New ventures: definition, financing needs, and legitimacy


Following the epistemological notion of social construction of new venture projects, chapter 3. 3 explores the need for legitimacy to initiate resource exchange relationships with external stakeholders. The need for new ventures to gain legitimacy arises primarily because of their dependence on both acceptance and resource support by external audiences, e.g. potential financiers (cf. Delmar & Shane, 2004). Therefore, before addressing new venture legitimacy, 3. 2. will look at external resource requirements of new ventures, and in particular, the need for external funding. First of all, however, it will be necessary to define and characterize new ventures more precisely (3. 1.). The definitional characterization suggests that the fund-raising and legitimizing challenge will be particularly relevant for new ventures with their liabilities of newness.


External Financing External Finance Established Firm Moral Legitimacy Resource Owner 
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  1. 32.
    Cf. figure 3–4 below for a characterization of firm conception, gestation, and infancy; gestation activities are defined as “actions taken in order to develop a business structure and operational procedures for the purposes of creating a new firm” (Newbert, 2005, 56).Google Scholar
  2. 33.
    Readers interested in this aspect may refer to Brown and Kirchhoff (1997).Google Scholar
  3. 34.
    In fact, a multitude of different firm gestation activities may be related to the four theoretical components that characterize organizations. For example, activities like’ serious thoughts about business’, ‘rented/leased facilities/equipment’, ‘created a new legal entity’, or ‘received money from sales’ may be indicators of intentionality, resources, boundary, and exchange components measuring the emergence or, if completed, existence of new organizations (Aldrich, 1999, 78).Google Scholar
  4. 35.
    The differentiation between the categories of activity progress ‘not yet initiated, initiated, completed, not relevant’, corresponds to Carter et al. (1996, 155).Google Scholar
  5. 37.
    Note that the establishment of a legal entity and other gestation markers referred to below have been used as legitimizing factors in empirical studies of new venture legitimacy (as in Delmar & Shane, 2004 or Tornikoski, 2005). However, passive indicators of formal existence are assumed to interfere least with the feasibility of raising funding from potential financiers. This is because the latter may demand indications of commercial proof of concept and profitable prospects (e.g. in the form of existing customer demand) rather than mere formal existence of the venture.Google Scholar
  6. 38.
    These activities pertain to typical markers of firm establishment; cf., for example, Newbert (2005, 64).Google Scholar
  7. 39.
    Also cf. the role of entrepreneurial pioneers in combining resources in novel ways stressed by Schumpeter (1934).Google Scholar
  8. 40.
    Good overviews of further studies in this area may be found in Mellewigt and Witt (2002) and Shane (2003).Google Scholar
  9. 42.
    This active role of the entrepreneur may be further strengthened by referring to research on firm closure itself. New and small firms cease to exist not only because they go bankrupt or are liquidated by external forces, but frequently also because the entrepreneur or owner-manager deliberately decides to disband the firm (cf. Pasanen, 2005, 94; Hager et al., 2004, 160; and Storey, 1994, 79pp. for the specific case of small, owner-managed businesses).Google Scholar
  10. 43.
    The terms legitimacy demands, requirements, or expectations will be used interchangeably. The term legitimacy requirements has been used in the seminal paper by Suchman (1995) while ‘demands for legitimacy’ may be found in Stone and Brush (1996), though having a broader meaning there.Google Scholar
  11. 44.
    In addition, researchers have observed that a lack of legitimacy increases the likelihood of new venture mortality as well as of failures to establish resource exchange (e.g. Shane & Foo, 1999; Newbert & Tornikoski, 2004).Google Scholar
  12. 45.
    See Grichnik and Kraschon (2002, 28) and Kuckertz (2006, 55) as far as market uncertainty is concerned.Google Scholar
  13. 46.
    In their discussion of trust in entrepreneurship, these authors also stress that “economic theories of organization, and in particular, principal-agency theory, have focussed on issues of opportunism and paid less attention to the issue of competence” (ibid.); also see Mellewigt and Witt (2002, 102) and Alvarez (2005, 30 and 35) pointing out that contracting structures between ventures and financiers may not only be aimed at combating opportunism but also at deficiencies in management competences and business uncertainty (also cf. Fallgatter, 2002, 35).Google Scholar
  14. 47.
    Concerning the composition of these groups, theory has addressed different levels of legitimacy: the legitimacy of single organizations, populations of organizations (e.g. within a specific industry sector), and communities (see Aldrich & Martinez, 2003 for a discussion of legitimizing at these three levels; also cf. Van de Ven, 2005 for population level legitimacy).Google Scholar
  15. 48.
    In fact, this definition appears to be a kind of accepted standard reference employed by institutional and entrepreneurship researchers (see, for example, Barron, 1998; Aldrich, 1999; Scott, 2001; Zimmerman & Zeitz, 2002; Newbert & Tornikoski, 2003; Tornikoski, 2005).Google Scholar
  16. 49.
    This external observation stands in contrast to concepts like organizational identity (as the beliefs of members about their organization) or organizational image (defined as members’ beliefs about how externals view their organization); for these differentiations see Reuber and Fischer (2005, 58).Google Scholar
  17. 51.
    Further categorizations may be found in Elsbach (1994) or Ruef and Scott (1998).Google Scholar
  18. 55.
    In legitimizing strategies some of the options may also be combined, e.g. selecting those types of financiers whose demands are easiest to conform to (cf. Zimmerman & Zeitz, 2002, 423).Google Scholar
  19. 57.
    “Institutional entrepreneurship refers to the practice of creating norms, values, beliefs, expectations, models, patterns of behavior, networks, or frames of reference consistent with an organization’s identity and current practice, and then getting others to accept these norms, values and so forth” (ibid., 423; also cf. Maguire et al., 2004, 657p.).Google Scholar
  20. 58.
    Theoretically, this compatibility has been revealed by Gidden’s structuration concept in which the duality of social structure is both a (restrictive) platform and a product of social action (ibid., 75).Google Scholar
  21. 59.
    At the community or population level, groups of venture organizations may well be able to manipulate their institutional environment (cf., for example, the collaborative lobbying and legitimizing strategies in Aldrich, 1999 and Zimmerman & Zeitz, 2002). However, note that the focus in this study is at the level of the individual new venture where the necessary power resources will likely not exist.Google Scholar
  22. 61.
    This broadly corresponds to the construct of organizational capital employed by Fichman and Levinthal (1991, 398).Google Scholar
  23. 62.
    Also cf. Tornikoski (2005) for the legitimating potential of entrepreneurial networking and Suchman (1995) for the relevance of personal reputation in legitimizing activities.Google Scholar
  24. 63.
    A frequently mentioned example of this refers to the access to additional information through personal networks in the venture formation phase. Here it is argued that strong ties such as intense relationships to close friends or relatives may be less useful to provide information because of redundancies stemming from the similarity of the contact and knowledge base between close friends or relatives and the entrepreneur (ibid. or, e.g., Jenssen & Koenig, 2002, 1040) Note, however, the mixed results that the latter put forward concerning information flows through strong ties.Google Scholar

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