The shackles of human “capital”

The concept of human capital has a stronghold in entrepreneurship research, as a reflection of the experience and skills entrepreneurs bring to their journey. It originates from economics where it was introduced as a means to measure the returns to years of education and experience. The main assumption behind it is that all years of accumulation are the same.

In a new paper, I demonstrate the need for a qualitative understanding of experience.  The knowledge and skills subsumed under human capital are not only derived in different contexts but also form qualitatively different combinations. Therefore, the term “capital” is misleading as it forces them into homogeneous units to be quantified. This works for financial capital because, regardless of its sources, it is ultimately assembled in the same bank account and put to the same uses. In contrast, the sources of human capital each feed into different pockets: 10 years of total experience
can amount to qualitatively different capacities depending on whether they are composed of education, industry, managerial or entrepreneurial experience.

The shades of human capital matter. In earlier work, I show that they can drive the entrepreneurial process to different realizations. They even point to different sets of skills in venture capital investing: those that minimize failure are different from those that maximize success. My favorite is that they can also explain investment decisions: finance expertise and early-stage investments do not go well together. It seems the focus on numbers and financial modeling can stifle even the greatest idea early on.


The pull of the null

At a dinner last year, I met a partner at a major European VC firm. Upon finding out what I did, he drew me into an ongoing conversation about whether entrepreneurship could be taught and asked me for my opinion on the subject. The consensus opinion in the group was that entrepreneurs were essentially born; I stated that my belief had evolved to be that anyone could be entrepreneur given the right circumstances. This statement was met with disbelief and the VC became agitated by its absurdity. He forcefully made the case about the efforts his firm made in selecting entrepreneurs with the right skills and of the right calibre. I was naturally inclined to play devil’s advocate and noted that many of the carefully selected entrepreneurs still would not succeed, thereby refuting the case for an outright profile of success. Although our conversation ended at that point, it made me think about the merits of my statement.

Aside from the fact that VC firms look for high-caliber entrepreneurial leaders  who can build multi-million-dollar companies, the broader question comes down to this. Where does the burden of proof lie in stating who can and can’t be an entrepreneur? Do we have to prove that entrepreneurs are special or that they are not? The consensus seems to be that because we are more inclined to perceive successful entrepreneurs as special, anyone claiming the contrary has to bear the burden of proof.

But is it that successful entrepreneurs are special because they are successful or that they are successful because they are special? The logic and convention of scientific inference would dictate that we cannot prove but only disprove the statement that entrepreneurs are not special. Until this is done, however, it remains a plausible null hypothesis. To reject it beyond reasonable doubt means that we have to find certain characteristics that widely and consistently show up to underpin successful performance. But after seeing countless studies and diverse cases of entrepreneurship, it seems to me that this is not obvious.

Not only do different skills work in different situation, but also humans have the capacity to prove those who doubt them wrong, overcoming great odds in the face of adversity or lack of necessary knowledge or skill. Thus, it is a question of people’s finding the situations that galvanize their stamina and enkindle their passion. For some this can be the building of a commercial empire; for other running a corner shop. Which of course is another way of saying that anyone can be an entrepreneur given the right circumstances.