Role of Human Capital in New Ventures

Topics: Entrepreneurship, Venture capital, Human capital Pages: 10 (3126 words) Published: March 22, 2013


With the increase in the rise of entrepreneurial ventures, it is necessary to understand the factors that determine success or failure of these ventures. One of such factors that have been considered by researchers is human capital (Bruderl, Preisendorfer and Ziegler, 1992). This report considers the function of the human capital element in a startup business. Based on a collation and analysis of previous research works on human capital in the entrepreneurial field, it was discovered that the various aspects of founder’s human capital have a role to play in attracting venture capital and improving the performance of the venture.


2.1 Human Capital

Human capital refers to the skills, abilities, knowledge acquired through work and educational experiences (Baron and Shane, 2008). The concept of human capital has been underpinned by several theories among which the theory of entrepreneurship, resource-based theory and human capital theory and these theories would be discussed. The theory of entrepreneurship places emphasis on the fact that the entrepreneur has the responsibility of decision making (Casson, 2005). Thus, the entrepreneur is to analyse relevant information which would be used in making business decisions (Ganotakis, 2012). The recognition of markets for the products and services are part of the decisions to be made and would therefore determine a firm’s progress and accomplishment. Casson (2005) further argues that entrepreneurs need to have the right professional skills and work experience as it is these competencies would impact upon performance.  The resource based theory (RBT) places value on resources which is argued to be a source of competitive advantage for the firm (Barney, 1991). Human capital is identified as one of such resources. In particular, Barney (1991) argues that a firm’s management team can be indispensable, rare and imperfectly imitable and has the capacity for producing a perpetual competitive advantage. Alvarez and Busenitz (2001) examine the relationship between RBT and entrepreneurship. They suggest that entrepreneurship necessitates the founder’s cognizance of opportunities, the ability to obtain the resources to utilize the opportunities and the ability of the firm to fuse homogenous inputs into heterogeneous outputs. They further identified that entrepreneurial awareness, perception, knowledge and the ability to organise resources as resources in their own right.  These two theories therefore place significance on the capabilities and resources of the entrepreneur. A theoretical foundation of how these capabilities can be measured is provided by human capital theory which was pioneered by Becker in 1964. The theory implies that an individual’s human capital is the skills and knowledge that can be of use to an organization and as such, employees’ salaries/wages was viewed as a return on the investment in human capital. The theory provides claims that the entrepreneurial team who have more experience tend to perform much better than those with less experience (Shrader and Siegel, 2007). This theory categorises the characteristics of an entrepreneur into general and specific human capital. 2.1.1 General Human Capital

General human capital refers to skills acquired through formal education, training and work experience which can be transferred to other jobs in the market. The educational level of founders has been considered to be vital for a firm’s performance (Ganotakis, 2012). Education can provide the entrepreneur with a professional foundation and greater self-assurance as it is supposed to provide scenarios which encourage creativity and problem-solving ability. However, other results showed a negative relationship with growth and performance (Haber and Reichel, 2007; Bosma et al, 2004 ; Dichon, Menzies and Gasse, 2008). According to Deakins (2005), education does not influence growth but...
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