Social capital theory of entrepreneurship

What is the social capital theory of entrepreneurship?

Too often, entrepreneurship is viewed as a solo job. This myth is perpetuated because of the heroic status that many entrepreneurs are conferred. For instance, the stories of Richard Branson, Steve Jobs, Bill Gates, Elon Musk and others reinforce the idea that entrepreneurs are individuals carving out a new world on their own.

More often entrepreneurs work in social networks to get their ventures up and running, to grow and to thrive. From a social network theory perspective, entrepreneurship is viewed as embedded in networks of enduring social relations (Walker et al., 1997). Research on entrepreneurship from a social network perspective has gained steam and evidence that networks are useful tools for gaining access to resources has emerged.

Social capital is loosely defined as the value of venture founders’ network resources! Networks may act as substitutes for investment capital. Private information flows over networks that can only be accessed through social interactions. An entrepreneur’s ability to recognize opportunities is largely related their ability to access private information in social networks.

One of the classic studies was conducted by Granovetter (1973) who concluded that weak ties are more important than strong ties for accessing opportunity-related information. Close ties usually contain high levels of redundant information, for instance, when a clique of friends or family members interact, they do so in relatively small numbers and tend to rehash many of the same experiences and information. By contrast, a single individual can establish weak ties with hundreds of individuals in disparate networks giving them access to information that would not ordinarily flow through their close ties. Social ties that bridge unconnected social networks are called bridging ties and these are particularly useful for sniffing out valuable information. Burt (1992) noted that advantages come to those who bridge “structural holes”, which are formed by a lack of social connections between large social networks. He emphasizes that it is not the number of such ties that matter, but how non-redundant they are. For instance, if an individual connects two social groups that are connected by no others, that will yield a better opportunity than if there exist others with the same connections. Moreover, if there are several links needed to connect two networks together, then being the sole direct link yields advantages.

Empirical studies examine whether individuals with more structurally diverse networks are more likely to encounter opportunities that can be seized through new venture creation Greve and Salaff (2003). Entrepreneurs may also be better at accessing financial capital, tacit knowledge and talented human resources if their networks are structurally diverse. Entrepreneurs with more structurally diverse networks may also have more influence than others. Social networks can signal legitimacy to stakeholders and investors.

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Burt, R. S. (2002). The social capital of structural holes. The new economic sociology: Developments in an emerging field, 148-190.

Granovetter, M. S. (1973). The strength of weak ties. American journal of sociology, 78(6), 1360-1380.

Greve, A. and Salaff, J. W. (2003). Social networks and entrepreneurship. Entrepreneurship theory and practice, 28(1), 1-22.

Walker, G., Kogut, B. and Shan, W. (1997). Social capital, structural holes and the formation of an industry network. Organization science, 8(2), 109-125.