Oct 2 2017

The Other Capital

You hear it in startup communities everywhere: “we don’t have enough capital; if only we had more capital we could achieve X; we can’t grow our company here because there is no risk capital,” and so on. All variations on a common theme. As Brad wrote in Startup Communities:

I’ve lived and invested in [countless places in the U.S.]… Over and over I hear one thing from entrepreneurs: “There is not enough capital here.” My message is the same for entrepreneurs—let it go. There will always be an imbalance between supply of capital and demand for capital. The whole idea of “enough capital” is nonsensical, and complaining about it doesn’t actually impact it.

There is no denying that early-stage funding can help startups profoundly. But, let me point to another type of capital that is just as important for a startup community over the long-run. It is also something that local leaders have greater control over.

Networks of trust

Social capital refers to the set of informal norms and values shared by a group of individuals (a network), which allows them to cooperate and engage collaboratively with greater ease. The network (relationships) directs vital information and resources (ideas, talent, funding) to company founders, but social capital—the nature of those linkages—determines how well information and resources flow through the network. This is particularly true for highly valued indirect connections.

In the context of building high-growth startups, social capital and informal norms are essential—acting as a lubricant for “transactions” (idea sharing, collaboration, connecting people) to occur. All businesses engage with external individuals and organizations—they have suppliers, customers, and talent to acquire. But in complex, fast-paced environments, it is not always feasible to engage in a “market” context (imagine signing an NDA every time you wanted to socialize an idea, or determining a price for offering feedback). Instead, participants in a healthy startup community make informal contracts—between each other and with the community as a whole—underwritten by trust, reciprocity, honoring commitments, and stewardship.

In other words, social capital represents the value improvements to a startup community caused by virtuous, high-trust, social networks. For a given set of resources and entrepreneurial heft in a region, startup communities with more social capital will achieve greater outcomes than those with less of it.

Berkeley scholar Anno Saxenian describes how a culture of collaboration and openness was decisive for Silicon Valley becoming the beacon of innovation and entrepreneurship that it is. Startup Communities makes a similar case for Boulder. Having spent nearly half a year here, it is evident that something is different about community culture in Boulder—which helps explain the remarkable innovative and entrepreneurial output such a small city produces.

A storied history

The concept of social capital is not new. The first known use of the term “social capital” was in 1916 by a school reformer in West Virginia named L.J. Hanifan, who urged a community-based approach to improving local education—an approach grounded in “goodwill, fellowship, mutual sympathy and social intercourse.” This may sound familiar to readers of Startup Communities.

Antecedents of social capital can be traced to the mid-19th century French philosopher Alexis de Tocqueville‘s Democracy in America, who called the “art of association” the “mother science” for understanding how American society functioned so well at that time. Classical thinkers from Aristotle to Thomas Aquinas and Edmund Burke espoused virtues like trust, caring for one another, and living by a society’s norms as essential ingredients for effective “community governance.” In 1905, the German philosopher Max Weber wrote that the foundation of Western Capitalism was rooted in Puritan virtues of truth-telling, reciprocity, and honoring commitments—not what it has evolved into, broadly, today.

More recently, social capital was injected into the mainstream by Harvard professor Robert Putnam in his 2000 book, Bowling Alone: The Collapse and Revival of American Community. Putnam describes two forms of social capital—bonding, which connects people in the same group, reinforcing exclusivity and homogeneity (religion, country clubs), and bridging, which connects people across groups, expanding identity, diversity, and reciprocity.

Startup communities need both. The latter is more difficult to achieve, yet ultimately more decisive for innovation.

The social capital imperative

I want to argue that social capital in startup communities is more important than ever—an importance that will accelerate.

First, as we progress further into an information and knowledge-intensive economy, the network as a form of organization over traditional hierarchies will become more pervasive. Information—particularly complex information—is better circulated in a network structure. As political scientist Francis Fukuyama claimed, the fall of the Soviet Union was a failed attempt at imposing a hierarchy on an increasingly information-based system (a modernizing economy). The rapid pace of technological advance today necessitates strong external relationships. These collaborations, often taking place informally (not in a “market” setting), work best when grounded in trust and shared values.

Second, technological advance and complexity require diversity, but this is not easy to achieve. Innovation networks are not based on just any type of relationship, but human ones. As they describe in their excellent book, The Rainforest: The Secret to Building the Next Silicon Valley, Victor Hwang and Greg Horowitt state that it is the ability to consistently overcome our primitive nature to distrust people who are different that separates vibrant innovation ecosystems from the others.

Finally, social capital exhibits increasing returns—which makes it important for economic growth. In an era of persistently low income and employment growth around much of the world, we need as much of this as we can get. In his 1995 book, Trust: The Social Virtues and the Creation of Prosperity, the aforementioned Mr. Fukuyama ties economic prosperity to societies that operate informally on the basis of trust, flexibility, and informal relations.

What you can do

Simply put, relationships and cultural norms in a startup community are economically valuable. As an asset, people extract value from social capital. Also as an asset, it requires maintenance, care, and replenishment. As a communal asset, social capital depends upon a shared commitment and responsibility. But like any public good, social capital is subject to underinvestment—it is too easy to take without giving, which undermines the entire undertaking.

How to get around that? First and foremost, it requires motivated leadership. The leaders set the tone in a city. If the leaders in a startup community take a #GiveFirst approach, demonstrate the virtues of trustworthiness, reciprocity, and fulfilling one’s commitments, and do so visibly, the rest of the startup community will follow suit.

In Startup Communities, Brad lists several key attributes of leadership and culture: be inclusive; play a non-zero-sum game; be mentorship driven; have porous boundaries; experiment and fail fast; have constant engagement; embrace weirdness; be open to ideas; be honest; and celebrate success—as well as failure! He also talks about the need to take a long-term view—at least twenty years. Changing the culture and mindset in a place can take awhile. It might be the next generation of startups that benefits from your hard work—be ok with that.

In The Rainforest, Hwang and Horowitt distill the Silicon Valley ecosystem to one that relies on human relationships—one that requires learning-by-doing; superconnector leaders they term “keystones” to build bridges and promote diversity; celebrating of role models and peer mentors; building “tribes of trust” so that people can engage freely under a common set of standards; and the creation and adherence to social feedback loops (both positive and negative).

So, before you resign your startup or your community as doomed to failure because of a lack of investors and risk capital, instead think about how you can develop a capital base of your own—one founded on shared informal norms and values that promotes relationships of trust, idea-sharing, collaboration, and a love of place (topophilia). Social capital won’t solve every problem, but over time, it will make a fundamental difference in the ability of young high-growth companies in any city to start, scale, and yes, secure financial capital.

Also published on Medium.