The entrepreneur’s human capital and the process of creating,
appropriating and expanding the value of the company
Tony Bailetti1 and Brian Hurley2
The objective of this paper is to examine the relationship between an entrepreneur’s
human capital and the process in which the company creates, appropriates and
The study of the relationship between entrepreneurial innovation4 and economic
growth can benefit by: (i) considering the company and entrepreneur spaces as
being distinct; (ii) a better understanding of the components of an entrepreneur’s
human capital and how these components affect performance at the individual,
company and community levels; (iii) understanding the process used to create,
appropriate and expand the value of the company; and (iv) promoting best practices
to improve the performance of an entrepreneur’s human capital.
This paper provides: (i) a model that explains how an entrepreneur’s human capital
affects performance measured at the individual, company, and community levels,
and (ii) observations on how to increase the entrepreneur’s human capital.
The model and observations will be of interest to novice and habitual
entrepreneurs, risk capital suppliers, government policy makers, and leaders of
economic development organizations.
Entrepreneur’s space as distinct from company’s space
An entrepreneur’s human capital refers to the individual’s capability to acquire,
assimilate, transform, and exploit knowledge and relationships. Entrepreneurs
concurrently: (i) build their own human capital, and (ii) create, appropriate and
expand value for their companies and associated stakeholders.
Tony Bailetti holds a joint appointment in the Sprott School of Business and the Department of
Systems and Computer Engineering, Carleton University, Ottawa, Ontario, Canada.
Brian Hurley is a repeat entrepreneur and is currently the President and CEO of Purple Forge, a
small technology company with headquarters in Ottawa, Ontario, Canada.
For the purpose of this paper, we assume that the entrepreneur owns and operates the company.
This assumption does not limit the model and observations described in the paper.
In this paper, we do not consider the intrapreneurial innovation that occurs in large companies.
Human capital cannot be separated from the entrepreneur in the way that financial
and physical assets can [Becker, 1993]. The entrepreneur develops human capital
while creating, appropriating and expanding the value of a company. However, the
entrepreneur’s human capital is not tied to a company. The entrepreneur’s human
capital exists whether or not the company continues to exist. The entrepreneur can
use his human capital to pursue other opportunities [Baird and Morrison, 2005]
serially or in parallel.
When we recognize that the entrepreneur and company spaces are separate, we
observe that the success of an entrepreneur is not necessarily tied to the success of
the first company the entrepreneur owns and operates. At the early stages of
venture formation, the value the entrepreneur creates and appropriates for the
company and the value of the entrepreneur’s human capital are tightly joined. As
the company grows, these two values follow different paths.
The success of the entrepreneur and that of the company are not the same. The
value of the human capital an entrepreneur accumulates over a lifetime is what
matters to him/her. Repeat entrepreneurs are characterized by their capacity to
absorb and learn from their entrepreneurial experiences thereby augmenting their
initial endowment of entrepreneurial skills [Stam, 2005]. Repeat entrepreneurs
tend to raise more venture capital at an early round of financing and tend to
complete the early round much more quickly [Zhang, 2007].
We argue for the need to conceptualize two distinct spaces, entrepreneur and
company, when examining how technology innovation and entrepreneurship
produce economic growth. How entrepreneurs accumulate and use their human
capital to create, appropriate and expand company value should be central to any
discussion of economic growth.
Entrepreneurs significantly impact economic activity at a local level through
fostering localized job creation, increasing wealth and local incomes, and connecting
local economies to the larger global economy [Henderson, 2002; Mueller, 2007].
Entrepreneurial activity tends to be the underlying factor that automatically and
naturally attracts venture capital to a community [Kreft and Sobel, 2003]. Increases
in an entrepreneur’s human capital from prior start-up experience has been shown
to increase the ability of the entrepreneur to more quickly go through the entire
process of starting a firm, developing it and executing the exit strategy, recognizing
a new opportunity and founding a new start-up [Eesley, 2006].
Model for how human capital affects performance
Figure 1 provides a model that defines what entrepreneur’s human capital is and
how it affects performance at the individual, company and community levels.
Our conceptualization of human capital applies the concept of absorptive capacity
[Cohen and Levinthal, 1990; Zahra and George, 2002; Zotto 2003] to the
entrepreneurial setting. The model in Figure 1 shows that the entrepreneur’s prior
knowledge, experience, cognitive skills, networks, and reputation are the
antecedents that affect the entrepreneur’s capacity to acquire, assimilate, transform
and exploit knowledge and relationships.5
At the early phase of company evolution, the entrepreneur’s human capital defines
the company’s path of evolution and development. However, the entrepreneur’s
human capital belongs to the entrepreneur, not the company.
Triggers are events that compel the entrepreneur to act (e.g., spouse demanding the
entrepreneur take a job, financial crises). The roots of these events are requirement
to fulfill human hierarchy of needs often referred to as Maslow’s hierarchy of needs
[Maslow, 1943]. These needs include: physiological (e.g., food, water), safety (e.g., of
body, of employment, of the family), love/belonging (e.g., friendship, family), esteem
(e.g., self-esteem, confidence, achievement, respect of/by others), and self-
actualization (e.g.,morality, creativity, problem solving).
Triggers can also be the appreciation of the need for risk management relative to
future outcomes. In particular, the realities for new business starts are very harsh.
Consider the following:
More than 50% of the time venture capitalists replaced the Chief Executive
Officer (CEO) in a venture backed company before exiting [White, D’Souza and
Entrepreneurs who succeeded in a prior venture (i.e., started a company that
went public) have a 30% chance of succeeding in their next venture; and first-
time entrepreneurs have only an 18% chance of succeeding, and entrepreneurs
who previously failed have a 20% chance of succeeding [Gompers, Kovner,
Lerner and Scharfstein, 2006]
Only 14% of venture-backed start-ups will make it to initial public offering (IPO),
33% will be acquired, and the rest - over 50% - will fail [Global Insight, 2007].
In light of these facts, self-aware entrepreneurs will have “rational self-interest” and
work to ensure that they actively seek to expand their human capital in a manner
that maximizes the potential for successful outcomes whether or not their
companies are successful.
Regime of appropriability refers to the institutional and industry dynamics that
affect the company’s ability to protect the advantages of new products and
processes. When appropriability is low, the entrepreneur will not invest heavily to
build industry specific human capital. When appropriability is high, the
Bosma, van Praag, Thurik, and de Wit  provide an alternative conceptualization of the
relationship between human capital and performance at the company level.
entrepreneur will invest in human capital required to protect assets (e.g., know how
to file patents).
Performance refers to the effectiveness of the entrepreneur’s human capital
relative at the individual, company and community levels. Effectiveness at the
entrepreneur’s individual level measures whether or not the entrepreneur’s goals
for its human capital were met. Effectiveness at the company level measures
whether or not the company’s goals for value creation, appropriation and expansion
were met (e.g., time to cash, time to breakeven, time to first round of financing,
amount of funds raised, market share, profits). Effectiveness at the community level
measures whether or not the community’s goals were met (e.g., number of
knowledge jobs, quality of health care, quality of infrastructure).
Table 1 provides examples of ways entrepreneurs, startup companies, and
communities create, appropriate and expand value.
The entrepreneur’s human capital creates opportunities for the entrepreneur, the
company and its stakeholders (including investors and employees), and the
communities where the company operates.
The company creates value through its product, intellectual property, customers
and revenue. The employees acquire value through employment, personal
development and stock option value appreciation. The company investors acquire
and expand value through the increase in the intrinsic value of the company,
ultimately leading to a liquidation event that delivers hard cash returns on initial
The community (including the associated governments) is an important stakeholder
of the value that entrepreneurs create. The community acquires value from the
entrepreneur through their efforts to create value for their companies. The
community benefits from the entrepreneur’s company through such things as: new
jobs, larger tax base, better infrastructure, better schools, more economic growth
opportunities through associated ecosystem growth, more cultural and sport
facilities, better health-care, increased philanthropy and so on.
Process to create, appropriate and expand the value of the company
The entrepreneur’s vision gives birth to the innovation from which the opportunity
exists for a company to create, acquire and expand value. For many entrepreneurs
that is the highest value they will ever create for the company and their intrinsic
value to the company diminishes from that point forward. This is particularly true in
the case where the entrepreneur does not have a controlling interest in the
Initially, an entrepreneur is the key engine of value creation. The entrepreneur
identifies the opportunity, scopes the innovation, leads the sales efforts, builds key
relationships, and guides the team forward down the twisty path to success. As the
company progresses in size and maturity, traditional management and
organizational processes and tools come into play to focus the business value
creation process. Team members around the entrepreneur adopt the vision and
carry it forward. Company evolution occurs organically and the entrepreneur,
investors and the team itself foster it. The importance of the entrepreneur as the
primary value creation engine for the company decreases over the life of the
Every entrepreneur will implicitly or explicitly have two plans: Plan A – the start-up
“hitting it big” plan focused on the company’s vision, strategy, and tactics; and Plan
B focused on the entrepreneurs personal goals that assume the company will fail or
they will no longer be with the company. Both plans imply a set of pre-conditions
required for success. The self-aware entrepreneur will spend time enumerating and
reflecting on these pre-conditions and actively address them by increasing their
own human capital. The resources and context of the company will provide the
ability to acquire human capital in the following general areas:
Knowledge about new technologies, new markets, business processes, etc.;
Opportunity to develop and hone new business opportunity recognition and
exploitation skills – learn the tools and information necessary to pin-point
where the entrepreneurial opportunities are, why they are opportunities, and
how to exploit successfully [Dellabarca, 2002];
Cross-function knowledge spanning areas such as finance, marketing, sales,
engineering, human resources, product management, outsourcing,
Personal growth and development of soft skills related to behaviors,
interpersonal and leadership skills;
Markets and sales models for different industries, e.g. government vs public,
Enterprise vs SME;
Personal industry and/or community visibility, reputation, and influence; and
Personal access to resources and knowledge through expanded networks of
individuals and businesses, analysts, press, government agencies, different
regional networks, capital and different company alumni.
Ideally, the company and the community would recognize the existence of Plan A
and Plan B and take a proactive, and collaborative, role in working with the
entrepreneur to help direct and develop the entrepreneur’s human capital in order
to maximize performance outcomes for the company and community.
Practices to improve performance of an entrepreneur’s human capital
Human capital is directly linked to positive performance outcomes [Bosma, van
Pragg, Thurik, and de Wit, 2002]. Unfortunately, the focus of attention is typically
on the company - the human capital growth aspects of the entrepreneur are often
neglected. Human capital development for entrepreneurs is very much an
experiential process and different groups of entrepreneurs learn in different ways
[Politis, 2005]. The following best practices can help an entrepreneur expand their
human capital while engaged in a particular start-up company:
Joining and participating in a professional group such as Young Presidents
Organization, and the Entrepreneur’s Organization. These organizations can
provide a peer group and education programs that can be used to develop new
skills and perspectives, in addition to expanding an entrepreneur’s social
Obtaining formal 360 degree feedback to identify peer and employee
perceptions on strengths and weaknesses
Formal executive coaching - executive coaching is a confidential one-on-one
relationship between a professional coach and the entrepreneur in for the
purpose of improved organizational performance and personal effectiveness
Training courses targeted at knowledge development from professional groups
such as YPO, EO, at industry conferences, or from top business schools such as
Directed self-study through books relevant to the industry, business, and
personal development. For instance, an entrepreneur unfamiliar with how to
benefit from board of directors might want to purchase a variety of books on
governance, how to run effective board meetings, influence and persuasion, etc..
Subscribe to and read journals, magazines, electronic newsletters and blogs to
stay abreast of trends and new ideas and to develop different perspectives
Participate in a not-for-profit organization associated with the company’s
industry, market or region to extend the entrepreneur’s network and associated
access to knowledge and resources
Formal mentoring - a mentor is an individual, usually older, always more
experienced, who helps and guides another individual’s development
Formal or informal advisors who have deep experience in areas where the
entrepreneur or company team has weaknesses
Networking with peers, potential executive officers, angel investors, venture
capitalists, partners, service providers, analysts – which can provide quicker
access to future team members and capital resources
Focused effort to collect insights and opinions on industry and opportunities
from social, professional and business network
Hold formal postmortems at major points in the company development -
postmortems are a very good reflective method to look back at what worked,
what didn’t and why, and to learn what would could have been done differently
Prepare and give speeches and presentations at local and industry conferences
Prepare and publish articles and papers online, newspapers, journals and
Focused effort to engage market analysts, government agencies, reporters, etc,
to expand the entrepreneur’s personal network and access to experience,
perspectives and resources
Use social networking tools such as Linked In and Plaxo to maintain contact and
grow professional and business network
Entrepreneurs should recognize that increasing their human capital increases their
prospects for increased performance, and the potential for faster execution and
positive outcomes in follow-on business ventures. Entrepreneurs should develop
their human capital value using the practical methods available.
Risk capital suppliers should proactively work to develop the human capital of
founders of companies they have invested in to maximize their performance.
Policy makers and leaders of economic development organizations should define
the unit of analysis for economic policy as the entrepreneur and not the company as
well as address the needs of the various types of entrepreneurs.6
Communities should provide entrepreneurs with the means to improve the number
and quality of the opportunities they shape.
Leaders of economic development organizations should hire habitual or repeat
entrepreneurs, not individuals with large company experience or first time founder-
owner experience as Executives in Residence (EIR). The EIRs play an important role
supporting novice entrepreneurs and employees with entrepreneurial aspirations.
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entrepreneurs; (iv) serial starter entrepreneurs; (v) direct re-entrants; (vi) latent
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Figure 1 – How a Entrepreneur’s Human Capital Affects Performance
Table 1 - Value Creation, Acquisition and Expansion
How to expand
How to create value How to appropriate value
For the Satisfy self esteem Negotiate agreement that Set up individual
entrepreneur and self actualization defines equity position and processes and
needs compensation upon departure tools that
Develop personal plan that
identifies skills, experiences,
reputation, behaviors and
relationships required in two
scenarios: i. remain with
company, and ii. depart
Use company to acquire
required skills, experiences,
reputation, behaviors and
For startup In markets space where Increase number of customers Set up
that purchase company’s
company company operates: organizational
products and services processes and
Collaborate to Increase customers’ tools that
increase number of support
willingness to pay for
customers company’s product and organizational
Collaborate with growth
customers, Expand into new
Decrease customers cost of
complementors, owning company’s products markets
suppliers and Develop brand
intermediaries Create IP
Decrease costs of Secure funding
providing products and Make it easy for customers to
services purchase from company and
Contribute to legitimize for suppliers to share risks
solutions Attract, lead and retain team
For the Attract and support Link habitual entrepreneurs Invest in the
community habitual entrepreneurs with keystone organizations health of the
that anchor global ecosystems ecosystem that
ecosystem approach Link entrepreneurs with early
to venture creation buyers
Establish an attractive Link entrepreneurs with capital
economic policy sources
taxes, incentives, labor
Tony Bailetti holds a tenured faculty appointment in both the Department of
Systems and Computer Engineering and the Eric Sprott School of Business at
Carleton University. He was the Director of the Technology Innovation Management
Program from 1998 to 2005 and 2006 to 2007. He is currently the Director of
Ontario's Talent First Network. He was the Director of Carleton University's School
of Business from 1981 to 1988 and worked at Bell-Northern Research (today a part
of Nortel) from 1988 to 1992. Professor Bailetti has published in engineering
management journals such as IEEE Transactions on Engineering Management,
Journal of Product Innovation Management, Research Policy, and R&D Management.
Brian Hurley is an entrepreneurial leader with over 24 years of experience in
building strong teams, innovative products and international businesses. Brian is
currently CEO of Purple Forge, which he founded in 2008. He founded Liquid
Computing in 2003 and as it's CEO raised over $44M in venture financing, built a
world-class team, delivered an award winning product to market and won initial
sales. Brian has built and led numerous successful business teams in Nortel, Bell-
Northern Research and Microtel Pacific Research. Brian is the best-selling author of
quot;A Small Business Guide to Doing Big Business on the Internetquot;. He is an active
member of the local Ottawa tech community and is member of the OCRI Board of
Directors and the Young Presidents Organization. Brian graduated from Carleton
University with a Bachelor of Engineering.