Deficit of Legitimacy in Startups: Main Consequences and Strategic Solutions

The purpose of this study is to identify and discuss consequences and solutions related to the phenomenon of “liability of newness” among startups causing a deficit of legitimacy among new ventures. In the literature, the “liability of newness” or lack of legitimacy is related to three legitimation mechanisms: identity, associative, and organizational mechanisms. They account each for various consequences of a deficit of legitimacy among startups. In the literature on evolutionary theories, there are different opinions about how new ventures can solve this lack of legitimacy - the institutional position claims that new venture enhances their legitimation by activities that make them more reliable and accountable. The social relationship position argues that developing relationships with stakeholders represent a better way to increase the legitimacy of new ventures - lastly, the Schumpeterian position claims that new venture survivals depend on obtaining control over and recombining resources in a way superior to that of established organizations. With the aim of investigating the identified consequences of the legitimation mechanisms and strategic solutions discussed in the literature empirically, this study builds on findings from a survey conducted in late 2016 among 300 startups. All startups were part of a growth-enhancing incubation program in the region of Zealand, Denmark, and the data collected and methodology used in this survey form the background for analyzing evidence supporting the various position in the literature. The findings show that, in the short run, the entrepreneurs can compensate their deficit of legitimacy by relying on local networks and resources close to them, but in the longer term, they need to solve the lack of organizational legitimacy vis-à-vis established organizations and their surroundings to survive and achieve the necessary economic growth.