Social Networks and Entrepreneurship

Fellow, RIETI


The ability to build and exploit social networks has been defined as a critical component of "entrepreneurial DNA" (Dyer et al., 2011). This, however, does not mean that entrepreneurs should simply try to socialize with as many people as possible at all times and exchange information as frequently as possible. In this column, I will focus on three key stages of entrepreneurial activity to draw attention to the fact that the desirable structure of social networks for entrepreneurs differs depending on their intention in utilizing social contacts.

Entrepreneurial activity is a complex process involving numerous factors. For the purpose of this article, following Stuart and Sorenson, I will focus on three stages: 1) identifying new business opportunities, 2) accessing knowledge (intellectual capital), and 3) acquiring financial capital (Stuart and Sorenson, 2005). "Social networks" refer to any personal relationship such as family, friends, and business acquaintances connected with entrepreneurs through monetary transactions, shared knowledge and values, emotional ties, or blood ties. I will focus my discussion on the structure of social networks?structural holes, strong and weak ties, and so forth?rather than simply examining the types of people to whom they are connected (Hoang and Antoncic, 2003).

Desirable social networks for entrepreneurs

First, in the stage of identifying new business opportunities, interactions within social networks serve as an occasion for entrepreneurs to obtain information that may lead to new business opportunities such as new business model ideas and potential customers. The type of information they obtain through such private communications is not publicly available but, in terms of quality, it is typically a mixture of wheat and chaff. Therefore, "weak ties," or not-so-close personal relationships with a large number of acquaintances, are the most efficient source from which to obtain useful information. However, simply having a large number of ties is not enough. The diversity and uniqueness of people connected through such ties are just as important as their sheer quantity. Based on data collected in a survey of managers at a large U.S. electronics company on their personal networks, Burt (2004) has found that those positioned to span structural holes?or serving as a bridge between multiple, non-overlapping groups?are most likely to find ideas that are evaluated as valuable. The same may be said of entrepreneurs.

Second, in the stage of securing intellectual capital, entrepreneurs need to communicate closely with individuals with indispensable knowledge and expertise. For instance, in the case of setting up a spin-off venture based on tacit knowledge gained through work experience at big companies, frequent information exchanges with providers of such knowledge are considered to be of critical importance. Such close relationships required in this stage are called "strong ties," as opposed to "weak ties" referring to the type of social network required in the stage of identifying new business opportunities.

Third, in the stage of acquiring financial capital, entrepreneurs must build strong and lasting relationships of trust with their investors in raising funds, which are similar to frequent information exchanges with knowledge providers in securing the intellectual capital discussed above. At the same time, however, it is also important to maintain good reputations among investors in general and other entrepreneurs in the same business?that is, in addition to building trusting relationships with sponsoring investors?because the sponsoring investors' judgments are often affected by such reputations.

Based on what has been discussed hitherto, we can draw the following implications: 1) entrepreneurs in search of large-lot investors for additional capital funds are unlikely to find them by attending pan-industry social events; and 2) those trying to develop new business ideas are unlikely to be inspired by holding entrepreneurship workshops with the same set of people.

Future development of research on social networks and entrepreneurship

According to Thomson Reuter's Web of Science, a database containing articles published in the world's leading academic journals, the number of articles on social networks and entrepreneurship began increasing in the second half of the 2000s, with the scope of disciplinary areas extending beyond business management to include economics, sociology, technology management, and so forth. The trends by country show that the number of such articles has increased notably in China, even discounting the impact of a significant rise in the number of overall academic articles. This is taken as a reflection of the high level of awareness of relationships between social networks and entrepreneurship in China, which is partly attributable to the presence of overseas Chinese playing an active role in various fields around the world. It is hoped that the same will happen in Japan with greater efforts directed toward research on social networks and entrepreneurship.

As to future directions of research in this field, it may be interesting to explore the mechanism of how entrepreneurial social networks are created?e.g., what triggers the development of strong and lasting relationships between entrepreneurs and investors in the stage of acquiring financial capital?or identify the nature and characteristics of desirable social networks for each type of start-up such as spin-off ventures and innovation- and technology-based ventures.

It is hoped that furthering research in such a manner will help us identify ways to develop desirable social networks and thereby stimulate entrepreneurial activity in Japan, which remains sluggish compared to that of other advanced economies.

June 5, 2012
  • Burt, R. S., 2004. Structural Holes and Good Ideas. American Journal of Sociology. 110.2, 349-399.
  • Dyer, J., Gregersen, H., Christensen, C.M., 2011. The Innovator's DNA: Mastering the Five Skills of Disruptive Innovators. Harvard Business Review Press, Massachusetts.
  • Hoang, H., Antoncic, B., 2003. Network-based research in entrepreneurship: A critical review. Journal of Business Venturing. 18, 165-187.
  • Stuart, T.E., Sorenson, O., 2005 Social Network and Entrepreneurship. In: Alvarez, S. A., Agarwal, R., Sorenson, O., (Eds.), Handbook of Entrepreneurship Research: Disciplinary Perspectives, 233-251. New York: Springer 2005.

June 5, 2012

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