Only time will tell! Understanding legitimacy challenges of start-ups (part 2)

As we mentioned the study of Fisher et al. suggests that three important factors influence entrepreneurs’ efforts to cross those threshold: facing the pluralistic demands of multiple audiences, failing to make changes in their direction of evolution and legitimacy buffering.

The first factor, tension due to pluralistic demands of multiple audience, highlights the complexity of satisfying the demands of various stakeholders. For example, venture capitalists have certain demands from a new venture like reaching profitability soon whereas employees, customers, authorities have other types of demands. It would be a major challenge to keep up with various types of demands for a newly founded venture with little experience.

The second factor, failing to make proper changes, relates to two forces: relational lock-in and cognitive lock-in. Relational lock-in is the obligations that the start-up has to others that can cripple it. Cognitive lock-in is about constraints on the founders’ motivation, capacity and competence to adopt new directions.

A prominent example is Groupon, Inc. Despite early success and IPO in 2011, its stock price declined by half in a short period because it failed to anticipate the audience perception and expectation changes from private to public ownership.

The third factor, legitimacy buffer, can be actually a positive force helping new ventures to gain or keep their legitimacy in later stages. The attained legitimacy from the previous stages can form a foundation for building further legitimacy in the following stage so that if a new venture makes mistakes, it would be still tolerated by stakeholders.  The ventures now have the time and resources to make bigger changes in their identities and deviate from current norms and expectations without being perceived as illegitimate. A nice example is Facebook before its IPO in 2012.

As Facebook transitioned toward becoming a public company, Mark Zuckerberg, founder and CEO, ignored and even rejected some of the expectations of these resource providers and influencers in the public markets. Zuckerberg continued to wear a hoodie sweatshirt to important interviews, violating the norms and expectations of Wall Street analysts and investors. While these behaviors stimulated some major resource providers and influential analysts to call the company’s legitimacy into question, the company still managed to raise $16 billion from its IPO and the stock price closed above the opening price.

What are “takeaways”for entrepreneurs and managers? First, they should be aware of their evaluating audiences and their legitimacy evaluation criteria. It is important to have a clear picture of who the main stakeholders of the company are and what are their priorities in each stage. Furthermore, evaluating audiences and their criteria may change over time. This awareness is especially important when the new venture transitions from one stage to another. In this transition it is crucial that managers know what the evaluating criteria of old and new audiences are so that they can make a smooth transition and can overcome the challenges of institutional pluralism. Last, several organizational behaviours could positively influence legitimacy. Evidence shows that the business plan has the highest positive influence on legitimacy in the conception stage. It is therefore crucial that managers in the conception stages should make a formal business plan which can help them to receive investment.

About pourya

I am an entrepreneurship postdoctoral research fellow at Tilburg University in the Netherlands. My vision is to fill the gap between entrepreneurship research and practice with this website. Research and practice are two separate islands when it comes particularly to entrepreneurship. There are hundreds of papers/articles written every month but we hardly see their contribution to real life entrepreneurship.

1 comment on “Only time will tell! Understanding legitimacy challenges of start-ups (part 2)

  1. Pingback: Do you need a business plan for your startup? Aspects to be considered – Idea to Start

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