There’s no doubt that entrepreneurs are innovative and have a ton of grit. Unfortunately, according to Harvard Business School Assistant Professor Andy Wu, that determination and creativity doesn’t always translate into funding. Often, entrepreneurs are short-sighted when it comes to where to find funding. And while there are discussions and classes all about starting a business, there are few learning opportunities dedicated to entrepreneurship funding—financial and non-financial—to bring the idea to life.
To examine how the entrepreneurial community looks at funding, Wu along with his colleagues David R. Clough, Tommy Pan Fang, and Balagopal Vissa published a paper titled, “Turning Lead Into Gold: How Do Entrepreneurs Mobilize Resources to Exploit Opportunities?”
What they found is that too much focus is placed on raising money and signing contracts, and not enough emphasis is placed on informal and non-financial resources. And the reality is that these resources can make or break a business.
“Entrepreneurs are more successful when they can leverage non-market, non-pecuniary resources,” Wu says. “We think that is totally the wrong mindset …The challenge to raising financial capital is often related to a lack of those other resources.”
In particular, there are three areas of non-financial funding where entrepreneurs tend to come up short:
- Searching for resources outside of immediate connections
- Non-market resources
- Transferring resources through informal transactions.
1. Resources Outside of Immediate Connections
When looking for resources, it’s fine to start with the people you know, but you can’t stop there. Your network is too narrow. Instead, you need an outward-looking mindset where you search for investors and partners outside of your immediate network.
2. Non-Market Resources
The people who will help you succeed are about more than financial capital. Your network should be leveraged for advice, mentorship, in-kind donations, and more. And the good news is that financial and non-financial resources are not mutually exclusive. Non-financial motivations can encourage investment.
3. Transferring Resources Through Informal Transactions
Not everything needs to be handled with formal contracts. Less formal arrangements for transferring knowledge that rely on trust and mutual understanding are also valuable. For example, mentors don’t need a formal agreement, but should not be discounted.
Read the full article on HBS Working Knowledge.