Financiers’ legitimacy demands and the evolution of entrepreneurs’ fund-raising intentions


Chapter four develops the specific research concept for analyzing the resource acquisition struggle in new ventures. The aim is to arrive at theoretical orientations relating to how entrepreneurs’ fund-raising intentions unfold throughout the financing process. These orientations will guide the empirical exploration in chapter five in order to derive propositions for future research. To meet this objective, chapter four proceeds as follows.


Venture Capital Entrepreneurial Action Entrepreneurial Intention External Finance Venture Capital Investor 
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    This corresponds to the principal point admitted by Suchman (1995) that it may be quite hard for researchers of organizational legitimacy to come up with normative recommendations for effective legitimizing strategies in detail.Google Scholar
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    And it seems therefore too strong a criticism that universal Darwinism inevitably neglects the importance of human intentional variation, considering managerial and entrepreneurial agents merely as passive agents (in contrast to Buenstorf, 2005, 10).Google Scholar
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    The above definition of general Darwinism by Hodgson and Knudsen even entails the possibility of a Lamarckian retention of acquired characteristics allowing the modification of the instructing code to be preserved (cf. Buenstorf, 2005, 3). This is because Darwinism and Lamarckism may not be considered mutually exclusive (cf. Hodgson, 2003, 5; also cf. the earlier discussion in Knudsen, 2001 as well as Wilkins, 2001 for the case of socio-cultural evolution). Rather, to Hodgson the strict independence of variation and selection confined to the biological domain falls into the area of Neo-Darwinism or Weizmannism (ibid. and Knudsen, 2002, 444; for the biological claim of Weizmann also cf. Cziko, 1995, 177).Google Scholar
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    For example, new entrepreneurial initiatives by front-line managers for product innovation may compete within the organization, as higher level management selectively scrutinizes and endorses project initiatives against the background of both personal and organization-wide goals and rules (cf. the corporate entrepreneurship concept of Burgelman, 1991 based on a V-S-R framework; also cf. Henderson & Stern, 2004, 41p. and Floyd & Wooldridge, 1999).Google Scholar
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    While intra-organizational decision-making is excluded from the analysis, this would be an interesting research issue, e.g., as young firms grow into large organizations with many members and differentiated structures. Here, the organization as an internal selection arena, as well as phenomena of group selection, may be addressed by future research (cf., for example, Campbell, 1994, 32p. as well as Kappelhoff, 2004 for a general overview of group selection phenomena in the context of organizations).Google Scholar
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    In agreement with Vromen (2001, 201; also cf. Bouchikhi, 1993, 558), there is more than “reconstructive downward causation” from (higher) external levels of the selection hierarchy (e.g. external market or resource owner selection). The point is that searching for similarities across heterogeneous new ventures and creative entrepreneurial agents (as mandated by Aldrich, 2000) may only be based on common environmental constraints that allow observable similarities to arise.Google Scholar
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    Note that there may be more restrictions than institutional boundaries alone. Generally, for the case of economic agents acting on markets, invariant restrictions from a range of spheres may be relevant, such as from the natural (biological/physical), socio-cultural, economic and institutional environment (cf. Koch, 1996, 79pp. and also Burns & Dietz, 1995, 353p.; see also 4. 2. 1. below). For the entrepreneurial mobilization of financial resources that are to be acquired from external societal resource owners, however, invariant restrictions from the financial domain will be of primary importance.Google Scholar
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    Judging from national GEM data, German private individuals may be, at least, no less risk averse than Americans (cf. Sternberg et al., 2006, 6 and 19).Google Scholar
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    Moreover, suppliers of debt to new ventures also “face a highly uncertain lending situation with minimal borrower information” (Stouder & Kirchhoff, 2004, 369) and substantial market and business risks in terms of fluctuation in sales and competition (Schulte, 2005, 491).Google Scholar
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    Here, Shepherd (1999, 628) found that venture capitalists do address such market risks in their screening criteria.Google Scholar
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    And apparently, their suggested approximate phase categorization still holds empirical validity, albeit that there may be recursive feedback loops in a seemingly linear pre-investment process (cf. Feeney et al., 1999 for the former and Wright & Robbie, 1998 for the latter).Google Scholar
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    Cf. Brettel (2002); Mason and Stark (2002); Gleissner (2002); and Kuckertz (2006) for an overview of possible sub-criteria of equity and debt financiers.Google Scholar
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    However, also cf. Gumpert and Lange (2003) for heterogeneity in the use of business plans by financiers.Google Scholar
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    Moreover, Hodgson and Knudsen (2004, 294) assume that internal managerial selection involves “perceptions of efficacy rather than the test of the external environment”. This means that founder management may make changes to fund-raising plans and the overall business conception over time as it perceives new attempts to establish the business with corresponding funding to be more effective than previous attempts to attract funding from potential financiers.Google Scholar
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    Note also that this may allow new variants to emerge from sources outside the process of selective replication itself (cf. Hodgson & Knudsen, 2004a). In other words, subset selection in an evolutionary process commencing at one point in time may not necessarily have to be considered to root deterministically from a fixed anterior set from which everything that follows will originate (as in Knudsen, 2002, 445).Google Scholar
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    In essence, this will mean group selection, in this case of (newly emerging) firms (cf., for example, Campbell, 1994, 32 and Kappelhoff, 2004 for a discussion of this implication of selection from phenotypes).Google Scholar
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    See Bieger et al. (2002) for a definition of business conceptions and, in particular, the notion of core business models.Google Scholar
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    Implicit in this is that internal selection activity follows from feedback interactions of the new venture with the environment over time (cf. Jablonka, 2003, 40).Google Scholar
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    Cf. Knudsen (2002) and Buenstorf (2005, 14) for further examples.Google Scholar
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    Note that Campbell considered that his BVSR concept was also applicable to human creative thought and problem-solving (cf. Cziko, 1995, 310 and Campbell 1960). The relevance of creative blind variation and selection in entrepreneurial action to assemble resources and establish an organization has also been stressed by Aldrich and Martinez (2001); also cf. Harper (1996, 274pp.) whose “falsificationist entrepreneur” concept follows a similar reasoning.Google Scholar
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    Further examples of a similar notion of cumulative variation-selection by agents in technical innovation processes may be found in Vincenti (2003).Google Scholar
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    There is one adjustment here to the situation described by Hesse and Koch (1998, 426). In figure 4-3 the selection context of individual action over time solely depicts external selection factors. The internal selection factors mentioned by Hesse and Koch (individual aims, intentions) are considered to be included within the principle of rationality and the selective realization of a course of action.Google Scholar
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    Also cf. Shane (2000) and Mitchell et al. (2000) for the relevance of prior knowledge to the perception of entrepreneurial opportunities and of the availability of resources in particular.Google Scholar
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    Cf. Rizzello (2001, 9) for a treatment of cognitive perceptive feedback mechanisms.Google Scholar
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    Underpinning this also cf. Pauen (2001) for the cognitive precondition that in addition to externally stimulated perceptions, internal action plans, behavioural imaginations, and intentions may also be possible content elements of conscious mind.Google Scholar
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    In fact, in Fallgatter’s original illustration (Fallgatter, 2002, 327 and 2005, 23), this is included by reference to the general action model of Guenther (2001, 114p.).Google Scholar
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    Note that there are models with a basic structure similar to Fallgatter’s concept which also make use of the intention construct; cf. for example, Hindle (2004, 589) and the concept of Forbes (1999).Google Scholar
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    In the chronology of Ajzen and Fishbein’s research programme, their earlier theory of reasoned action added the notion of social norms to the explanation of intentional behaviour. Later, TPB introduced perceived behavioural control as an additional explanatory factor (cf. Ajzen & Fishbein, 1980 and Ajzen, 1991).Google Scholar
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    As far as other constructs not yet introduced are concerned, the figure also includes propensity to act and possible precipitating factors. Propensity to act may moderate the relationship between attitude antecedents and intentions. It refers to the innate tendency to take action which may vary across people (Mair & Noboa, 2005, 4; also cf. Krueger, 1993, 9 and 12). Contextual precipitating factors are influences which “precipitate the realization of action into behavior” (Krueger, 2000, 10). Such factors may be, e.g., available time budgets (ibid.).Google Scholar
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    That said, note that entrepreneurs’ perceived self-efficacy has been analyzed in relation to different instrumental tasks in the venture creation process; cf. Kickul and D’Intino (2005).Google Scholar
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    However, on the positive side, any intentions to act that arise spontaneously may still be acknowledged based on underlying attitudes which may be reflected as long as the intent pertains to a conscious, planned behaviour (Krueger, 2000, 9).Google Scholar
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    An empirical example of where such a hurdle may have been perceived as quite intense is discussed in Schulte (1999). The author refers to the empirical case of German start-up entrepreneurs perceiving substantial risk aversion, lack of interest, and hesitation of commercial banks to fund new, in particular innovative, ventures.Google Scholar
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    Note that financier legitimacy demands would be relevant in their subjective perception by the entrepreneur (cf. Elsbach, 1994, 57p.; also cf. Reitan, 1997, 4 as well as Davidsson, 1991 and Koch, 1996, 78 for the relevance of exogenous influences such as environmental restrictions or social norms, as they are subjectively perceived).Google Scholar
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    Further orientation for the entrepreneur’s competence assessment to obtain funding is provided by Brown and Kirchhoff (1997) who point out some indicators of efficacy beliefs specific to acquiring external finance.Google Scholar
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    This also involves past mastery experiences which, if truly positive, may reinforce the level of perceived efficacy (Shepherd & Krueger, 2002, 172). Possible questions therefore look into prior indirect observational or direct personal experiences, e.g., relating negotiations with banks to arrange a private loan or talking to investors about funding in the context of previous professional work experience. Note that such experiences, be they positive or negative, will be made not only prior to but also during the focal financial resource acquisition process under study.Google Scholar
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    Abstractly, the above study of start-up sequences by Carter et al. (1996) also hints at the possibility that events of perceived unfeasibility may not only inhibit the initiation of start-up intentions, but may also contribute to terminations of entrepreneurial endeavours later on (see also Fallgatter, 2005, 67p. referring to Gimeno et al., 1997 for the relevance of threshold effects for continuation decisions; also cf. Davidsson, 1991 who inquired into the factors that may influence the continuation of entrepreneurial growth efforts in existing businesses). Note finally that Davidsson (ibid.) and Fallgatter (2005, 68) stress that it will be subjective, reality-as-perceived factors which influence entrepreneurial intentions and growth orientation.Google Scholar
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    As a further orientation, the cognitive planning style notion in Bouckenooghe et al. (2005) will be borrowed from. This notion tracks in how far entrepreneurs go through detailed planning before taking action. In particular, the aim is to check whether reduced intent to continue with action to seek funding may have to do with the tendency to go back to ‘contemplative planning’ rather than with decreasing feasibility of obtaining funds.Google Scholar
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    For a similar notion see Bhave’s well known model of the entrepreneurial process which also entails a strategic market feedback loop (Bhave, 1994).Google Scholar
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    For entrepreneurial cognition biases such as simplification heuristics or framing effects may also play a role here (cf., for example, Mitchell et al. 2000, 976pp. or Lichtenstein et al., 2003, 23). This said, this study will, however, not attempt to make detailed contrasting propositions as to the exact cognitive circumstances in which biased assimilation and negligence of singular feed-back signals may prevail. This is because concentrating solely on such detailed presumptions of cognitive biases and risk attribution would not be suitable for this study’s focus on the broader overall financing process and modest approximate patterns within it.Google Scholar

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