No one conjures success out of thin air. They create it through a mix of skill, timing, and circumstance. When people talk about success, they often point to things like wealth, status, and accomplishment. Success is subjective but always contains some element of financial wellbeing. And a key component of success, no matter how it's measured, is human capital. Your future is not created by simply saving a certain amount of money each year and waiting for it to compound. Instead, you are harnessing your human capital to create value for yourself and the world. Compounding your human capital is not only financially rewarding, it also creates new possibilities and upside. Today we dive into what we talk about when we talk about human capital.
Your Resources - Human Capital & Financial Capital
Most financial plans start with a balance sheet that captures assets and liabilities today. Next, they assume some rates of return and saving. Plot this over time and draw an X when your assets can support your desired retirement spending. Plan achieved.
In this model, all you can do is save diligently, invest intelligently, and wait for compounding to work its magic. This strategy can work, but it ignores the human capital and serendipity that create successful outcomes. The typical plan makes financial capital explicit, but it leaves human capital implicit.
Let’s step back - where does the annual savings assumption come from? It comes from an implicit assumption that you will be able to earn money every year. And you can earn money because you have human capital, or an ability to create wealth in a social context. In this way, financial capital is a byproduct of human capital. So, what if instead of only focusing on financial capital, we consider your human capital as an explicit part of the balance sheet?
When your plan’s success isn’t predicated on saving a certain amount each year, it opens up a world of possibilities. You open the door to optimize for things other than financial capital, knowing you have another resource that you can convert to dollars later. In fact, you should optimize for human capital over financial capital. This is especially true early in your career. If we had the choice, we’d always choose to start with high human capital and no money rather than the reverse. To understand why, consider that it’s difficult to convert financial capital into human capital, at least outside of education settings. However, human capital can readily be converted to financial capital, and in fact should bend the curve of your compounding function, allowing you to reach your goals sooner.
Lastly, introducing human capital gives you another metric to measure against. Not every worthwhile experience is measured in dollars, and sometimes a return on your human capital alone is sufficient reward to take something on. If you’re not measuring an activity’s contribution to your human capital you could think you’re stagnating, but all the while you’re creating valuable skills for future actions.
Cultivating & Harnessing your Human Capital
Just as financial capital compounds, so too does human capital. But there’s no mutual fund you can stick your human capital in and passively watch it grow. Cultivating your human capital is an active process.
Before anything else, human capital is a skill. Your training, your creativity, and your ability to add value in ways that others can’t are the first ingredients of high human capital.
Human capital is social in nature. You don’t grow it in the dark - it’s only worth something if other people know about it and value it. This is one of the reasons agglomeration effects still exist in the startup world; discoverability of human capital is important to both companies and employees.
Your human capital grows with your skills and reputation. There’s an element of clout to the concept - as you prove your mettle, you gain access to more interesting people and work opportunities.
Cultivating your human capital unlocks doors to do more interesting work, allows you to collaborate with special people, and maybe even attracts others to join you on a founder's journey. For these reasons it’s often better to optimize for the return on your human capital rather than on your financial capital. As the opportunities available to you expand, you’ll undoubtedly find pathways to earn money. If you optimize for money from the start of your career, you may never open the doors that offer your target equilibrium of meaningful work and high compensation.
Human Capital In Practice
High human capital is not enough to create success. It is potential energy in need of a catalyst. You can’t spend human capital directly on goods, services, and experiences. Nor can you measure it directly. And while financial capital can compound passively, allocating and compounding your human capital is always an active endeavor. Here are some tactical considerations regarding how to protect, grow, deploy, and evaluate your human capital.
Be explicit about what metrics you use to define success. Financial upside isn’t the only yardstick. Measuring return on human capital is difficult, so consider using the following metrics as proxies:
- Short-term cash flow
- Long-term financial upside (e.g. equity)
- Intellectual stimulation
- Network & social capital
- Call to purpose / meaningful work
- Time & energy demands
You may choose to prioritize these criteria in any order, and that order will change over time. At all times, be truthful about what you’re optimizing for. It’s ok to prioritize cash flow if financial obligations require it. If you’re optimizing for something else, ensure your baseline financial needs are still met, then layer on upside exposure along the other axes.
Human capital bets are concentrated by nature. You only have so much time, so choose your human capital investments wisely and don’t overcommit yourself. For example, the opportunity cost of rushing into the wrong job can be very high in terms of human capital. Since a human capital bet demands your time and energy, you can likely only afford one or two bets at a time.
As your human capital compounds, ensure you have the runway to let it keep growing. Stay aware of your risk capacity and be sure to never exceed it. Human capital planning still involves “traditional” financial planning strategies to mitigate blowup risk. Your burn rate might preclude you from taking higher risk human capital bets (joining an early stage startup, being a founder, writing an angel check) if you don’t have the necessary runway and safety nets.
Human capital acts as leverage in your career. It helps you optimize for the specific blend of benefits and compensation that help meet your goals. It’s even more valuable during the negotiation process; if your human capital is worth enough, people are willing to offer more value in exchange for your participation.
When building your financial investment strategy, account for the fact that your human capital investments are concentrated and risky. If you work at a startup, you have plenty of upside exposure to a potential financial windfall paired with a risk that the company goes bust. Balance this with an appropriate investment portfolio and cash balance that optimizes for resilience.
Since human capital is social in nature, it’s also positive sum. Win and help win is the best strategy here. If you can help others level up their human capital, you’ll undoubtedly be paid back, either directly or indirectly. Serendipity is an important component of success, and making yourself a resource for others is a great way to increase your own exposure to upside.
Human Capital & Upstart
We see it as our responsibility to help you identify possibilities and then achieve them. Our focus on the startup ecosystem grants us deep insights into the tools and strategies that work for people in your position. It’s easy to get bogged down trying to optimize at the margin. We introduce the human capital lens to our clients in order to zoom out and refocus on what’s important. A meaningful life signifies something different to everyone. For us, a key is to be engaged with the world and to build things you are proud of. We want that for our clients as well. Helping you cultivate your human capital increases the chances you find that meaningful thing to build, and that’s something we’re proud to be a part of.
