Invisible Capital and Why We Need to Democratize Entrepreneurial Opportunity

By Chris Rabb

Invisible capital is the toolkit of our skills, knowledge, networks, experiences and other resources, along with the set of assets we were born with.

Invisible capital is the toolkit of our skills, knowledge, networks, experiences and other resources, along with the set of assets we were born with: our race and gender, our family’s wealth and status, the type of community in which we were raised, and the education we had as children. Some of these assets are fixed—we cannot change who our parents are. Others are in our power to acquire or modify. What makes them “invisible” is that our society rarely acknowledges that entrepreneurial opportunities—and thus entrepreneurial outcomes— are greatly influenced by these assets.

You can predict which entrepreneurs will succeed with a fairly high degree of probability if you know some basic facts about them. And on the surface, race, gender, and the educational attainment and/or household income of their families seem like pretty obvious factors. It’s simply easier for some people to succeed. The playing field is not level.

If you want to become an entrepreneur, or help other entrepreneurs succeed, you have to be familiar with the terrain of the playing field because it is neither smooth nor level. Additionally, you have to understand the rules of the game. Those rules are not written anywhere. A rulebook has yet to be written by the institutions’ most vocal and influential regarding the cause of entrepreneurship.

To understand the lay of the land and be able to effectively navigate the often hidden obstacles on a playing field, you have to learn how the unseen forces that shape entrepreneurial opportunity work, in ways that even the “winners” in business may not fully appreciate.

Platforms to access versus proxies for success

When we limit “success” to such things as occupational prestige, higher education, income, and so on, too often we discount the impact of strong networks and other forms of access that correlate to increased upward mobility for successive generations. As the saying goes, “It’s not what you know, it’s who you know!” Of course, this expression is overly simplistic—and good connections alone rarely are enough for prolonged success in any field.

The truth is that there is a range of invisible factors that give some an unequal advantage on the entrepreneurial playing field. Successful entrepreneurs in the U.S., the data show, have a toolkit that tends to be more broadly valued in some communities than others, but the all-important mix of these assets is the invisible capital (or lack thereof) that helps or hinders entrepreneurial viability.

Let me be clear: invisible capital is not a proxy for racism, sexism, classism, xenophobia, or heterosexism. People who are on the receiving end of one or more of these “isms” are not powerless, nor are they devoid of invisible capital. Indeed, they have the capacity to build invisible capital strategically despite the clear social liabilities they may bear through no fault of their own. Invisible capital is also no substitute for the entrepreneurial trinity of hard work, ingenuity, and positive attitude. But these qualities are often prerequisites rather than predictors of sustained viability in business.

Invisible capital is not simply how big your Rolodex is or how many times you’ve traveled abroad. It is not just knowing that EBITDA stands for earnings before interest, tax, depreciation and amortization, knowing how to dress when meeting a loan officer, what degrees you’ve earned, or the level of your digital literacy.

It is all of those things and more.

Invisible capital revealed

Anyone can acquire invisible capital. Depending on the entrepreneurial opportunity, which aspects of invisible capital you need and in what proportion may change dramatically. If Woody Allen is right and just showing up is indeed 90 percent of success, then some portion of that must be attributed to the invisible capital that informs us where, when, how, and why we must show up in the first place.

Without equality of opportunity, we don’t know what (or who) represents “the best”. We can only safely know what the best is based on the rickety system we have inherited—along with those rare but highly visible exceptions society uses to validate the rule.

To fully acknowledge the importance of invisible capital in expanding opportunity for entrepreneurs, it’s vital to understand more about the different types of capital that constitute invisible capital.

At first glance, capital is just a synonym for money. But it’s not.

Capital is something whose value resides only in its ability to create wealth or other wealth-producing assets. Traditional definitions of capital focus on economic capital. They include monetary investments, real estate, production equipment, and intellectual property.

Economic capital is certainly helpful in building a business.

Clearly, old-fashioned capital is immensely useful to all entrepreneurs. But there are other types of capital. We should consider as capital the assets we bring with us from birth and childhood—fixed assets: our race, ethnicity, nationality, geographic, birthplace, language of origin, gender, sexual orientation, religious background, and socioeconomic status. These characteristics are aspects of ourselves that we cannot change.

Invisible capital is a set of tacit assets—fixed and variable–that are invaluable to aspiring entrepreneurs. Invisible capital includes cultural capital, social capital, and what is often, in macroeconomic and corporate circles, termed human capital. In the context of entrepreneurship, I use the term “human capital” to encompass a broad set of skills and training that have real value in the workplace and professional advancement.

Equal opportunitiy is not the same as opportunity to be equal

Timely access to sufficient start-up funds, as previously alluded to, is one of the most important determinants linked to positive business outcomes. Money is not the only factor that has a significant influence on business outcomes. The other factors are connected at least in part to human, cultural, and social capital—that is, to acquired factors that the entrepreneur can control.

Educational attainment begins with the elementary school you attend, a factor you cannot control. However, even as an adult, you can recast the die, working your way through community college to a four-year college and a bachelor’s degree. Formal education is cultural capital that comes easier for those born to highly educated and wealthy families, but it is highly attainable by all.

Likewise, relevant work experience is a type of human capital. You are one step ahead if your family owns a business that you may have been “voluntold” to work in as a teenager (or even younger). You are also a step ahead if the kind of work and study that you were raised to value leads to a high-income or high-prestige career choice. However, once this kind of capital becomes visible—that is, once you realize you should get work experience in a family-owned business and in a business similar to your prospective venture—you can go about applying for those kinds of positions. Of course, whether you can get those positions may also depend to some degree on inherited factors—your native tongue, race, gender, and so forth.

All of these factors seem relatively straightforward. What does it mean, however, to make a successful choice of venture? To answer that question, we first have to reevaluate success.

There are studies which examine factors for business success: factors, not guarantees. However, they do not question how conventional success is defined, and how our current, very limited definition impacts industries, local economies, natural environments, cultural communities, or civil society.

The onus is on policymakers and an engaged citizenry to demand that these frames of broad sustainability are explicitly defined, and accounted for, by the bureaucracies we empower to crunch the numbers on our behalf.

What you’re born with and into – and what you do with it

Inherited characteristics include your race, gender, and class as well as your age, birthplace, nationality, mother tongue, early education, family structure and size, and early exposure to entrepreneurship. These are all characteristics over which you and I have no control. They were decided for us—not by us. Some labels have been ascribed to us whether we like them or not, or whether they are accurate, fair or reasonable.

Acquired characteristics flow from the choices we have made, largely from options that were available to us, such as continuing education, occupation, work experience, marital status, financial sophistication, and access to wealth and to potential partners and employees. Some of these factors are more influenced by the circumstances of our birth than others. However, we do have control over our acquired characteristics because they are based largely on decisions we make as we mature. How inclusive and equitable a society is has a significant impact on how much one’s inherited characteristics will help or hinder one’s capacity to build and leverage acquired assets such as formal education, diverse networks, high-level skill development and broad bases of knowledge.

We are still far from the day when all Americans have the same practical range and quality of choices that the Founding Fathers–at least rhetorically–evangelized. Sexism, racism, heterosexism, and a batch of other “isms” still exist. Culturally, there remain both male-oriented and female-oriented business sectors. While much has changed for the better since the socio-political upheavals of the 1960s, there still exist real disparities born of legally codified and socially accepted forms of discrimination, as well as continuing bias among people who are the gatekeepers of our economy and society at large.

Clearly, historical and institutional practices continue to influence the modern entrepreneurial sphere. However, if we allow ourselves to scratch the surface, we can see an array of overlapping considerations that deserve greater scrutiny. I don’t mean to unduly minimize the powerful role that opportunity plays in entrepreneurial success, but equally important is the issue of capacity, which is not wholly distinct from opportunity. As economist Hernando de Soto points out:

They forgot what gives an edge to a particular group of people is the innovative use of a . . . system developed by another culture. For example, Northerners had to copy the legal institutions of ancient Rome to organize themselves and learn the Greek alphabet and the Arabic number symbols and systems to convey information and calculate. And so, today, few are aware of the tremendous edge . . . given [to] Western societies. As a result, many Westerners have been led to believe that what underpins their successful capitalism is the work ethic they have inherited . . . in spite of the fact that people all over the world all work hard when they can.

Most human and cultural capital can be acquired. What many entrepreneurs don’t realize is how deeply they must commit to acquiring human and cultural capital in order to improve their opportunities to excel.

Playwright George Bernard Shaw understood both the possibility and the difficulty of using human and cultural capital to level the playing field. It’s the subject of his play, Pygmalion, which was turned into the classic movie, My Fair Lady, in which Eliza Doolittle, a poor English flower girl, tried to pass as a refined society lady by learning upper-class diction and etiquette.

Eliza Doolittle did not grow up rich nor formally educated, nor was she educated informally in the ways of the English elite. She did not have the vocabulary, accent, graces, skills, or experiences of her wealthy counterparts, having grown up poor and without formal education, without the opportunity into which her privileged patrician counterparts were born. In other words, Eliza Doolittle had little to no cultural capital (or at least none of value in that elite world).

An invisible hand-out versus a hand up

Even in twenty-first-century America, it is highly improbable for a member of the average family in the bottom fifth of the economic ladder to ever make it to the top fifth (or for that matter, the second fifth). Sure, we see plenty of rags-to-riches stories on TV, in the movies, and in print. But these are the sexy exceptions to the far more ugly rule. Economic upward mobility in this country may be easier than establishing a scalable business, but it’s so much harder than we tell ourselves, and our children, when we blindly accept the American Dream as holy gospel.

The famous nineteenth-century political economist Henry George defined capital as “wealth devoted to a certain purpose.” In his famous treatise on economic opportunity and political democracy, Progress and Poverty, he took great pains to draw distinctions between what are mere consumer possessions and what is capital. Food in a restaurant is capital, but food in one’s pantry is not. But unlike invisible capital, these are material forms of capital—not socially constructed ones attached to an individual’s being, competencies or achievements. Further distinguishing these forms of capital is the fact that the value of invisible capital is most often determined by people and factors outside ourselves.

So, invisible capital, while valuable, is not wealth in and of itself. Invisible capital’s worth resides exclusively in its exchange value. Once it’s no longer useful in exchange, it loses all value. That depreciation of value as it relates to invisible capital is determined by the vicissitudes of society at large and not by the whim of any individual. And even though it is exchangeable, it is not transferable.

In the case of Eliza Doolittle, her tutor could not simply transfer his cultural capital from his brain to hers like some kind of Vulcan mind-meld. She had to acquire it, albeit under Professor Higgins’s tutelage. Eliza could learn what was proper and what her new patrician colleagues thought was important to know. But her knowledge (and capital) was incomplete because she did not have that embodied knowledge that only comes from first-hand experience.

Hidden assets, unfulfilled potential

The hidden advantages of such things as social access dissipate as the cause of social equity gains strength. If invisible capital represents forces that advantage those who possess it over those who do not, then acquiring it is indeed a zero-sum game. Because if those people who didn’t have invisible capital learned how to recognize it and acquire it (albeit proportionally), everyone would have it, and therefore no one would have it. In other words, there would be no stealth advantages afforded to one person or group over another. And in this idyllic scenario there would finally exist the perfect equality of opportunity and real meritocracy that only the deeply delusional or profoundly ignorant believe exists today.

Social capital, which is convertible based on the social situation is essentially your networks and connections. More pointedly, however, it is who knows you (and how much they like, respect or value you).

Cultural capital is unlike either economic or social capital, because both can be possessed and embodied. If the value of what we learn formally or informally can be represented by where we went to college or what degree we received, by embodying cultural capital we are essentially internalizing the “external wealth” of such distinctions as evidenced by how we put this capital on display (consciously or not). In other words, cultural capital can be acquired through research and traditional learning. However, embodied cultural capital is born of immersion in a social milieu and deeply rooted experience.

To succeed, you first have to know what kind of cultural capital you need for your particular enterprise and industry. However, unless you already have that capital, it may be invisible to you. So how can you find out what you need to succeed if you were not born with the proverbial silver spoon in your mouth?

Democratizing entrepreneurial opportunity

Who you know and have access to in life has a direct and powerful influence on creating and expanding entrepreneurial opportunity. Where you were born, where you went to school, and where you work or go to church, for instance, all help determine with whom you interact and how easily you can access others you don’t yet know, but could meet through your various social networks (yes, including Facebook).

Where the fixed and variable assets of invisible capital intersect is at the crossroads of two esocteric-sounding phenomena: homophily and propinquity.

Homophily simply means a preference for seeking out and bonding with folks who are similar to you. It begins to get complex when we probe beneath the surface to determine all the many ways we can define similarity, whether inherited, like gender, or acquired, like occupation.

Propinquity is a term common in the field of social psychology and is defined as the physical or psychological proximity—or closeness—between people. But like similarity, closeness can be ambiguous. Propinquity can be multilayered and should not be downplayed. Not surprisingly, homophily and propinquity are highly interrelated.

One reflects how birds of a feather flock together, while the other reveals that how they nest, feed, and fly influences how flocks are formed.

So what does flock formation have to do with entrepreneurial opportunity? To illustrate, the kinds of stakeholders an entrepreneur can bring in as co-founders, partners, investors, or early employees correlates highly to the inherited attributes of the entrepreneur. More bluntly, entrepreneurs tend to team up with people who look like themselves, notwithstanding that what many entrepreneurs have in common with their founding teams is family, through blood or marriage. This is homophily at work. Moreover, entrepreneurs with high status as defined by inherited characteristics such as race, gender, and socioeconomic class tend to more easily attract other high-status team members—even when low-status persons with more beneficial acquired traits such as key complementary skills and professional experience would add significant value to the founding team.

The inherited characteristics of low-status individuals—language, nativity, ethnicity, gender, or sexual orientation, for example—may be considered undesirable and therefore mark some would-be entrepreneurs as “low status” to others with the complementary skills and resources. These prospective entrepreneurs need to find ways to access and collaborate with individuals who have valuable strengths (that is, acquired characteristics) where they themselves possess clear weaknesses—strengths that too often for all nascent entrepreneurs are given short shrift when building entrepreneurial teams. Sociologists Martin Ruef, Howard Aldrich, and Nancy Carter published a study with some findings relevant to this point:

[W]e find that team composition is driven by similarity, not differences. Founders . . . appear more concerned with trust and familiarity . . . than with functional competence.
. . . During team composition, entrepreneurs seek out . . . those with whom they already have strong interpersonal relationships, while avoiding strangers who could bring fresh perspectives and ideas to the organizational founding process.
. . . Thus, entrepreneurs’ tendency to avoid the inclusion of strangers on founding teams tends to decrease functional diversity and may, in the long run, inhibit the success of new formal organizations.
. . . The composition of entrepreneurial founding teams reflects the tendency toward gender, ethnic, and occupational homophily in the contemporary United States.

But this is no small feat. The twin forces of homophily and propinquity make it exceptionally challenging for individuals to engage with people who do not look or act like them, or live or work near them—especially if they don’t have acquaintances who themselves are connected to potential business partners, key employees, vendors, or investors.

Redefining success

According to economists, policy wonks, and academic researchers, there are four universally accepted measures of positive business outcomes (aka “success”): revenues, profits, employee count and longevity.

Not surprisingly, these metrics value growth and profitability over all else. They are neither new, nor particularly creative measures of business viability or success. However, they offer a good starting point for baseline organizational progress. Plenty of data on these measures is gathered, compiled, and analyzed. But these four factors only tell us about businesses that already exist rather than entrepreneurial ventures in their infancy.

Methodically analyzed by entrepreneurial experts and co-authors of the book, Race and Entrepreneurial Success: Black-, Asian- and White-Owned Businesses in the United States, Alicia Robb & Rob Fairlie, the massive Characteristics of Business Owners (CBO) data set from the U.S. Census Bureau contains exhaustive information about business owners based on a raft of demographic and psychographic questions that have been seen and culled by only a few researchers. As a result of their groundbreaking efforts, Robb & Fairlie have identified five key predictors of entrepreneurial viability. They are: sufficient start-up capital, formal education, prior work experience in a relevant field, prior work experience in a family-owned business and choice of industry. What’s so amazing about this list is that it is definitive proof of the power and impact of invisible capital. It shows that long-standing proxies for success are not nearly as determinative as platforms to meaningful access, namely, how the combination of networks, experiences, knowledge, and skills trump all else. That said, as long as there is a high correlation between what body, family and community one is born into and one’s ability to acquire these assets, any nation’s entrepreneurial class will suffer amid such inequities — along with society itself.

Like entrepreneurship, invisible capital has no intrinsic worth; it is not inherently good.

We know that invisible capital is a mixed bag—that some assets are earned and others are claimed as the bitter fruit of inequality that inherently benefits one group over another.

However, when invisible capital is leveraged for the public good through innovation, it is a catalyst for the type of commerce that transcends what we now call social entrepreneurship, and represents the broad matrix for shared prosperity that must be the basis of any enduring success for a nation, community or local economy.

Beyond social entrepreneurship

Unlike the usual framing of social entrepreneurship, commonwealth enterprises go beyond merely implementing a modus operandi that is implicitly socially responsible; it signifies the desired outcome. In other words, it’s not just about good intentions, but meaningful outcomes. Embracing social enterprise, social entrepreneurship, and principles around the triple bottom line (one that integrates financial, environmental, and social gains) is only useful as long as we acknowledge the existence, relevance, and problematic nature of invisible capital.

Commonwealth entrepreneurship elevates the social element of the triple bottom line from a vital dimension of an enterprise to the litmus test for success itself. In the final analysis, if such businesses’ toll on local communities impairs their socioeconomic sustainability, then the triple bottom line is too low a standard.

We need to commit to the strategic formation, support and advocacy for commonwealth entrepreneurship—that subset of social entrepreneurship that builds sustainable organizations that create value beyond the wealth of their immediate stakeholders.

Commonwealth enterprises in their very operation create community assets that by default inure to the benefit of society at-large. Be they urban farms or wind farms, commonwealth enterprises do four, highly complementary things. They provide offerings that disproportionately benefit people with the least invisible capital such as offering products or services that have a positive environmental impact, make neighborhoods safer or educate our children better.

Commonwealth entrepreneurship is also highly inclusive and democratic. They demand a diversity of stakeholders. At their best, commonwealth enterprises embody a governance that lives up to the truest, most equitable form of inclusion. Business co-operatives and credit unions, which are certainly not new ideas, illustrate what this kind of organizational structure can look like. Further, commonwealth entrepreneurship generates for their stakeholders influence capital—invisible capital that is leveraged in service of meaningful social change. The multiplier effect of creating influence capital is that in so doing it begins to make invisible capital visible, and its once hidden assets that much more powerful –not just to those who possess them, but to all people–thus, leveling the playing field.

Entrepreneurship that promotes shared prosperity in this post-economic meltdown era seems more (rhetorically) popular than ever. As soon as we truly understand and account for the social context within which economic opportunity and innovation merge, our entrepreneurial literacy will be fuller, our capacity to build and support scalable, sustainable enterprises more robust, and the metrics with which we assess progress and prosperity abundantly more meaningful. Recognizing the imperative to democratize entrepreneurial opportunity should be the first step toward these lofty, yet attainable goals.

This article was based on material from the book, Invisible Capital: How Unseen Forces Shape Entrepreneurial Opportunity, by Chris Rabb, Published by Berrett-Koehler Publishers, Copyright © 2010

About the author

Chris Rabb is a writer, consultant and speaker on the intersection of entrepreneurship, media, politics and social identity. He is a visiting researcher at the Woodrow Wilson School for Public and International Affairs and an executive ensemble member of the consulting firm, ImprovEdge. Mr. Rabb has worked as a legislative staffer in the United States Senate and as a writer, researcher and trainer at the White House Conference on Small Business. He is also a 2001 American Marshall Memorial Fellow and a former director of a nationally recognized business incubator. A native of Chicago, Illinois, Mr. Rabb lives in Philadelphia, Pennsylvania.