Why networks matter so much: jobs, pay, venture capital, influence

Professor Wayne Baker, in his excellent book Achieving Success Through Social Capital: Tapping the Hidden Resources in Your Personal and Business Networks, lays out the business case for the importance of social networks. He summarizes the empirical evidence demonstrating the many benefits of social capital to individuals and to organizations:

● Getting a job: More people find jobs through personal contacts than by any other means.

● Pay and promotion: People with rich social capital are paid better, promoted faster, and promoted at younger ages.

● Influence and effectiveness: Those who become central in an organization’s networks are more influential and even paid better, compared with those who occupy peripheral network positions.

● Venture capital and financing: 75% of startup-ups and new businesses find and secure financing through the informal investing grapevine: the social networks of capital seekers and investors. Companies that develop personal relationships with their bankers get financing at lower rates, compared with companies that maintain an arms-length relationship.

● Organizational learning-and doing: As much as 80% of learning in the workplace takes place via informal interactions.

● Word-of-mouth marketing: Advertising increases awareness of products and services, but personal referrals and recommendations lead to the actual decisions to purchase them. Any salesperson will testify that the majority of sales come through that salesperson’s network, not unsolicited.

● Strategic alliances: The more strategic alliances a company creates, the more it will create in the future.

● Financial stability: Bankruptcy is less likely for firms with well-connected executives and board members, even controlling for many other explanations.

● Democracy: Harvard political scientist Robert Putnam found in his twenty-five year study of democracy in Italy that those regions with rich social capital enjoy strong economic development and responsive local governments, but regions with poor social capital suffer.