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.