Founding TMT Reputation and Investments in New Ventures: The Mediating Role of Idea Legitimacy

Abstract

This study examines the complex relation of new venture reputation and legitimacy on attracting investment capital. Many scholars infer legitimacy and reputation from past actions of a new venture’s founders or top management team (TMT) members. This study focuses on the sociopolitical legitimacy of a new venture’s business idea, which is based on the quality evaluation by industry experts on behalf of a government institution that provides subsidies. We find that the reputation of a new venture’s TMT enhances the sociopolitical legitimacy of a new venture idea. In addition, we find that the sociopolitical legitimacy of the new venture idea mediates the effect of TMT reputation on attracting investment capital. However, this is significant for the TMT member acting as chief technology officer (CTO) but not for the TMT member acting as chief executive officer (CEO). We study this in the empirical setting of the Italian film industry where we focus on the sociopolitical legitimacy assigned to a film script by a government commission of industry experts and how it mediates the relationship between the reputations of the two key TMT members - the director (or CTO) and producer (or CEO) - and attracting investments.