×
Eric Litman

Fast Company

The Social Capital Investment Strategy

Fast Interview: Tech observer and former VC Eric Litman, who recently founded Medialets, an ad delivery platform for native mobile applications, on why a million friends can be more valuable than a million bucks.

Can't get that VC firm to return your calls? Don't despair! Startups can increasingly scale up by taking advantage of another type of capital -- social capital. Litman, a prominent entrepreneur, says it's easier than ever to leverage relationships into business success, and you have to spend social capital before you can profit from it. In fact, such networking helped him launch his new company in six weeks.

Why is social capital so valuable?

The one thing I've consistently seen entrepreneurs do that has significant measurable impact on everything they do -- more than any other factor -- is manage their relationships and manage their social capital. Folks that do that really well are bound to find some measure of success in some area of their life. It may not be the course they set initially, but there's invariably some positive that comes from it. So I've made it point throughout my own endeavors to continue to find ways to improve my own ability to manage and maintain relationships and to learn from others.

More importantly, to maximize the value that one gets from a relationship, one has to give a great deal. I spend a fair amount of my time making introductions, providing referrals, providing connections and generally engaging with the breadth of the community to benefit the business and personal lives of others. It's like an investment strategy: the more social capital that you spend, the more your network appreciates and the more social capital you ultimately have to spend in future endeavors.

Why is social capital becoming more of an alternative to traditional venture capital?

It has everything to do with the power of the communications networks at our disposal today -- the instantaneous nature of communications, the lack of barriers between people at different levels of career and industry, and the ease and rapidity with which messages can spread. I can go into the office in the morning, determine some new business or personal need and, almost invariably, within a matter of hours be directly connected to someone at the top of whatever related field and have a dialogue about how I'm going to solve that business need. I'm an enormous believer in the power of all the online social tools. And I use every one of them. On any given day, I find myself in utter amazement at just how transformative these tools have been to my business and personal life.

How do you leverage friends into a business that makes money?

Last week, I made a decision that I wanted to form five new significant relationships in the marketing and communications world. I sent out a message on Twitter -- I have 800 plus followers on Twitter. I received somewhere around 40 responses. I have significantly overstepped the goal and have some fabulous new relationships that are turning into business opportunities.

The odds of getting funding through the traditional VC route aren't great, are they?

It's a fairly grim picture. Depending on the year and economic conditions, there are somewhere between 3,500 and 4,000 venture capital professionals available to service deals in the USA. The opportunities for startups to get in front of those are exceptionally limited. A venture capitalist is typically going fund anywhere between one in a hundred or one in thousand deals. There's not a lot of room in there for startups to find access to capital.

So what does that mean? It means that entrepreneurs need to be entrepreneurial. They need to be just as clever in ways to fund their business as they are in ways to run their business. Candidly, as an investor, I'm much more impressed by somebody who's been able to scrappily put the business together in the absence of professional capital. It shows me there's a level of determination and doggedness as well as an ability to creatively solve problems, which is fundamentally what being an entrepreneur is all about.

In the technology space, it's very easy today to build very light businesses that can get off the ground quickly and find their way to revenue quickly. The most successful path to getting there is to leverage what you already know, what you already have and what you've already built. Relationships, what we call social capital, obviously play an enormous part of that.

Until recently, you headed a VC firm. Do people find it ironic to hear you arguing that venture capital isn't always the best way to go?

It depends on the audiences. If it's a very technical audience, I'll often get applause. If it's more of a business focused audience, I'll often see people in the crowd just sort of deflate.

Why did you leave the venture capital business?

There's great work that can be done by people in the investment community helping to foster and sponsor the dreams and entrepreneurial nature of others. But at this point in my life and career, it's just a hell of lot more fun to be out there creating the innovation myself.

Can you explain in nutshell what your new company, Medialets, does?

We're a creative ad network for new applications on mobile devices. We provide a scalable business model for developers to create free applications on mobile devices like the iPhone, Google Android, Windows Mobile, and others by providing the technology and relationships that enable developers to monetize their applications through rich, engaging ads. There is an opportunity today in mobile that is nothing less than the early opportunities for developers in desktop computers.

How is this disruptive?

We are part of a new wave of disruption in technology: the shift in the balance of power in mobile from the mobile operators to the consumer. We're not necessarily providing the disruption point, but we're a critical enabler of the disruption. Since the beginning, applications, content and access to any network service has all been heavily controlled by the mobile operator to which the consumer subscribes. The new generation of mobile empowers consumers to find content, applications, services that they believe to be more appropriate for themselves. In the midst of this, just like on the Internet, we're seeing that consumer demand is driving content, and even applications, to the price point of free. For free to be sustainable, there needs to be a business model and that's where we come in.

How does your new company reflect your thoughts on social capital?

I launched this company in 41 days. I was at a venture fund prior to running this. I gave my last hug on May 31. On June 1, I woke up anticipating spending the next few months moving myself and my family to New York. By June 4, I was chomping at the bit to be doing something else. I didn't like the idea of not having a job.

Between June 1 and June 4, I did the planning for Medialets. By June 4, I had the team of 14 people in place. Over the course of those 41 days, we gave up sleep, we gave up all outside activities because we knew there was an enormous opportunity at hand and the only way to capture the opportunity was to be first to market. There is no way I could have pulled this company together as quickly as I did, or with the caliber of people I had, if I had not been successfully building, managing and maintaining and spending social capital throughout my career.

The level of effort people have been putting forth is awe inspiring. We literally have been taking 20-minute naps on the floor of the office so we can get back up and work. We do it with enthusiasm and verve. It's a team of people who all deeply believe in the mission and, probably more important, who deeply believe in each other.

For all the advances in technology, business remains essentially about relationships and people?

Unequivocally, yes. The key is finding the right enabling technologies to foster the human relationships that drive the company's success.

Add New Comment

9 Comments

  • james culvers

    An excellent and thought provoking articles. Im not an expert on this subject, however I have to agree with the fact that skills are the most important thing, far more important than hardware etc as you can always rebuilt from scratch is you have the know how. Thanks, James at become a driving instructor

  • David Wilson

    Social capital is a sociological concept used in business, economics, organizational behaviour, political science, public health and the social sciences in general to refer to connections within and between social networks. Though there are a variety of related definitions, which have been described as "something of a cure-all" for the problems of modern society, they tend to share the core idea "that social networks have value. Just as a screwdriver (physical capital) or a college education (human capital) can increase productivity (both individual and collective), so do social contacts affect the productivity of individuals and groups".

    Bow Ties

  • John Agno

    Over the years, I have discovered success is powered by three things: know-how, reputation and a network of contacts.

    The formula for success = your human capital (what you know) times your social capital (who you know) times your reputation (who trusts you).

    You can take away all my money and even my customer list, but if I can keep my smarts, my business relationships and reputation, I'll get it all back and then some. Having knowledge, social capital and trust is the ultimate security blanket in good times and bad.

  • Seye Jolayemi

    Iron sharpen iron...if you, being an iron, sharpen another you will automatically be sharpened.
    God bless!!!

  • Brian Johnson

    An excellent article. Social capital has some value for sure and needs to be looked at in terms of business. In the social space, it is called friendship... in the business world, it is social capital.

    As described in the article, you need to know how to spend your social capital and how to save it.

    Brian
    http://www.konnects.com

  • david wayne osedach

    It is certainly something to think about. Especially with our present economic climate. And, internet social networking opportunities...