Legitimating first: organizing activities and the survival of new ventures

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Abstract

The process by which firm founders create new organizations is of considerable interest to evolutionary theorists and entrepreneurship researchers. This article tracks the life histories of 223 Swedish new ventures started between January and September 1998 by a random sample of firm founders. We explore the effect of legitimating activities on the hazard of disbanding and the transition to other firm organizing activities during their first 30 months of life. We find that undertaking activities to generate legitimacy reduces the hazard of venture disbanding and facilitates the transition to other organizing activities.

Introduction

Firm founders do not instantaneously establish new firms, but create them through a series of actions—obtaining inputs, conducting product development, hiring employees, seeking funds, and gathering information from customers—undertaken to different degrees, in different order, and at different points in time, by different firm founders (Gartner, 1985). This cross founder variation in the firm organizing process raises the question: Does the timing of founders' organizing activities influence the survival of new ventures?

The prior literature has offered three different arguments for the effect of firm organizing activities on the survival of new ventures: (1) the institutional theoretic strand of evolutionary theory argues that new venture survival is enhanced by activities to make new ventures appear reliable and accountable, thereby increasing the legitimacy of the organizing effort Hannan and Freeman, 1984, Meyer and Rowan, 1977; (2) the social relationship school of evolutionary theory argues new venture survival is enhanced by activities to establish relationships with external stakeholders, thereby overcoming the liability of underdeveloped social ties between new ventures and their external stakeholders Stinchcombe, 1965, Stuart et al., 1999; and (3) the Schumpeterian strand of evolutionary theory argues that new venture survival is enhanced by obtaining control over and recombining resources in a way superior to that of established organizations Nelson and Winter, 1982, Schumpeter, 1934.

Unfortunately, the literature has not yet considered whether one of these categories of organizing activities should precede another (Carroll and Hannan, 2000). As Hannan and Freeman (1989, pp. 148–149) explain: “the founding process can be seen to consist of a series of subprocesses including: 1. initiation, 2. resource mobilization, 3. legal establishment, 4. social organization 5. operational start-up. We suspect that the dynamics of these sub-processes vary in important ways among organizational forms, and we doubt that there is a universal sequence of sub-processes.”

However, firm founders lack the cognitive capacity to undertake all firm organizing actions simultaneously Gifford, 1992, Simon, 1976. Thus, firm founders will vary as to whether they first engage in actions that generate legitimacy, develop social ties with stakeholders, or recombine resources. We argue that even if firm founders are unaware of the relative efficacy of undertaking firm organizing activities at particular times, undertaking legitimating activities should be the first step in the firm organizing process because obtaining legitimacy is a necessary precondition to initiating social ties with stakeholders and obtaining and recombining resources.

To determine if an initial focus on legitimating activities enhances the survival of new ventures, we analyze a unique dataset capturing the life histories of 223 new ventures initiated by Swedish firm founders in the first 9 months of 1998, and followed over the subsequent 30 months. Controlling for a variety of factors that capture the effects of human capital, the venture opportunity, and the industry sector, we show that (1) undertaking activities to obtain legitimacy with external stakeholders reduces the hazard of venture disbanding during the first 30 months of life and (2) undertaking activities to obtain legitimacy with external stakeholders increases the hazard of undertaking activities to overcome the liability of underdeveloped social ties with external stakeholders and to recombine resources. The paper proceeds as follows: The next section develops the theoretical framework of the paper and generates specific hypotheses. The third section describes our methodology. The fourth section presents the results. The fifth section provides a discussion.

Section snippets

Theoretical development

When entrepreneurs found new firms, they organize. Organizing involves establishing the set of routines and structures that support a goal-directed, boundary-maintaining collective system of activities (Aldrich, 1979). In contrast to much of the static description of organization theory, organizing is a process not a state (Katz and Gartner, 1988). Over a period of several months, or even years, new firms emerge as firm founders engage in activities such as writing a business plan, buying

Design and sample

Empirically evaluating the effect of founders' actions on the survival of new ventures has been problematic because reliable evidence has been difficult to gather (Katz and Gartner, 1988). Archival sources generally do not record the existence of new ventures that fail very early in their existence, biasing efforts to identify new ventures from lists of new firms Aldrich et al., 1989, Katz and Gartner, 1988. Consequently, most researchers begin their investigation of new ventures at the point

Results

The sample we explore consists of new ventures pursuing a variety of opportunities. Fifteen percent of the sample pursuing manufacturing opportunities, 37% pursuing service opportunities characterized by a high level of knowledge (e.g., software), and 48% pursuing an opportunity in low-technology service industries. More than half of the sample, 58%, reported that their main customers would be other businesses. With regards to the human capital of the start-up team, 42% of sample reported that

Discussion

We explained that different strands of prior evolutionary research emphasize the importance of three different foci for activities in new ventures: The creation of social ties with external stakeholders, the establishment of external legitimacy, and the creation of routines to transform resources. We argued that different founders choose different activities on which to focus their efforts at different points in time. We argued that new ventures would be selected for survival if the firm

Conclusion

In this paper we overcome the methodological obstacles to the examination of the life histories of new ventures. By tracking a random sample of 223 Swedish new ventures initiated in the first 9 months of 1998 over time, we explore which new ventures disband during the first 30 months. We find that undertaking activities to generate legitimacy reduces the hazard of venture disbanding during the first 30 months of a venture's life and that generating legitimacy with external stakeholders is an

Acknowledgements

Both authors contributed equally to the writing of this paper and are listed alphabetically. The research design owes an intellectual debt to the Panel Study of Business Start-ups undertaken by the Entrepreneurial Research Consortium, a temporary voluntary association of more than 30 U.S. and non-U.S. universities. The study was financed by the Knut and Alice Wallenberg Foundation, the Swedish Foundation For Small Business Research, and the Swedish National Board for Industrial and Technical

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