Social Capital of Nascent Entrepreneurs and Informal Finance

How to finance a business venture is a strategic issue for entrepreneurs. Banks and financial institutions do not help finance a new business in start-up or pre-start-up phase. In this phase, the entrepreneur should rely on self-funding and informal investors such as family, friends and foolhardy strangers for their initial seed capital. In this research, we have focused on understanding why some entrepreneurs can access to informal sources but some others cannot. We suggest that the social capital can play a major role in understanding this matter. In fact, the explanation of the role of social capital in informal financing is the main contribution in this research. We define four aspects for social capital: social networks, trust, social skills and cooperation with others. Data are gathered through questionnaires from 77 nascent entrepreneurs (established less than one year or in start-up phase) and are analyzed by logistic regression method. The results have supported the impact of networks, trust and cooperation on informal financing. Contrary to our prediction, the impact of social skills on informal finance is not supported. To sum up, the research has confirmed the importance of social capital for new venture creation and, most likely due to the accessibility to social capital, can achieve finance as a vital resource.