A New Venture's Cognitive Legitimacy: An Assessment by Customers

Many legitimacy problems associated with new ventures appear to stem from a lack of customers' knowledge and understanding of the new venture. Of particular concern to entrepreneurs is cognitive legitimacy. The findings of this article suggest that customers appear to have a preference for greater rather than lesser information about a new venture's product, organization, and management (holding the content of that information constant). Furthermore, customers appear to use a contingent decision policy. For an independent startup business that is perceived as new on all three dimensions; priority should be given to building customer knowledge in the product, followed by building customer knowledge in the organization. Less attention should be given to building the customer's knowledge in the management team, although such actions still will build cognitive legitimacy. Introduction The number of new ventures launched in the U.S. has grown rapidly from about 600,000 per year in the 1970s to approximately 3.5 million per year in 1996 (Timmons 1999). A more recent report estimates that there are over 7.3 million startup efforts under way at any given time (Zacharakis et al. 1999). These new, small and expanding firms generate virtually all new jobs and also generate 50 percent of all innovations and 95 percent of all radical innovations (Timmons 1999; Vesper 1996). However, new ventures fail at an alarmingly high rate. Twenty-four percent of new ventures fail within their first two years and 63 percent within six years (Timmons 1999). While there is dispute over the rate of failure, it generally is acknowledged that new ventures fail at a greater rate than do established firms (Hannan and Freeman 1984; Singh et al. 1986; Stinchcombe 1965). In light of the economic benefit derived from new ventures, it is important to understand why new ventures fail. What is unique about new ventures (relative to established organizations) that results in this higher mortality risk? Business failure has been investigated by scholars using an industrial organization (10) strategy perspective (for example, see Ashforth and Gibbs 1990; Pfeffer and Salancik 1978) and also a sociological perspective (for example, see Singh et al. 1986; Stinchcombe 1965), among others. The sociological perspective is particularly interesting, as it specifically addresses the uniqueness of a venture's early stage of life and how this increases an organization's mortality risk (the probability of death due to failure). Some sociology scholars have suggested that a new venture's higher risk of failure is derived from the liability of newness, which includes the costs of learning new tasks (Singh et al. 1986; Stinchcombe 1965); the characteristics of the new product; the strength of conflicts regarding new organizational roles (Singh et al. 1986; Stinchcombe 1965); the presence or absence of informal organizational structures (Stinchcombe 1965); the stability of links with key stakeholders (Singh et al. 1986; Stinchcombe 1965); and the degree of organizational stability/inertia (Hannan and Freeman 1984). Sociologists argue that obtaining legitimacy is central to the process of survival of new organizations (Hannan and Freeman 1984). More generally, the higher mortality risk faced by newer ventures is due, in part, to a lack of external legitimacy (Singh et al. 1986). External legitimacy is conferred to a new venture when its actions are endorsed by powerful external collective actors (Stinchcombe 1968) and strong relationships are developed with external constituencies (Singh et al. 1986). Many legitimacy problems associated with a new venture appear to stem from a lack of knowledge and understanding (Aldrich and Fiol 1994; Hannan and Carroll 1992). By gaining legitimacy among its stakeholders (including suppliers, distributors, customers, employees, society, etc.), a new venture finds it easier to obtain access to resources and to respond to competitive threats (Baum and Oliver 1991) and to attract customers (Wiewel and Hunter 1985). …