Human Capital Investments and Decision-Making in Entrepreneurship

Abstract

Every year, entrepreneurs launch millions of new ventures in the hopes of transforming their new ideas of solving business problems into legitimate and successful businesses. However, the vast majority will fail for a variety of reasons, ranging from management team failures to a lack of consumer interest. To mitigate these risks, entrepreneurs commonly turn to their business models and financials, giving due diligence to ensure they have sufficient assets and growth for moving forward. However, human capital, including the employees hired, their relevant skills and knowledge, and the skills attributed to the founding team, arguably deserves significant attention as well, particularly during early phases of the startup. Not only can employees contribute toward a growing business through their personal networks and skills, but they could also be essential for general venture growth and success. Therefore, human capital investments like initial hiring efforts and long-term sustained investments both require consideration.

This paper outlines the general entrepreneurial ecosystem and human capital. This provides an overview of the benefits of human capital and begins to answer the inquiry as to why human capital is both complex yet essential. Lastly, the paper poses two questions: how do ventures choose to initially invest in human capital and effectively assess associated risks, and how can entrepreneurs increase the likelihood that the investments made are beneficial for the long-term? Detailed answers are provided for both, with both serving as useful general guidelines for entrepreneurs to follow.