied to new startups.
Once the capabilities of the founder are in place you can start to think about co-creation. This way you build a team that truly believes the mission and vision of your startup. Instead of regularly paying employees, you make a different arrangement such as a share of equity or later payment.
This way you compensate on low financial capital in the beginning. It is not always easy to find people that share this mindset, believe the vision and are inspired by the story, but this is a practiced manner.
In order to successfully apply co-creation in your company, there are some fundamental requirements
Interaction: always communicate with your team. Let them bring ideas and do not intrude your strategy.
Risk: when people want to join your team on co-creation, there’s a certain risk that they can leave. There’s no formal obligation to make them stay. But a great environment and culture lowers this risk.
Transparency: you should try to eliminate information barriers to a certain degree in order to gain trust from your co-creators.
Notes of the author
I truly believe more startup entrepreneurs should discover the art of acquiring human capital through co-creation and bootstrapping.
A lot is possible if you believe in your vision and if you gain some serious knowledge about the theory.
We are now about one year further in the development of our company. Applying the principles of interaction and transparency are really working for us.
The relationship between an entrepreneur's background and performance in a new venture, 1996, Hyungrae Jo, Jinjoo Lee
Brown and Kirchoff (1997); Chandler and Jansen (1992); Lahm and Little (2005); Thorne,(1989); Ebben and Johnson (2006); Chandler and Hanks (1998)