Building new venture legitimacy for resource mobilisation

Abstract

The process of early-stage new ventures building legitimacy for resource mobilisation is explored in this research. Early-stage new ventures face high levels of uncertainty, resource constraints, and the liability of newness and smallness. Consequently, it is challenging for resource holders, such as potential investors and customers, to mobilise resources to a new venture and for new ventures to mobilise resources from resource holders.

New ventures need to build legitimacy and cross legitimacy thresholds to mobilise resources from resource holders. A legitimacy threshold is a critical decision point where, as a result of their interaction with the new venture, resource holders take action to mobilise their resources for a new venture. After crossing a legitimacy threshold, a new venture can achieve further gains in legitimacy and resources. Existing literature has yet to adequately explain the process through which early-stage ventures build legitimacy thereby mobilising resources.

This research aims to understand the process of crossing legitimacy thresholds. The research question is: How do new ventures build legitimacy for crossing legitimacy thresholds thereby mobilising resources? Case studies of two early-stage new ventures are presented to explore how the process of building legitimacy unfolds and the underlying mechanisms that drive that process.

The findings shed light on the process of building legitimacy: rather than being 'on' or 'off', legitimacy is co-created through repeated interactions between resource holders and new ventures. Repeated interaction enables resource holders to accumulate knowledge about a new venture and decrease the level of uncertainty and equivocality, thereby enabling legitimacy thresholds to be crossed.

We find that potential customers and investors commit their resources in increments, which increase in size as knowledge is accumulated, and relationships are built between the two parties. However, because of differing institutional logics and tolerance of uncertainty, the time taken for customers and investors to build legitimacy with a new venture is different. Potential customers take much longer than potential investors because failure of a new venture is an inherent part of investors' business model, while customers have zero tolerance for failure in their purchasing decisions.

In the face of irreducible uncertainty, trust explains why potential customers and investors take action to mobilise resources. Trust consists of knowledge and willingness to suspend uncertainty to enable action. Resource holders momentarily suspend their uncertainty when making decisions to act to mobilise resources and continue their interaction with a new venture. Resource holders transfer resources to a new venture when the level of uncertainty decreases to a level that they are willing to bear.

A model of new ventures building legitimacy for crossing legitimacy thresholds is developed that combines the cognition and action of resource holders in mobilising resources. This is a unified model as it applies to both how customers and investors evaluate new venture legitimacy and decide whether a new venture has crossed a legitimacy threshold, thereby mobilising their resources. It is the first model that explains how both customers and investors co-create new venture legitimacy with a new venture. Show more