What makes a startup legitimate?
What makes a startup legitimate and successful? It’s a question we ask ourselves a lot at Barrington Edge. Is it the team or is it the product? Is it their advisors, or perhaps whether they secure enough funding? Is it pure luck and market timing, or a combination of all the aforementioned elements?
Startups face many hurdles, but being the new kid on the block is one of the greatest. It’s what Arthur Stinchcombe referred to as “the liability of newness.” To be sure, being new does have its advantages, and startups are often quick to point to their “first mover advantage,” or how they are a “category creator,” but leveraging these advantages can sometimes be lost in the nascency of the venture and innovation. Being new presents risks for both the innovator, and the first adopters of the innovation.
Niccolo Machiavelli, writing in 1513, described the risks the innovator faces, saying;
“There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new order of things. . . .Whenever his enemies have the ability to attack the innovator, they do so with the passion of partisans, while the others defend him sluggishly, so that the innovator and his party alike are vulnerable.”
So how can startups hedge against the risks of being new? In 2008, a landmark study was published, which examined the effects and rewards of legitimacy for new ventures. Legitimacy is admittedly a slippery concept, but the study provides a helpful definition; “a generalized perception or assumption that the actions of an entity are desirable.” The authors identified six legitimizing actions and studied those actions against the stock market gains made by all products introduced by public firms in the U.S. biotechnology industry from 1982–2002. The study showed that legitimizing actions affect stakeholder confidence in new ventures and in particular, affect their ability to introduce products successfully. Let’s briefly examine these six actions.
Rao, Raghunath Singh, et al. “The Fruits of Legitimacy: Why Some New Ventures Gain More from Innovation Than Others.” Journal of Marketing, vol. 72, no. 4, 2008, pp. 58–75.
The oldest trick in the book – riding the coattails of someone else’s success. If you don’t have your own independent credibility, one way to legitimize your startup is to form an alliance with an established brand or organization. The partnership loans legitimacy, but the fact that an established and successful organization is willing to engage with you and share their resources, signals to others they’ve identified your potential.
Internal legitimacy is golden ticket for any startup, and thankfully, this form of legitimacy is one that can be developed, even if you don’t already have it intrinsically. For many early-stage startups, that internal legitimacy will have to be coached and nurtured, and it’s essential, because while alliances can lend some legitimacy shade, at the end of the day investors and customers alike are buying into the legitimacy of your company and team.
Success begets success. In other words, you have the track record of launching other successful innovations, which suggests that you have the experience and know-how to do it again. Perhaps even more importantly, the mistakes and lessons of your other ventures will accelerate and inform this one.
Startups in emerging industries must prove to investors and customers that they understand and can work with, as well as incorporate the latest scientific ideas in their respective fields. Often, this takes the form of having scientists and engineers as part of the founding team, but if it doesn’t, an alliance becomes extremely important.
Startups need to convey to their stakeholders that not only can they build a cutting-edge product or service, but that they can market and commercialize that product. Executives and management with experience in customer discovery and commercialization will improve stakeholder’s perceptions of the likely success of the startup.
Just like the real estate maxim, “location, location, location,” physical location is also important for startups. The ecosystem and cluster accessible to the startup provides legitimacy, especially for early-stage companies. For example, an ocean tech startup in Utah doesn’t have nearly as much legitimacy as an ocean tech startup in Halifax, Canada, where there is a strong ecosystem of companies, researchers and resources for such ventures.
The strategies and actions of gaining legitimacy are not stand-alone solutions and work best in concert with one another. Successful startups who overcome the liability of newness often develop a legitimizing strategy that combines all six actions. If you are a founder, you already know how many competitive pressures you face. Positioning your startup for the greatest possible legitimacy could be the difference between your success and failure.
Ian Whytock is Manager of Strategic Initiatives at Barrington Edge, a strategy and innovation consultancy which supports the development and scaling of early-stage and growth-stage companies. You can contact him at firstname.lastname@example.org