It won’t come as a surprise to anybody to learn that social networks are valuable. But it may come as a surprise for you to learn the increasing importance of social networks in the land of the Giants. As a growing number of institutional investors take end-to-end control of their investment operations and decisions, these funds are relying more and more on relationships and connections (that their staff have) with other like-minded organizations.
Think of it this way: If investors are going to bypass the banking and broker community in New York and London through direct investment programs, those investors are going to have to forge new relationships and networks that can supplant the role that has traditionally been played by intermediaries. (For the nerds in the room, investors will, in the future, rely on ‘network effects’ instead of ‘agglomeration economies’. You dig?)
My prediction, then, is that ‘social capital’ will become as important as ‘human capital’ to the success of these direct institutional investors. And I’m not pulling that prediction out of the air; research already shows that an organization with more social capital will get higher returns from their human capital because they are positioned to identify and develop more rewarding opportunities. And this, in my view, is why institutional investors need “Chief Networking Officers” – to leverage social capital to maximize returns.
But I’ll come back to the concept of a CNO in a moment. First let me offer some more insights on the value of social capital. And to do that I’d like quote directly from Ronald Burt’s seminal paper on the value of social capital:
“While human capital refers to individual ability, social capital refers to opportunity...
“While human capital is surely necessary to success, it is useless without the social capital of opportunities in which to apply it...”
“Social capital is quality created between people, whereas human capital is a quality of individuals.”
Investments that create social capital are therefore different in fundamental ways from the investments that create human capital...”
So social capital matters. A lot. In fact, Burt shows that better-connected people experience better returns when holding human capital constant.
But it’s that last quotation in particular that I want to flag up for institutional investors. The development of an organization’s social capital is an altogether different process from the development of human capital. And this suggests to me that it may require a different type of person: a Chief Networking Officer!
My vision for a CNO would be someone who has the capability to match people from inside their own institution with people from outside in a way that adds value for all parties. That’s the ideal. In order to do this, however, the CNO has to have intimate knowledge of the institution, a deep understanding of the industry and its value drivers, and a wide net of contacts from which to design and build opportunities (e.g., deal flow, co-investments, access, information, insights, Etc.)
For too long institutional investors have ceded these functions to bankers and intermediaries. But if they could internalize these functions, they'd be saving money. A lot of money. There’s the obvious proxy for how much money they’d be saving: take a look at the fees bankers and brokers charge for their services.
But let’s also consider how much young finance and business professionals are willing to pay to go back to business school (~$150 – 200k). For these twenty-somethings that already know finance and business, there really isn’t all that much more to learn (...I’m being a bit cynical now...), and this means the value of an MBA is not in its human capital enhancements. In my view, an MBA is all about accessing a network. You’re investing in social capital. (That’s what all those group projects are about.) And your next employer will undoubtedly be very pleased to have that access to your network; it’s quite valuable in fact. (Especially for the top schools.)
Anyway, all this is to reinforce the importance of networks for institutional investors interested in direct investments. In my view, these organizations need to start taking their ‘social networks’ quite seriously.
So, Giants, get out there and attend some conferences in lovely locations with good friends...it may literally be your job to do so!