Discussing “Building Social and Financial Capital” by Noam Wasserman

Written by Lance Hillis

Types of Capital Explained 

Social Capital is a network of social and professional relationships through which an individual benefits. Wasserman states, as with human capital, youth is often at a disadvantage. This is likely due to older people within one’s network having more established careers, therefore, providing them connections to customers, advisors and investors, such as in Barry Nalls case. Barry Nalls is the founder of Masergy, the sole founder and CEO, at the time of the book’s writing. Prior to his founding of Masergy, he spent 25 years as a part of GTE, a telecommunications company, gaining valuable executive and sales experience, as well as an extensive social network. His journey into creating a startup had the advantage of social capital, and a bit of financial capital as well.  

Financial Capital provides the funds for a startup, funds needed for expansion, and any other tangible benefits. When Barry left his last company before building his startup, he had considerable savings and a six-month severance package, which gave him considerable runway compared to many founders who began their businesses much earlier in life, however, that’s typically not enough. When founders don’t have the advantage of possessing financial capital, this is when partners are brought into the fold, such as angel investors and venture capitalists.  This is obviously a double-edged sword, as bringing on partners who hold an equity stake in your company will not only relinquish larger financial outcomes, but control as well, but with the clear upside of having immediate cash flow to make strategic decisions focused on growth.

Human Capital on the other hand, was something that Barry didn’t have aside from his own. He fancied himself a “solo guy”, so when he went to approach investors for funding, he had presented to venture capitalists in the same vein that he had at GTE, resulting in his pitches focusing on the wrong aspect of the business that investors were interested in.  Human Capital is the cumulative skill sets of every founder, cofounder, and employee within a startup.  On the other hand, Vivek Khuller, one of the founders of Smartix, had partnered with a fellow engineer, but found himself as a disadvantage when it came to knowledge of the ticketing industry in sports and music venues. Later in the book, he describes looking for a cofounder that fit this bill but running into issues and eventually losing the opportunity to bring him on as fellow founder, as they had not established an equity share amongst the current founders, as they were waiting to establish this during their first round of funding.

Self-Reflection On the Different Types of Capital 

What types of capital would I bring to the table to ensure success with my entrepreneurial journey? Let me start by shortly explaining what my entrepreneurial goals are. I started an LLC for my business idea related to high fidelity earplugs. High fidelity earplugs were originally created for musicians who wanted an upgraded earplug from foam. They carry an attenuation filter that evens the frequency of sound, while softening the volume. This is as opposed to foam earplugs, which completely muffle the sound. These earplugs already exist, and there’s a moderate level of competition in e-commerce, but I had a different angle. They didn’t sell these earplugs at most music venues! That offered a distribution opportunity in front of customers where they were most needed. I went ahead and got in contact with manufacturers in China via Alibaba, designed the product packaging, developed the LLC, and funded the first bulk order of 500.

However ambitious and excited that I was, there were some glaring holes in my personal capital that overwhelmed me in my first attempt at getting this business off the ground. First, human capital. I understood rudimentary web design, payment processing and product design because I had access to the internet, and a history of graphic design and web design courses. I’ve also been working in sales, and have a knack for developing relationships, and contract implementation, which led to my first two business-to-business sales.  

What I was naive to see where blind spots were in my technical knowledge; bookkeeping, social media management, and advertising, amongst many other things. I figured I would learn through exposure, but some blind spots, such as not having supply chain or retail experience, created implementation issues with one of the venues I was able to get on board. This quickly became overwhelming; not in a dissuading way, but I focused on what my weaknesses were, and the potential ways to improve them, rather than focusing on my strengths, which led me to stretching myself very thin.

Next, my social capital. My network was basically non-existent, but I’m a huge music lover, including all different kinds of underground and niche genres, and a decent and persistent salesman, so I found some early success at two different music venues. One of the two venues was a friend who had recently purchased a music venue in Raleigh. He signed onboard, but I was too inexperienced to get a stubborn general manager to implement my plans at the music venue.  

Then, there was the financial capital. The reason that I chose to start this business to begin with was the projected low cost of entry, but I also understood there was a low profit ceiling, and it would require a lot of venue partners to be lucrative as a solo founder. The first bulk order of 500 slightly more than $1,800, with me setting the projected retail cost of $14.48.  

Per Order Cost	$1,810.00
MSRP	$14.48
Gross Profit Per Unit	$7.24
Material Cost Per Unit	$3.62
Profit Per Unit Sold	$3.62
Breakeven Units Sold	250
Total Gross Profit	$7,240.00
Net Units Per Order	250
Net Profit	$1,810.00

Figure 2.1 An early financial spreadsheet I created projecting the first bulk order of 500 units, not including yearly costs such as website domain costs, Shopify, social media ad revenue spend, LLC, taxes, and many other expenses. 

With a 50% split with the retailer, the net profit would be approximately $3.62 per unit after material costs.  However, I hadn’t mentally prepared for other expenses. Design fees, international shipping, Shopify, Google SEO, advertising, and dissatisfaction with the product packaging would present as additional costs that I had to bake into my expenses, which pushed my breakeven point even further. This wasn’t even considering the cost of potentially bringing on a cofounder in equity costs. I lacked human capital in this aspect too, as I’m by nature, conservative with financial risk. 

What learning about financial, social and human capital has allowed me to do is reflect on where the “blind spots” in my knowledge were. If I were to do things differently, I’d begin by revaluating the financial viability of the business, and whether I would need to consider financial capital from a lender, such as a bank, and hiring a bookkeeper to start. Next, I would consider bringing on a partner to cover some of my blind spots, namely someone with e-commerce experience. I would seek out someone who had experience in business-to-business logistics, order management, and can expand our online presence by increasing our Google SEO results, getting our product on various e-commerce sites such as Amazon, and managing our social medial accounts.

All in all, these various capital requirements are something I hadn’t researched or taken into consideration when developing my own company. Reflecting upon them makes me think that these concepts are key in strategic thinking when developing a startup and the way to think about forming partnerships based on needs, and to avoid partnerships with redundant skill sets, as well as the costs.