When the Going Gets Tough: New Venture Legitimacy Buffering to Mitigate Product Development Failure

Abstract

The introduction of its first product, serves as a critical milestone for a new venture, generating legitimacy and providing a route to earning revenue and market share that can enable the venture to evolve and grow. However, major product development failures can constitute a legitimacy crisis for new ventures. Although prior research has suggested that legitimacy can be acquired and maintained through different types of actions such as founder human capital, investor reputation, patenting and various kinds of inter-organizational relationships, research is yet to systematically investigate how the value and information conveyed by these different mechanisms could vary over the course of evolution of the venture. Hence our research question is, “How might new ventures maintain legitimacy in the face of product development failures and how might this vary over the course of the venture’s evolution?” We test and evaluate the effectiveness of different types of legitimacy buffers on a sample of 256 VC funded new ventures founded in the biotechnology industry over the period 1990 to 2012. By examining the course of development of the venture’s first product, we posit that the efficacy of legitimacy buffers used by ventures will vary based on the stage of development at which product failure occurs. We then theorize when and how different types of buffers protect a new venture from adverse legitimacy judgments imposed by financial resource providers in the face of significant failures. Our study makes important contributions to the literature on new venture legitimacy and entrepreneurial resource acquisition by providing a temporal perspective on the changing criteria for legitimacy judgements over the course of a new venture’s evolution.