Complementing capital: the role of status, demographic features, and social capital in founding teams' abilities to obtain resources.
This is an article about how the past can influence the present. I tackle the question of how peoples' prior work experiences, affiliations, and status may help or hinder them in subsequent career decisions. I analyze this question in the context of organizational founding, which requires the gathering of people and resources to create a new legal entity. Originally blank slates, the early identities of these start-up firms are molded by their founders' decisions and abilities to acquire resources. What resources organizations gather--and how quickly they obtain them--will depend in part on the combined characteristics of their founding teams' industry status, entrepreneurially relevant demographic features, and social capital.
Inherent to these relationships is the degree to which path dependence impinges on firms. Some researchers argue that founders have an imprinting effect on their firms, setting them on trajectories from which it is difficult to depart (Boeker, 1988), while others suggest that founders have no enduring influence on their firms because organizations are malleable, sensing and reacting to changes in the environment (Teece, Pisano, & Shuen, 1997). Rather than pose the question as either/or, I consider the extent to which founders may have lasting effects on their firms. To be sure, there are always charismatic leaders who have the ability to change the course of a firm (Ensley, Pearce, & Hmieleski, 2006), but who the entrepreneurial team is and the decisions that they make in the early years of an organization may both shape its subsequent characteristics and constrain its range of future options (Kimberly, 1980; Miles & Randolph, 1980). As Boeker (1988, p. 34, italics in original) stresses, "while organizations undergo modifications and display varying degrees of flexibility, they are cast at birth into a mold that is discernible in all subsequent stages of their life cycle."
I also aim to augment our current understanding of the ways in which founding teams can use their pasts to gain legitimacy for their firms. Legitimacy--that is, being seen as desirable and appropriate (Berger & Luckmann, 1966)--is "often a critical ingredient for new venture success" (Starr & MacMillan, 1990, p. 83). Organizations deemed legitimate are better able to attract the resources that they need (Stinchcombe, 1965). Yet where does an organization's initial legitimacy come from? Are all organizations judged to be legitimate based on the same criteria? I argue that initial legitimacy is transferred to the organization from the founding team. Moreover, I suggest that which features of the founding team's biography are used to determine an organization's legitimacy will depend primarily on the industry status of the founding team.
In sum, I formulate a framework that considers how an organization's initial legitimacy, and thus ability to obtain resources, is derived from the interaction between three main facets of its founders' backgrounds: industry status, entrepreneurially relevant demographic features, and social capital. As the arguments and illustrations suggest, the presence of one type of capital may reduce the dependence on or need for others. The framework has applicability to a variety of industries with uncertain outcomes resulting from high risk and/or long product cycles (e.g., nanotechnology, software, or hardware) or subjective quality (e.g., restaurants or movies).
The Challenge: Making the Best Bet on a Highly Uncertain Future
High-growth new ventures, particularly those based on novel unproven technologies, face significant hurdles in getting started (Aldrich & Fiol, 1994). These teams of individuals--and most are teams (Kamm, Shuman, Seeger, & Nurick, 1990)--must overcome the skepticism of outside resource providers in order to gain legitimacy and thus access to resources that are essential to building and growing a corporation (Singh, Tucker, & House, 1986). Of those attempting to found organizations, approximately half succeed in getting their companies started, and fewer than one in 10 grow their organizations (Reynolds & White, 1997). Companies founded on the commercialization of early stage technology are among those high-risk, high-reward firms most dependent on external sources for resources, such as employees, strategic alliances, and financial investments necessary for growth.
Unfortunately, nascent ventures usually lack track records providing evidence that their products and/or services are marketable and/or that they have the right management experience for their companies (Ostgaard & Birley, 1996). Thus, absent established predictors of success, outsiders must depend on "symbolic signals of competence" when deciding whether to invest in new organizations (Sine, Mitsuhashi, & Kirsch, 2006, p. 123). Often included in their evaluations are characteristics of the external environment, the market and industry, the technology, the type of business, and founding team (Muzyka, Birley, & Leleux, 1996). Of these, "venture capitalists' strongest belief is that it is the founding entrepreneur who determines much (though not all) of a venture's prospects for success" (Sandberg & Hofer, 1987, p. 25, italics in original). As such, the remainder of this article focuses on the role of the founding team in securing resources, with the caveat that any empirical test of the proposed framework should include controls for the other variables.
[FIGURE 1 OMITTED]
The Framework: Experience Leads to Opportunities
Why do some organizational founding teams receive resources when others do not? To answer this question, I develop a framework that teases apart the relationships between three facets of the founding team's prior experience--namely, industry status, entrepreneurially relevant demographic features, and social capital--and its organization's ability to gain legitimacy and thus resources. As demonstrated in propositions 1, 2a, and 3a in Figure 1, I follow previous studies and suggest that each of these factors is positively related to organizational legitimacy and thus resource obtainment. In the framework, initial organizational legitimacy, which cannot be tested directly, fully mediates the relationship between the characteristics of the founding team and the initial obtainment of organizational resources.
My framework differs from prior research, however, in two important ways. First, I consider industry status, entrepreneurially relevant demographic features, and social capital in conjunction with one another, whereas researchers in the past have primarily studied these factors in isolation or in pairs. Second, and more importantly, I argue that it is the combination of the three main factors that is critical. My focus on different types of factors as partial substitutes for one another differs from prior work that, with few exceptions (e.g., Boxman, de Graaf, & Flap, 1991), presumes different factors are additive. These key interaction effects are highlighted as propositions 2b, 3b, and 3c in Figure 1. Interactions 2b and 3b indicate that the strength of the positive relationships between the entrepreneurially relevant demographic features or social capital of the founding team and legitimacy is moderated by the team's level of industry status. Proposition 3c indicates that the strength of the positive relationship between social capital and organizational legitimacy is also moderated by the team's entrepreneurially relevant demographic features.
Legitimacy is a somewhat elusive, but widely used, concept in organizational research. Organizations that are legitimate are considered to have established their competency and the value of their business and its offerings, thus having an easier time securing needed resources (Meyer & Rowan, 1977; Pfeffer & Salancik, 1978). This relationship is highlighted in Figure 1 by the arrow and positive sign between organizational legitimacy and organizational resources. The box surrounding legitimacy is dashed to indicate that legitimacy cannot be tested directly and instead is most easily inferred through resource acquisition. The greater the initial resources obtained, the greater the initial legitimacy of the organization.
Building on Suchman (1995), Zimmerman and Zeitz (2002) focus specifically on the role of legitimacy in entrepreneurial firms. They identify four strategies--conformance, selection, manipulation, and creation--that organizations can use to build their regulatory, normative, and cognitive legitimacy. Among these, they identify conformity, with a focus on developing cognitive legitimacy, as the strategy that may be most beneficial to the newest of organizations. An organization can gain cognitive legitimacy by putting "forward the impression that its identity is such that it provides what is needed or desired and will be successful in the business domain in which it purports to operate" (Zimmerman & Zeitz, 2002, p. 420). As depicted in Figure 1, in the beginning an organization's identity, and therefore its legitimacy, is primarily based on the characteristics of its founding team. I investigate the relationship between each type of characteristic and organizational legitimacy in more detail below.
Status is the "esteem, respect, or approval that is granted by an individual or a collectivity for performances or qualities they consider above the average" (Goode, 1978, p. 7). There are three types of status. First, ascribed status refers to characteristics that cannot be changed, such as ethnicity and gender. Many studies that have contrasted large populations of self-employed to employed workers have considered the benefits or limitations of ascribed characteristics (Constant & Zimmermann, 2006).
The second type of status is affiliative, which is the benefit people receive from being connected with high-status institutions. Citing Domhoff (1967) and Mills (1958), D'Aveni (1989, p. 1127) argued that the inclusion of such a measure was based on the presumption "that association with elite universities creates more credibility and prestige than does association with less visible schools." He found that teams with higher status were less likely to face bankruptcy when compared with financially similar, but lower-status, firms.
Finally, the third type of status is achieved status, which results primarily from education and prior occupations. Riley (1979) found that employees of employers who knew their educational credentials were paid more than similarly skilled and educated employees whose employers did not know their educational credentials. In other words, employers paid a premium for education that exceeded the true productivity value gained from that education.
Regardless of whether the status is ascribed, affiliative, or achieved, the rewards to people with status are clear. Those with high status receive overt deference, gifts, hospitality, and services from others who have lower status. A high level of status also brings an "aura" of legitimacy and morality, the expectation of high performance, and a greater confidence in the abilities of those involved (Giordano, 1983).
Organizations can also both have and benefit from status. For example, young biotechnology firms that gained affiliative status from the "endorsement" of prominent strategic alliance partners and organizational equity investors went to initial public offering faster and earned greater valuations than firms that lacked such connections (Finkle, 1998; Stuart, Hoang, & Hybels, 1999). Similarly, Certo, Daily, and Dalton (2001) studied the initial public offerings of 748 companies across more than 50 different industries and found that the greater the achieved status of the boards of directors, the less under-pricing that occurred in the initial public offering. In Finkle's (1998) study, status was based on the presence of a sample generated list of the most active venture capitalists and lead underwriters, while in Stuart et al.' s (1999) study, it was based on the presence of a highly cited portfolio of biotechnology patents, and an established track record of working with and evaluating young companies in the industry. Certo et al. (2001) measured the achieved status of the board of directors as the total number of additional board seats held by the outside directors of the organization.
These studies, along with others, share an important feature. Namely, they take as given that some firms have high-status partners, while others do not and simply compare the results between the groups. There is an implicit assumption that nascent firms are too young to have developed their own status and therefore rely on the status of others to serve as a proxy for their own organizational legitimacy. Yet it is equally important to know which organizations are able to secure these high-status affiliations that serve as valuable corporate resources. Ruef, Aldrich, and Carter (2003) found that entrepreneurs with generally preferred ascribed characteristics had a greater ability to attract other team members when compared to those without these characteristics. If we extend this argument to the organization, it would suggest that the firms perceived to be of high status will be the most successful in attracting resources perceived to be the most valuable. Thus,
Proposition 1: As the status of the founding team increases, the firm's initial cognitive legitimacy and thus its initial likelihood of obtaining outside resources will increase.
Proposition 1 is displayed graphically in Figure 1. Source of organizational status. There are many ways in which an organization's status can be determined. Higgins and Gulati (2006) used the affiliative status of the top management team (based on the financial success of their past employers) to serve as a proxy for organizational legitimacy. Burton, Sorensen, and Beckman (2002) used the founding team's biographical background as proxy for the expected success of the new enterprise. Thus, the affiliative status of the founding team was transferred from the individual-to firm-level at the time of founding and served as the initial status for the organization. Burton et al. (2002) inductively measured the status of the founding teams in their geographically bounded, but multi-industry, sample. Organizations that "generated" many entrepreneurs were considered more prominent.
To gauge an organization's initial status, I argue that the most relevant measure is industry-specific and based on the features of the founding team that are deemed critical to expected success in the industry. These features may be the result of prior or current affiliations of founding team members to particular institutions, specific achievements that they have demonstrated, and/or ascribed characteristics of the team itself. Outside observers initially use the perceived quality of the industry-essential characteristics to attribute a level of status to the founding team. This categorization is particularly crucial where the uncertainty of the product, and thus the firm, is high.
The key point is that these factors will differ depending on the industry. For example, a law firm's success, in terms of both recruiting clients and future associates, is dependent on the affiliative status of the institutions from which its recent hires obtained their law degrees (Kim & Laumann, 2003). Among investment services firms, those companies that are viewed most favorably are those with the greatest number of analysts who have obtained achieved status by making the peer-nominated Institutional Investor's "All American Research Team" (Phillips & Zuckerman, 2001). Finally, in science-driven fields, achieved status is also important as the perceived scientific capability of the organization's employees and research partners is crucial to gaining resources (Darby, Liu, & Zucker, 1999). In each of these examples, the measure of status is highly specific to the industry and is of little relevance to the other industries highlighted. A founding team that is classified as high-status in one industry may be considered low-status in another industry.
In summary, one way that founding teams can gain organizational legitimacy is to highlight the industry-relevant status of their founding teams. Team-level industry status acts as a proxy for initial organizational-level industry status, and organizations with greater levels of industry status are expected to attract greater levels of resources. In the next two sections, I elaborate how lower-status organizations can also be successful in obtaining resources. To do so, they must capitalize on other features of their founding teams in order to augment the legitimacy of their firms.
The second method by which founding teams can increase the legitimacy of their organizations and thus the ability to gain resources is to conform to investors' mental models of what attributes are held by effective founding teams. In essence, the teams, through highlighting their entrepreneurially relevant demographic features, increase their organizations' cognitive legitimacy. Following Beckman, Burton, and O'Reilly (2007, pp. 149-155), I utilize the term demographic features instead of human capital because "demography theorizes about team composition and diversity in addition to the existence of any particular experience."
Previous industrial, management, and entrepreneurial experience are all important demographic determinants in one's success as an entrepreneur. Investors consistently consider industry experience to be a key predictor of new venture success (Hall & Hofer, 1993). Those with industry experience bring detailed knowledge about how the industry works, likely have a better understanding of customer demand, and may have previous experience growing a company in the industry (Boeker & Karichalil, 2002). Numerous studies have found support for the link between the founding team's prior industry experience and organizational performance. Examining a sample of high-technology firms founded in the Silicon Valley region of California, Cooper and Bruno (1977) showed that 80% of high-growth firms were in a similar market as the founder had been in previously. Feeser and Willard (1990) found similar results for a mostly California-based sample of computer firms.
Prior management experience is a second demographic feature viewed by venture capitalists as an important component of the founding team (MacMillan, Siegel, & Subba Narishma, 1985). Also important is having a diverse or complete skill set. An experienced CEO adds diversity to a technology-based team and conveys confidence to stakeholders that administrative tasks will be completed and organizational demands will be managed (Wasserman, 2003). More broadly, diverse teams have been found to have improved strategic decisions, increased ability to handle complex situations, and better long-term firm performance (Gartner, 1985; Kamm & Nurick, 1993; Murray, 1989).
Among Silicon Valley organizations founded between 1984 and 1994, those with prior management experience had better odds of receiving external funds at founding (Burton et al., 2002). Similarly, semiconductor organizations with experienced management formed more alliances, and those with heterogeneous teams had higher growth and faster product development (Eisenhardt & Schoonhoven, 1990, 1996; Schoonhoven, Eisenhardt, & Lyman, 1990). The level of prior management experience among founders of New York and New England technical ventures positively related to increased performance as did the completeness of founding team skills among West Coast electronic companies (Roure & Madique, 1986; Stuart & Abetti, 1990).
Prior founding experience is a fourth demographic feature considered beneficial to entrepreneurial teams. Many tasks associated with starting a new venture are unique to start-ups, tacit in nature, and can only be learned by doing (Shepherd, Douglas, & Shanley, 2000). The likelihood that inventors at the Massachusetts Institute of Technology founded a company based on their invention was greater when they had prior founding experience (Shane & Khurana, 2003), and the number of prior new ventures started by the CEOs of young technical ventures in the New York and New England region was significantly related to firm performance (Stuart & Abetti, 1990). Looking outside of the United States, Colombo and Grilli (2005) demonstrated that superior growth was correlated with prior entrepreneurial experiences among Italian firms.
A fifth demographic feature that potential resource providers view positively is prior joint work experience. Nahapiet and Ghoshal (1998) suggest that the creation of intellectual capital is increased through the shared language and vocabulary that comes from prior joint experience. In a study of work groups at a Midwestern contract research and development organization, teams with members who had previously worked on projects together completed their current projects faster than teams that did not have prior coworkers (Reagans, Zuckerman, & McEvily, 2004). Similarly, Eisenhardt and Schoonhoven (1990) demonstrated that joint work experience was positively related to organization growth in a sample of semiconductor companies. More generally, individuals who have worked together in the past and are willing to work together again probably have stable relationships. Therefore, it is less likely a key member of the group will leave because of personal conflicts.
In short, having a diverse skill set, and prior industry, management, founding, and joint work experience can all positively influence firms' early abilities to gain resources, form strategic alliances, and succeed in the long term. Taken together, I refer to this set of characteristics as entrepreneurially relevant demographic features because the highlighted qualities are important to entrepreneurship irrespective of industry. Further, while having more features is advantageous for the team, the added value of one factor versus another is difficult to discern. For example, it is beneficial to have a founding team with business, technical and financial experience--or a diverse skill set--regardless of whether the team is starting a biotechnology company or a semi-conductor firm. In the same way, people who have gone through the process of founding a company in the past will have a better idea of what is involved and will be beneficial in any founding situation. A team that has both a diverse skill set and prior founding experience should be better prepared than a team with just one of these skills. The added value of one factor versus another however is difficult to discern a priori. Thus,
Proposition 2a: The greater the number of entrepreneurially relevant demographic features among founding team members, the greater the firm' s initial cognitive legitimacy and thus its initial likelihood of obtaining outside resources.
Proposition 2a is illustrated in Figure 1. While I expect there to be a generally positive relationship between a higher number of entrepreneurially relevant demographic features and an organization's overall legitimacy, I also expect the founding team's level of industry status to play an important moderating role.
Following the norm is most beneficial to those in the middle. To explain the relationship between status and entrepreneurially relevant demographic features of founding teams, I draw on the work of Phillips and Zuckerman (2001), which advances a longstanding theory that there is an inverted U-shaped relationship between status and conformity. Conformity may entail certain behaviors, appearances, or attributes. For example, a teenager's peers will judge the coolness of his or her fashion choice, or firms will be scrutinized on the appropriateness of their service offerings. In turn, I argue that founding teams will be judged on the degree to which they appear to possess the characteristics required to successfully lead their new ventures.
Phillips and Zuckerman's key point is that the position on the status curve a person or organization occupies is not as important as the group to which she or he belongs. The institutions at the top of the hierarchy are secure in their spots and enjoy freedom to break the rules if they choose to do so. At the other end of the spectrum, the lowest-status individuals are also free to break the rules because they have little chance of advancement. In contrast, organizations in the middle find that competition is fierce, and must manage the fine balance between accepted and deviant activities or appearances. Thus, conformity to what is expected is most important for those who fall in the middle range of the status hierarchy. For example, Phillips and Zuckerman (2001) demonstrated that among law firms that introduced the low status practice of family law, only middle-status firms had a subsequent decrease in the quality of their new hires.
In the world of new venture creation, the highest industry status teams live off of their reputations, while the lowest industry status teams are deemed illegitimate from the beginning. Those middling in industry status, however, are scrutinized on the extent to which they look like a successful founding team. The more entrepreneurially relevant features they have the more likely they are to obtain resources. Thus,
Proposition 2b: Industry status will moderate the relationship between entrepreneurially relevant demographic features and the firm's initial cognitive legitimacy in an inverted U-shape such that the positive relationship between the two will be weaker at the lowest and highest levels of status.
Proposition 2b is displayed graphically in Figure 1. The pop-out box in the top right corner shows how the strength of the relationship between demographic features and organizational legitimacy varies as status increases. The flat tails at the lowest and highest levels of status reflect Phillips and Zuckerman's (2001) comment about those at the top and the bottom being secure in their place and therefore not gaining any advantage from conforming. For certain, there will be demographically strong highest and lowest industry-status founding teams, but the presence of these features will not significantly increase their organizational legitimacy.
In summary, a second way that founding teams can gain organizational legitimacy is to highlight the entrepreneurially relevant demographic features of their founding teams. Teams that resemble perceived successful teams will establish greater cognitive legitimacy and thus resources for their organizations. Moreover, this relationship will be most important for founding teams who fall in the middle of the industry status hierarchy. Thus, an organization with a moderate level of industry status, but a demographically strong founding team, is expected to obtain resources at a level comparable to higher industry status organizations, while one with a demographically weak founding team will face resource constraints similar to lower industry status teams. In the next section, I conclude the discussion of the framework depicted in Figure 1.
The third aspect of a founding team's background that influences its ability to obtain resources is its prior social connections, or social capital. Social connections are widely recognized as an important means through which organizations can acquire legitimacy (Aldrich & Fiol, 1994). For example, in a study of start-ups in Indiana, the main source of help in assembling resources were the entrepreneur's social networks (Birley, 1985). Similarly, among Russian entrepreneurs in the post-Soviet era, those with greater revenues and profits had numerous acquaintances and were able to use rich and powerful contacts to gather financial resources (Batjargal, 2003). All else being equal, the person who is socially connected to the community from which he or she wants to gain resources will more easily be able to obtain the desired goods. In short, personal social networks are often the most valuable asset that founders can provide for their emerging firms (Hansen, 1995).
Since a firm does not start with its own network, during the initial founding stages the social network of the founding team is analogous to the firm' s network (Hite & Hesterly, 2001). Powell et al. (1999) observed that intellectual and social ties formed as early as graduate school linked scientists across different organizational forms and facilitated collaboration. In addition, Burton et al. (2002) showed that founders who were formerly employed in well-connected firms were more successful at generating outside funding. Therefore, individuals may be able to directly capitalize on their prior work experiences to gain substantial economic benefits, measured by rates of growth, profitability, or survival (Podolny, 1993). Specifically,
Proposition 3a: As the number of organizations affiliated with members of the founding team increases, the firm's initial cognitive legitimacy and thus its initial likelihood of obtaining outside resources will increase.
Proposition 3a is illustrated in Figure 1. While I expect there to be a generally positive relationship between the increasing social capital of the founding team and its overall legitimacy, I also expect both the founding team's level of industry status and number of entrepreneurially relevant demographic features to play important moderating roles.
Relying on friends is most beneficial to those at the bottom. Although all people and organizations benefit from having social connections, Boxman et al. (1991) found that only when human capital was low did social capital play an important role in the income attainment of Dutch employees. In other words, "actors can sometimes compensate for a lack of financial or human capital by superior 'connections'" (Adler & Kwon, 2002, p. 21). For example, Starr and MacMillan (1990) highlighted how a Cuban-American entrepreneur who lacked a reputation in the U.S. fashion industry was able to capitalize on the resources and strategic location of a college classmate to establish legitimacy through association. Similarly, Kalnins and Chung (2006) found that the least prosperous immigrant entrepreneurs in the Texas lodging business benefited the most from their connections to better established ethnic peers. Turning to the social capital of founding teams I suggest,
Proposition 3b; Industry status will moderate the relationship between social capital and the firm's initial cognitive legitimacy such that the strength of positive relationship between the two will diminish as the level of status increases.
Proposition 3c: The entrepreneurially relevant demographic features of the founding team will moderate the relationship between social capital and the firm's initial cognitive legitimacy such that the strength of the positive relationship between the two will diminish with a higher number of demographic features.
As with the other propositions, these relationships are graphically illustrated in Figure 1. The two pop-out boxes at the bottom of the diagram show the changing strength of the relationship between the variables mentioned. The same argument about diminishing returns (and thus flattened tails) that was utilized in proposition 2b applies here. In addition, the same argument about the benefit versus the presence of these factors applies for social capital as it did for entrepreneurially relevant demographic features. Higher industry status and demographically strong founding teams are not precluded from relying on past social relations and likely do so, particularly if those prior affiliations are the most appropriate organizations with which to partner.
Taken together, the three sets of propositions provide a refined way of considering how industry status, entrepreneurially relevant demographic features, and social capital work in concert. I argue that organizations, along the industry status continuum, capitalize on different types of features of their founding teams' biographies in order to establish cognitive legitimacy and thus resources. Overall teams at the upper end of the status spectrum live off their reputations or great expectations for success, and obtain more outside resources than middle or low industry-status teams. While the venture teams that fall in the middle range of the status hierarchy are not taken for granted, they can augment their overall legitimacy by highlighting the entrepreneurially relevant demographic features of their founding teams. Those who are most successful should establish a level of legitimacy that is comparable to higher-status organizations. Finally, the lowest-status organizations as well as the demographically weak, middle-status organizations will use their social networks to build their organizations' legitimacy either through the process of endorsement or the direct solicitation of resources from members of their networks. In summary, an organization's initial "stock" of legitimacy may be composed of industry status alone, or industry status augmented by entrepreneurially relevant demographic features and/or social capital of the founding team.
Examples from the Biotechnology Industry
Founding teams that understand the expectations for their industries and then play to their appropriate strengths will increase their probability of obtaining resources. Figure 2, which is meant to be illustrative, highlights the likelihood of firms obtaining resources based on the characteristics of their founding teams. In this stylized version, decisions are black and white. If the founding team meets the criteria, they obtain their desired goods; if they do not, then they also do not secure sufficient resources. In reality, of course, decisions are rarely black and white. Thus, landing in either box should be seen as increasing or decreasing one's probability of resource obtainment rather than guaranteeing it. To connect this figure more clearly to Figure 1, I indicate which proposition has been used to determine the outcome at each decision point that leads to a final yes/no answer. For example, if a founding team has a high level of industry status, then the decision to invest may be made on that basis alone, supporting proposition 1. Put differently, investors/partners make up their minds to invest before they have evaluated the demographic features and social connections of the team, thus highlighting the interactions between status and the other variables described in propositions 2b and 3b. If the founding team is not among the highest status organizations in its industry, potential resource providers will evaluate the team on its entrepreneurially relevant demographic features and/or its social connections.
[FIGURE 2 OMITTED]
To further build on this stylized portrait, I draw on several founding stories that illustrate the resource acquisition abilities of biotechnology founding teams with different types of career histories. Biotechnology is an excellent industry in which to test this framework because of the general lack of objective criteria (e.g., a prototype) on which to judge a company at the time of founding. The stories and quotes that are described anonymously come from confidential interviews that I conducted with a small number of biotechnology founders in the San Francisco bay area in June 2002 and the Boston area in June 2003. These examples were selected because each succinctly describes a different pathway through the flowchart.
In the first example, an academic founder, who was tenured at a top university in the Boston area, described how he was recruited by venture capitalists:
In the late 1980s ... it seemed that the venture capital community, having satisfied itself that molecular biology could be the basis for a company, discovered the brain. And I, and probably many other people who work on the brain, began to be visited by [venture capitalists]. 'How would like to have a company?' I had never thought about it and I really had no experience with it.
Similarly, in 1976, Bob Swanson, a young enthusiastic employee at the venture capital firm Kleiner-Perkins, recruited Herb Boyer to found Genentech. Boyer was a distinguished professor from University of California at San Francisco and one of the researchers behind the discovery of gene splicing. Mapping these scenarios onto Figure 2, both founding teams met the hurdle of having a high level of industry status, which in biotechnology is achieved status in the form of perceived scientific ability (Audretsch & Stephan, 1996). Therefore, the decision to invest and collaborate was clear, despite the overall lack of management and industry experience in each of the two cases described. This process of venture capitalists actively recruiting the highest-status technologists occurs in other technology-based industries as well (Timmons & Bygrave, 1986).
In contrast to the aforementioned academics, Lisa Conte, the founder of Shaman Pharmaceuticals, started her company at the bottom end of the industry status spectrum. Not only did she lack an established track record of scientific achievements, she did not have an advanced scientific degree. She did, however, have close ties to venture capital and biotechnology consulting firms with whom she had worked previously. In Figure 2 she failed the first two checkpoints, but was able to capitalize on her former relations to secure early financing for her firm (Conte, 1997; Glater & Barnum, 1992).
In-between the Genentechs and Shaman Pharmaceuticals of the industry are companies whose founding teams have some level of scientific ability, but the perceived quality of this ability is more difficult to determine as compared to their higher-status counterparts. As a result, groups that fall in the middle-level of the industry-status hierarchy are scrutinized on the extent to which they conform to the demographic features of generically successful founding teams. To that end, it is not surprising that a career scientist attempting to found a firm on his own experienced substantial difficulty in searching for funds.
I spent the latter half of '98 and the first part of '99 developing the idea, writing a business plan, filing patent applications, and then going out and talking to investors in the traditional sense.... I had one consultant who was helping me with a business plan, with investor introductions, and presentations. I did that through the first quarter of '99. At that point, we had no success with the investors. So, I decided to back off from raising money, and basically did consulting work through [the firm he had founded] ... [In early 2002 I] finished going through 30 or 40 venture firms,... who I identified as probably being interested in this kind of stuff. Unfortunately, again, no investors came out at the other end.
This middle industry-status founder was a career scientist who held a PhD, but his abilities were not taken for granted. Furthermore, he lacked almost all of the demographic features thought to be associated with winning founding teams. He also did not have a set of social connections that he could capitalize on to overcome his lack of entrepreneurially relevant demographic features. Therefore, he was unsuccessful in his initial attempts to secure resources for his firm.
Contrast this scientist's lack of success, to another scientist who paired up with a friend who had previously founded two companies, albeit in different industries. As the friend explains, "I said, 'Sure I'll help you with this,' I'll lend my expertise, my consulting expertise and everything to this project, and so we started the company. Right away I put the attorneys in place, and the accountants, and kind of built the structure that I was used to building." The pair was successful in closing a seed round of financing through a combination of individuals who had invested in the friend' s prior firms and new investors. The new investors judged the team on the combination of their industry status and entrepreneurially relevant demographic features (one member had industry experience, the other had founding experience, and there was a diversity of skills between the two).
Discussion and Implications
The framework advanced in this article contributes to the field of technological entrepreneurship by taking three commonly studied aspects of entrepreneurial teams and consolidating them into a single argument. The dependent variable in the framework proposed is the acquisition of resources, whether it is employees, strategic partners, and/or financial assistance. Further, it is these types of resources that are particularly important to the survival and growth of technology-based new ventures, as opposed to other types of start-ups, which tend to be more commonly bootstrapped. The independent variables have all been used in prior research, thus many opportunities exist to empirically test this model against a variety of resources, such as initial funding, acquisition of employees, and formation of strategic partnerships. Of course, any empirical test of the model should control for other factors, such as technology and type of business, that also influence organizational legitimacy.
In recent years, organization theorists have devoted substantial effort to studying the role that top management teams play in firm outcomes and to companies' increased abilities to attract desired resources when they have prestigious partners (Davis & Greve, 1997; Michel & Hambrick, 1992). Few studies, however, have stepped back and asked whether there are events that lead to a diverse management team or the ability to attract high status partners. I suggest here that much of what is known about firms in the present can be traced back to the characteristics of their founders. Specifically, I draw on sociological literature to demonstrate how something as simple as the transfer of founding team biographies to an organization's initial level of legitimacy can have an enduring effect on a firm's ability to obtain resources.
Once formed, first impressions are often difficult to change (Dougherty, Turban, & Callender, 1994). For example, Melton (1968) showed that rewards and recognition accrue more rapidly in academic science to renowned researchers than to less well-known scientists doing similar work. Furthermore, the process was one of accumulative advantage: a young scientist would get a break, perhaps in form of sponsorship from a preeminent scientist. Freed to do more research, because grants allowed the scientist to buy out teaching time, the young scientist was able to progress more rapidly than his peer who did not receive sponsorship. In the corporate world, high-status organizations frequently maintain their high ranking because people want to work for these corporations. Thus, they are able to recruit abler and more productive employees than their lower-status counterparts (Goode, 1978). Previous research has found ample support for this pattern of "the rich getting richer" at the individual, university, and even national levels (Allison & Stewart, 1974; Bentley & Blackburn, 1990; Bonitz, Bruckner, & Scharnhorst, 1997; Owen-Smith, 2003).
Organizations that begin their lives resource-rich may also experience an extended period of adolescence (Fichman & Levinthal, 1991). Bruderl and Schussler (1990) use the term "liability of adolescence" to suggest that just as children are evaluated less critically than adults, new organizations may also be given the benefit of the doubt with respect to performance. Moreover, they found that in a sample of German companies the length of an organization's adolescence was positively correlated to its initial endowment of resources.
These points emphasize how the initial composition of the founding team can set the organization on a particular trajectory that will have long-term benefits. Organizations with strong founding teams will be born with greater levels of legitimacy, which will allow them to gain larger initial endowments. Armed with these resources, they will be able to attract talented employees and partners, and use their extended period of adolescence to solve complex problems and develop saleable products or services. When the time comes for them to return to the market for resources, the progress that they have made may be greater than their lower industry status counterparts and they once again will be rewarded accordingly. For example, among 134 companies founded on inventions from the Massachusetts Institute of Technology, entrepreneurial teams with both direct and indirect connections to venture investors were most likely to receive funding as well as to survive. Furthermore, the single most important determinant of whether the firm went public was whether it had successfully received venture funding (Shane & Stuart, 2002). Thus, characteristics of the founding team were important predictors of initial investment, which in turn was an important predictor of whether the company had an initial public offering.
Despite the importance of history in determining an organization's level of legitimacy (Suchman, 1995), few researchers have considered the existence of important underlying factors. In this paper, I suggested that a company' s legitimacy originates in large part from the past accomplishments and achievements of its founding team. This is particularly true for companies based on early stage technologies, where both the technical and commercial successes of their products are largely unknown at the time of founding.
The unquestioned legitimacy of the highest industry-status teams implies that they are able to draw on their prior reputations, while those lacking this benefit must either capitalize on different features of their group or demonstrate their abilities anew. The lowest industry-status firms are deemed illegitimate from the outset and therefore have difficulty securing resources. Freed from expectations, however, low industry status groups may choose novel or unconventional strategies, or depend on references (their social capital) to speak of their abilities. Finally, in addition to low and high industry status firms, some organizations are neither part of the "in" nor "out" group. Phillips and Zuckerman (2001) suggest that these companies are "middling in status" because they are located in a zone where competition is fierce and legitimacy cannot be taken for granted. For this group, increasing their legitimacy may mean highlighting their entrepreneurially relevant demographic features and if that is not sufficient, also emphasizing their social connections. Thus, it is the combination of the founding team' s industry status, entrepreneurially relevant demographic features, and social capital that determines its initial level of cognitive legitimacy.
More broadly, the framework developed here builds upon the existing literature and addresses two issues important to entrepreneurial research: the transfer of individual-level characteristics to the firm level and the potential short- and long-term benefits of that initial transfer of legitimacy.
This research was funded in part by the SSRC, Program on the Corporation as a Social Institution, and the Ewing Marion Kauffman Foundation Emerging Scholars Initiative.
The author would like to thank Woody Powell and the members of the Strategic Organization and Networks Group, Mark Mortensen, two anonymous reviewers, and attendees of research seminars at HEC, Queen's University, Stanford University, University of Alberta, University of Victoria, and Wharton for comments on earlier versions of this paper and/or framework.
An earlier version of the framework described in this paper has previously been presented at the 2004 Babson Kauffman Entrepreneurship Research Conference (Scotland, U.K.) and the 2005 USASBE Meeting, Kauffman Dissertation Fellows Ceremony (Palm Springs, CA).
Adler, P.S. & Kwon, S. (2002). Social capital: Prospects for a new concept. Academy of Management Review, 27, 17-40.
Aldrich, H.E. & Fiol, C.M. (1994). Fools rush in? The institutional context of industry creation. Academy of Management Review, 19, 645-670.
Allison, P.D. & Stewart, J.A. (1974). Productivity differences among scientists: Evidence for accumulative advantage. American Sociological Review, 39, 596-606.
Audretsch, D.B. & Stephan, P.E. (1996). Company-scientist locational links: The case of biotechnology. American Economic Review, 86, 641-652.
Batjargal, B. (2003). Social capital and entrepreneurial performance in Russia: A longitudinal study. Organization Studies, 24, 535-556.
Beckman, C.M., Burton, M.D., & O'Reilly, C. (2007). Early teams: The impact of team demography on VC financing and going public. Journal of Business Venturing, 22, 147-173.
Bentley, R. & Blackburn, R. (1990). Changes in academic research over time: A study of institutional accumulative advantage. Research in Higher Education, 31, 327-353.
Berger, P.L. & Luckmann, T. (1966). The social construction of reality. New York: Doubleday.
Birley, S. (1985). The role of networks in the entrepreneurial process. Journal of Business Venturing, 1, 107-111.
Boeker, W.P. (1988). Organizational origins: Entrepreneurial and environmental imprinting at the time of founding. In G.R. Carroll (Ed.), Ecological models of organizations (pp. 33-51). Cambridge, MA: Ballinger Publishing Company.
Boeker, W.P. & Karichalil, R. (2002). Entrepreneurial transitions: Factors influencing success. Organization Science, 14, 149-172.
Bonitz, M., Bruckner, E., & Scharnhorst, A. (1997). Characteristics and impact of the Matthew effect for countries. Scientometrics, 40, 407-422.
Boxman, E.A.W., de Graaf, P.M., & Flap, H.D. (1991). The impact of social and human capital on the income attainment of Dutch managers. Social Networks, 13, 51-73.
Bruderl, J. & Schussler, R. (1990). Organizational mortality: The liabilities of newness and adolescence. Administrative Science Quarterly, 35, 530-548.
Burton, M.D., Sorensen, J.B., & Beckman, C. (2002). Coming from good stock: Career histories and new venture formation. In M. Lounsbury & M.J. Ventresca (Eds.), Research in the sociology of organizations (Vol. 19, pp. 231-264). Oxford: JAI Press.
Certo, S.T., Daily, C.M., & Dalton, D.R. (2001). Signaling firm value through board structure: An investigation of initial public offerings. Entrepreneurship Theory. and Practice, 26(2), 33-51.
Colombo, M.G. & Grilli, L. (2005). Founders' human capital and the growth of new technology: A competence-based view. Research Policy, 34, 795-816.
Constant, A. & Zimmermann, K.F. (2006). The making of entrepreneurs in Germany: Are native men and immigrants alike? Small Business Economics, 26, 279-300.
Conte, L.A. (1997). Shaman Pharmaceuticals [SEC 10-K Form]. South San Francisco. Available at http:// www.sec.gov/edgar.shtml.
Cooper, A.C. & Bruno, A.V. (1977). Success among high-technology firms. Business Horizons, 20, 16-22.
D'Aveni, R.A. (1989). Dependability and organizational bankruptcy: An application of agency and prospect theory. Management Science, 35, 1120-1138.
Darby, M.R., Liu, Q., & Zucker, L.G. (1999). Stakes and stars: The effect of intellectual human capital on the level and variability of high-tech firms' market values. National Bureau of Economic Research Working Paper 7201. Cambridge, MA: NBER. Available at http://www.nber.org/papers/w7201, accessed 11 May 2007.
Davis, G.F. & Greve, H.R. (1997). Corporate elite networks and governance changes in the 1980s. American Journal of Sociology, 103, 1-37.
Domhoff, G.W. (1967). Who rules America? Englewood Cliffs, NJ: Prentice-Hall.
Dougherty, T.W., Turban, D.B., & Callender, J.C. (1994). Confirming first impressions in the employment interview: A field study of interviewer behavior. Journal of Applied Psychology, 79, 659-665.
Eisenhardt, K.M. & Schoonhoven, C.B. (1990). Organizational growth: Linking founding team, strategy, environment, and growth among U.S. semiconductor ventures, 1978-1988. Administrative Science Quarterly, 35, 504-529.
Eisenhardt, K.M. & Schoonhoven, C.B. (1996). Resource-based view of strategic alliance formation: Strategic and social effects in entrepreneurial firms. Organization Science, 7, 136-150.
Ensley, M.D., Pearce, C.L., & Hmieleski, K.M. (2006). The moderating effect of environmental dynamism on the linkage between entrepreneur leadership behavior and new venture performance. Journal of Business Venturing, 21, 243-263.
Feeser, H.R. & Willard, G.E. (1990). Founding strategy and performance: A comparison of high and low growth high tech firms. Strategic Management Journal, 11, 87-98.
Fichman, M. & Levinthal, D. (1991). Honeymoons and the liability of adolescence: A new perspective on duration dependence in social and organizational relationships. Academy of Management Review, 18, 442-468.
Finkle, T.A. (1998). The relationship between boards of directors and initial public offerings in the biotechnology industry. Entrepreneurship Theory and Practice, 22(3), 5-30.
Gartner, W.B. (1985). A conceptual framework for describing the phenomenon of new venture creation. Academy of Management Review, 10, 696-706.
Giordano, P.G. (1983). Sanctioning the high-status deviant: An attributional analysis. Social Psychology Quarterly, 46, 329-342.
Glater, J. & Barnum, A. (1992, June 17). A walk in woods for biotech San Carlos firm enlists rain forest medicine men in drug search. The San Francisco Chronicle (San Francisco), B1.
Goode, W.J. (1978). The celebration of heroes: Prestige as a control system. Berkeley, CA: University of California Press.
Hall, J. & Hofer, C. (1993). Venture capitalists' decision criteria in new venture evaluation. Journal of Business Venturing, 8, 25-42.
Hansen, E.L. (1995). Entrepreneurial networks and new organization growth. Entrepreneurship Theory and Practice, 19, 7-20.
Higgins, M.C. & Gulati, R. (2006). Stacking the deck: The effects of top management backgrounds on investor decisions. Strategic Management Journal, 27, 1-25.
Hite, J.M. & Hesterly, W.S. (2001). The evolution of firm networks: From emergence to early growth of the firm. Strategic Management Journal, 22, 275-286.
Kalnins, A. & Chung, W. (2006). Social capital, geography, and survival: Gujarati immigrant entrepreneurs in the U.S. lodging industry. Management Science, 52, 233-247.
Kamm, J.B. & Nurick, A.J. (1993). The stages of team venture formation: A decision making model. Entrepreneurship Theory and Practice, 17, 17-25.
Kamm, J.B., Shuman, J.C., Seeger, J.A., & Nurick, A.J. (1990). Entrepreneurial teams in new venture creation: A research agenda. Entrepreneurship Theory and Practice, 14, 7-17.
Kim, H.H. & Laumann, E.O. (2003). Network endorsement and social stratification in the legal profession. Research in the Sociology of Organizations, 20, 243-266.
Kimberly, J.R. (1980). The life cycle analogy and the study of organizations: Introduction. In J.R. Kimberly, R.H. Miles & Associates (Eds.), The organizational life cycle: Issues in the creation, transformation, and decline of organizations (pp. 1-14). San Francisco: Jossey-Bass Publishers.
MacMillan, I.C., Siegel, R., & Subba Narishma, P.N. (1985). Criteria used by venture capitalists to evaluate new venture proposals. Journal of Business Venturing, 1, 119-128.
Merton, R.K. (1968). The Matthew effect in science. Science, 159, 56-63.
Meyer, J.W. & Rowan, B. (1977). Institutional organizations: Structure as myth and ceremony. American Journal of Sociology, 83, 340-363.
Michel, J.G. & Hambrick, D.G. (1992). Diversification posture and top management team characteristics. Academy of Management of Journal, 35, 9-37.
Miles, R.E. & Randolph, W.A. (1980). Influence of organizational learning styles on early development. In J.R. Kimberly, R.H. Miles, & Associates (Eds.), The organizational life cycle: Issues in the creation, transformation, and decline of organizations (pp. 44-82). San Francisco: Jossey-Bass Publishers.
Mills, C.W. (1958). The power elite. New York: Oxford University Press.
Murray, A.I. (1989). Top management group heterogeneity and firm performance. Strategic Management Journal, 10, 107-114.
Muzyka, D., Birley, S., & Leleux, B. (1996). Trade-offs in the investment decisions of European venture capitalists. Journal of Business Venturing, 11, 273-288.
Nahapiet, J. & Ghoshal, S. (1998). Social capital, intellectual capital, and the organizational advantage. Academy of Management Review, 23, 242-266.
Ostgaard, T.A. & Birley, S. (1996). New venture growth and personal networks. Journal of Business Research, 36, 37-50.
Owen-Smith, J. (2003). From separate systems to a hybrid order: Accumulative advantage across public and private science at research one universities. Research Policy, 32, 1081-1104.
Pfeffer, J. & Salancik, G. (1978). The external control of organizations: A resource dependence perspective. New York: Harper & Row.
Phillips, D.J. & Zuckerman, E.W. (2001). Middle-status conformity: Theoretical restatement and empirical demonstration in two markets. American Journal of Sociology, 107, 379-429.
Podolny, J.M. (1993). A status-based model of market competition. American Journal of Sociology, 98, 829-872.
Powell, W.W., Koput, K.W., Smith-Doerr, L., & Owen-Smith, J. (1999). Network position and firm performance: Organizational returns to collaboration in the biotechnology industry. Research in the Sociology of Organizations, 16, 129-159.
Reagans, R., Zuckerman, E., & McEvily, B. (2004). How to make the team: Social networks vs. demography as criteria for designing effective teams. Administrative Science Quarterly, 49, 101-133.
Reynolds, RD. & White, S.B. (1997). The entrepreneurial process: Economic growth, men, women and minorities. Westport, CT: Quorum Books.
Riley, J. (1979). Testing the educational screening hypothesis. Journal of Political Economy, 87, 227-251.
Roure, J.B. & Madique, M.A. (1986). Linking prefunding factors and high-technology venture success: An exploratory study. Journal of Business Venturing, 1, 295-306.
Ruef, M., Aldrich, H.E., & Carter, N. (2003). The structure of founding teams: Homophily, strong ties, and isolation among U.S. entrepreneurs. American Sociological Review, 68, 195-222.
Sandberg, W.R. & Hofer, C.W. (1987). Improving new venture performance: The role of strategy, industry structure, and the entrepreneur. Journal of Business Venturing, 2, 5-28.
Schoonhoven, C.B., Eisenhardt, K.M., & Lyman, K. (1990). Speeding products to market: Waiting time to first product introduction in new firms. Administrative Science Quarterly, 35, 177-207.
Shane, S. & Khurana, R. (2003). Bringing individuals back in: The effects of career experience on new firm founding. Industrial and Corporate Change, 12, 519-543.
Shane, S. & Stuart, T. (2002). Organizational endowments and the performance of university start-ups. Management Science, 48, 154-170.
Shepherd, D.A., Douglas, E.J., & Shanley, M. (2000). New venture survival: Ignorance, external shocks, and risk reduction strategies. Journal of Business Venturing, 15, 393-410.
Sine, W., Mitsuhashi, H., & Kirsch, D. (2006). Revising Burns and Stalker: Formal structure and new venture performance in emerging economic sectors. Academy of Management Journal, 49, 121-132.
Singh, J.V., Tucker, D.J., & House, R.J. (1986). Organizational legitimacy and the liability of newness. Administrative Science Quarterly, 31, 171-193.
Starr, J.A. & MacMillan, I.A. (1990). Resource cooptation via social contracting: Resource acquisition strategies for new ventures. Strategic Management Journal, 11, 79-92.
Stinchcombe, A.L. (1965). Social structure and organizations. In J.G. March (Ed.), Handbook of organizations (pp. 142-193). Chicago: Rand McNally & Company.
Stuart, R.W. & Abetti, P.A. (1990). Impact of entrepreneurial and management experience on early performance. Journal of Business Venturing, 5, 151-162.
Stuart, T.E., Hoang, H., & Hybels, R.C. (1999). Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44(2), 315-349.
Suchman, M.C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20, 571-610.
Teece, D.J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18, 509-533.
Timmons, J.A. & Bygrave, W.D. (1986). Venture capital's role in financing innovation for economic growth. Journal of Business Venturing, 1, 161-176.
Wasserman, N. (2003). Founder-CEO succession and the paradox of entrepreneurial success. Organization Science, 14, 149-172.
Zimmerman, M.A. & Zeitz, G.J. (2002). Beyond survival: Achieving new venture growth by building legitimacy. Academy of Management Review, 27, 414-431.
Kelley A. Packalen is an assistant professor of strategy and organization at Queen's School of Business, Queen's University.
Please send correspondence to: Kelley A. Packalen, Queen's School of Business, Kingston, ON, Canada K7L 3N6; tel.: (613) 533-3243; e-mail: email@example.com
|Printer friendly Cite/link Email Feedback|
|Author:||Packalen, Kelley A.|
|Publication:||Entrepreneurship: Theory and Practice|
|Date:||Nov 1, 2007|
|Previous Article:||Private enterprise growth and human capital productivity in India.|
|Next Article:||Assessing the relationship between human capital and firm performance: evidence from technology-based new ventures.|