Eric Litman 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?
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Recent Comments | 11 Total
September 9, 2008 at 11:59am by Karen Hill
Very nicely said. This is a refreshing perspective, and one I don't often hear. I work in the venture industry and from an insider's perspective know quite well just how difficult it can be for entrepreneurs trying to raise money for their companies.
I will share this article with our current portfolio and new companies I meet as inspiration in their process.
September 9, 2008 at 1:57pm by david wayne osedach
It is certainly something to think about. Especially with our present economic climate. And, internet social networking opportunities...
September 15, 2008 at 4:03pm by 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
September 16, 2008 at 1:28pm by Seye Jolayemi
Iron sharpen iron...if you, being an iron, sharpen another you will automatically be sharpened.
God bless!!!
September 19, 2008 at 10:28am by 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.
May 9, 2009 at 5:44am by Jaime H
Part of the backbone of American commerce are business investments, which provide many investment opportunities and investors. Good business investments are how the greatest of business pioneers such as Carnegie, Vanderbilt, and Rockefeller built their empires. Installment loans, from banks or investors, are often how small business outfits pursue business growth and expand their reach, and therefore, revenue potential. Investors are free to structure the loan, so that cash is dispensed in the best way to aid the business, and also receive payments, and business owners looking for investors can also find people that have compatible visions. All megafirms started out as small shops, looking for cash advances as business investments at one point or another.
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