Are you building the right kind of capital for your startup?

In its original use the word, “capital,” referred to the number of cattle a person might own. The headcount of cattle and total assets of the owner were often synonymous in ancient Greece and Rome, so capital took on the broader meaning of “wealth” until sometime in the thirteenth century when it evolved to mean money advanced to an entrepreneur to start a business (Hodgson, 2014). Wealth created through goods and stock—assets that could be turned into cash for investment—became the primary definition of the word capital for more than 500 years.

In the eighteenth century, industrialization changed the economic structure. Labor, as well as money, became a critical factor in the ability to create wealth. Economist Adam Smith recognized the importance of labor in the creation of new products and introduced the idea that “capital” applies to people as well as things (Smith, 1776). Karl Marx expanded on the Smith’s idea, arguing that “capital is not just things or people, but a social relationship between people, established by the instrumentality of things” (Hodgson).  And the concept of capital grew again—financial, human, and social.

In modern economics, capital is typically defined as an asset that you can use to produce something that is economically useful to a business or an individual.  The word, then, has different meaning depending upon its context (Goodwin, 2003). The most common types of capital are:

  • Financial – referring to an investment that produces something of value;
  • Natural – involving the supply of natural resources in any form that plays a productive process in economic gain;
  • Human – referring to individual education, skills, abilities, and labor used in some combination to produce assets for economic benefit;
  • Produced (Physical) – relating to those physical assets (products or objects) created for sale by applying Human Capital to Natural Capital for economic gain;
  • Social – referring to the goodwill, trust, shared values and social knowledge that, in combination, facilitates a financial benefit.

Even with these different meanings, you still might think capital is synonymous with money. And it would make sense since if you’re a founder, you are spending a lot of time raising and...

Choosing between wealth and control

You're an entrepreneur. You identify a problem, come up with a solution, and then launch a business to deliver that solution to the marketplace. And as the company grows, you continue to exercise control over every aspect of it, because after all, it is your idea and your solution, so there is no one better to ensure the vision of the company than you, it’s creator.

Until you’re not.

Many startup founders desire to maintain control as the primary means to achieving their goals with their business. One of those goals, of course, is solving that problem on which the company is built. However, many of the other goals are much more personal. Things like personal pride and wealth, for example, come to mind. Thanks to men like Jobs, Gates, and Zuckerberg, almost every first-time entrepreneur has aspirations of building something big by controlling everything and then gaining fame and a fortune when the company goes public.

It rarely happens.

Pride and personal recognition have fanned the flames of more crashing businesses, than the successful companies those same goals have fueled. Control is the problem for founders who, like Yertle in Dr. Seuss’s Yertle the Turtle, desire “to be king of all they can see” (Geisel, 1958). A king might see the wealth in the distance, but eventually, somebody sneezes, the king loses control, and everything comes tumbling down.

Being a king and building wealth are not mutually inclusive. Some research suggests that if you focus on maintaining control of your business you may become king, but it is unlikely you will ever create significant wealth. And if you focus on building wealth, it is inevitable that you will give up control (Wasserman, 2012). It is rare for an entrepreneur to maintain control and achieve wealth.

Here’s why: Like it or not, your business will inevitably outpace your skills, abilities, and expertise. If you believe controlling all aspects of the company will ensure your success, it is unlikely you’ll recognize when your company has outgrown you. You might be the king, but you’re likely to have little else. Plus,...

The Entrepreneur and the Sunk Cost Fallacy

If you’re an entrepreneur and you’re not familiar with the term “sunk costs” you may have a problem.

A “sunk cost” is any past cost for something that you’ll not be able to recover. Typically, sunk costs are not included when making forward-looking decisions because those costs will remain the same regardless of what you may choose to do. In manufacturing, for example, a sunk cost might be the cost of equipment because it is a cost that has been incurred which will remain constant regardless of whether that equipment produces any product.

Think of it this way: It’s money you needed to spend that you’ll never get back.

The problem for most of us is that our forward-looking decisions become too tied to those sunk costs. We often become emotionally invested and the more investment we make, the harder it becomes to divest ourselves from those costs. In these situations, it is difficult to consider the pros and cons objectively. Instead, we try to recoup sunk costs, which makes us do irrational things.

Researchers Hal Arkes and Catherine Blumer argue that when we continue a behavior or work because of our previous investments of time, money, or effort, we fall victim to what has become known as the sunk cost fallacy (Arkes & Blumer, 1985). We place such a high value—either monetarily or emotionally—on those investments that we irrationally behave when faced with a decision that devalues those prior investments. Moreover, we look for ways to justify our choice rather than accepting the sunk costs as what they are—money we can never recoup.

Let’s look at it a more personal way.

Say you bought a quart of your favorite yogurt at the grocery store. It’s been in the fridge for a few weeks unopened, and putting away the dinner leftovers you spot it and realize that yesterday’s date is the “use by” date on the package. Concerned that it will spoil, you open and eat as much of the yogurt as you can—maybe even all of it—even though you’ve already had dinner because you’d rather do that than “waste your money” on food that will...