Entrepreneurial reputations
Violina Rindova and Antoaneta Petkova
The Importance of Entrepreneurial Reputations
Reputations have been identified as valuable in tangible assets (Barney, 1991; Dierickx and Cool, 1989), because they influence the willingness of stakeholders to exchange resources with a given firm. Reputations influence stakeholders’ will ingness to exchange resources with a firm be cause they reflect collective perceptions about the ability of the firm to create value for various stakeholders (Rindova and Fombrun, 1999). Be cause most entrepreneurial settings are charac terized by resource scarcity, entrepreneurial reputation is a particularly important asset that facilitates the growth and survival of a new ven ture (Aldrich, 2000). Even new ventures that are well funded by a sponsoring parent firm or strong financiers face the need to develop strong reputations because higher levels of re source commitments by initial stakeholders are accompanied by higher expectations for eco nomic returns. Therefore, building an entre preneurial reputation early in the life of a new venture can significantly improve its chances for success.
The development of entrepreneurial reputa tions is associated with a number of unique chal lenges, not encountered by established firms in an industry (Aldrich, 2000). Reputations are an outcome of social interactions that take place in an organizational field, including competing firms, their customers and suppliers, and insti tutional intermediaries engaged in dissemination of information about firms (DiMaggio and Powell, 1983; Fombrun, 1996; Pollock and Rin dova, 2003). In this environment, firms seek to attract the favor of stakeholders and gain access to the resources that these stakeholders control. Examples of strategic characteristics about which reputations convey information are the ability of a firm to produce high quality prod ucts (Shapiro, 1983), its willingness to defend its competitive position against new entrants (Clark and Montgomery, 1998), and its interest in ad dressing the concerns of multiple stakeholders (Fombrun and Rindova, 2000).
Stakeholders in turn seek to identify firms that best meet their needs and expectations in order to achieve their own exchange goals. To do so, stakeholders observe and evaluate the actions of firms and the performance of their products (Weigelt and Camerer, 1988) and form percep tions of the firms’ ability to create value. These perceptions define a firm’s reputation (Rindova and Fombrun, 1999).
New ventures, however, tend to lack even public awareness of their existence and offerings (Aldrich and Fiol, 1994; Rao, 1994). They also have rather limited history and performance records to guide stakeholders’ evaluations. Finally, in order to select a new venture as an exchange partner, stakeholders must be willing to trade products, services, and jobs that offer them relatively well defined and understood means for achieving their exchange goals, with products, services, and jobs that may have poorly defined characteristics and unknown per formance, but may offer a promise of better means to achieve the stakeholders’ goals. Thus, entrepreneurial reputations are more likely to entrepreneurial reputations 107 emphasize the value creating potential of the novel products and opportunities associated with a new venture, rather than its performance history. Whereas reputations in general are based on extrapolations of the past, entrepren eurial reputations are based on assembling infor mation cues that make it possible to envision the future.
Below, we outline three cognitive hurdles that new ventures must overcome in order to build their reputations: attracting attention, gaining legitimacy, and earning positive evaluations. Overcoming each of these hurdles leads to de veloping the three constituent elements of entre preneurial reputations: prominence, legitimacy, and competitive prestige. We then discuss briefly the key resources through which new ventures provide stakeholders with information about their potential to create value: entrepren eurial human capital, social capital, and symbolic capital.
The Elements of Entrepreneurial Reputations
In order to attract potential stakeholders and enter exchange relationships with them, a new venture must overcome three major cognitive barriers. First, it must ensure that the potential stakeholders are aware of its existence, its activ ities, and the products and services it offers. Second, it must provide evidence that it is a legitimate organization – that is, that the new ways in which it seeks to satisfy stakeholder needs fit with existing norms and values in the organizational field. Third, the new venture must convince prospective stakeholders and other relevant publics that it can serve their interests and create value for them in ways su perior to the already available alternatives offered by existing firms. Coping successfully with these three hurdles enables a new venture to build three distinct but interrelated elements of entrepreneurial reputations: prominence, le gitimacy, and competitive prestige.
Prominence refers to the extent to which stakeholders are aware of the existence of the new venture; or in cognitive terms, the degree to which a new venture is available in their memory, so that they can readily recall infor mation about it. Prominence is an important aspect of entrepreneurial reputations, not only because it is practically impossible for stakehold ers to exchange resources with a new enterprise if they do not even know of its existence, but also because the likelihood of them doing so increases with the prominence of the venture in their minds. Prominence is an initial step in building entrepreneurial reputations because only after the relevant publics are aware of the new ven ture’s presence in the organizational field can they begin to form more specific impressions and evaluations of it (Rao, 1994).
After stakeholders have developed awareness of the new venture, they need to evaluate it, and they do so in two stages: they first must judge whether the new venture fits with the norms, values, and logics that exist in the organizational field (Aldrich and Fiol, 1994). These evaluations result in judgments of legitimacy, which are the second constituent element of entrepreneurial reputations (Lounsbury and Glynn, 2001). Finally, stakeholders evaluate the products and services of a new venture relative to existing standards of performance in the industry (Rin dova and Fombrun, 1999) or to those of compet ing firms (Rao, 1994). These evaluations result in judgments of competitive superiority, which constitute the unique content of reputations as such – beliefs about the relative ability of firms to create value. Entrepreneurial reputations have the greatest value as intangible assets to new ventures when they combine all three elements. In the absence of prominence and legitimacy, the venture may appeal to a very limited set of stake holders, whose support may be insufficient to ensure its survival and success.
The Drivers of Entrepreneurial Reputations
At first glance, all attempts to estimate a new venture’s potential appear to be by necessity speculative in nature. Unlike established firms, for which stakeholders can rely on a proven track record, new ventures in general have very few tangible things to offer to stakeholders as evi dence of their ability and potential. The founder of Hotmail, Sabeer Batia, expresses this problem when he states: ‘‘All we had was an idea’’ (Bron son, 1999: 85). However, in the new venture world, an idea and other intangible assets may have a high value if they make it possible for stakeholders to envision a previously invisible 108 entrepreneurial reputations future. The idea, the relationships of the new venture, and the knowledge of its founders are such intangible assets, discussed next.
Symbolic capital. The idea, or the business con cept about how an entrepreneur or a team of entrepreneurs (‘‘founders’’ from here on) will exploit an entrepreneurial opportunity they have identified, is a key component of the sym bolic capital of a new venture. The opportunity and the business concept to exploit it are at the heart of the entrepreneurial process. Entrepren eurial opportunities – defined as opportunities to create new goods, services, raw materials, and organizing methods and to sell them at greater than their production cost (Casson, 1982; Shane and Venkataraman, 2000) – vary in their quality. That is, different opportunities have different expected value (Shane and Venkataraman, 2000; Venkataraman, 1997). Some opportunities are perceived as more important or more excit ing than others. For example, developing a cure for cancer is perceived as more important, and consequently more valuable an opportunity, than selling snacks to students (Shane and Ven kataraman, 2000). Therefore, the quality of entrepreneurial opportunity contributes to the symbolic capital of the new venture.
Symbolic capital refers to the various mean ings that stakeholders attach to the new venture. Whereas researchers have identified many types of capital to which a new venture has access, such as human, technological, financial, intellec tual, social, and institutional capital (Lounsbury and Glynn, 2001), the symbolic capital associ ated with the business concept and the oppor tunity pursued by a new venture has not received much attention. Yet a compelling business con cept and high quality opportunity around which a new venture is formed can give it significant advantages in attracting public attention and achieving prominence.
Social capital. A second type of capital that is particularly relevant to the rapid accumulation of entrepreneurial reputations is the social cap ital of the new venture. Social capital is ‘‘the sum of the actual and potential resources . . . derived from the network of relationships’’ (Nahapiet and Ghoshal, 1998: 243) (see social capital). Entrepreneurs rely extensively on their personal networks, including family, friends, and profes sional contacts, for material, financial, moral, and emotional support (Aldrich, 2000). These social relationships play a twofold role in the process of building entrepreneurial reputations. First, the people who know the founders person ally are able to provide first hand information and opinions regarding their personal and pro fessional qualities and the viability of their ven ture. Second, outside observers can infer certain characteristics of the new venture by the quality of its social ties, because people tend to associate with others who have similar values and interests (Aldrich, 2000; Burt, 1982; Fischer, 1982; Mars den, 1987). Thus, affiliations of a new venture with prestigious financial backers, seasoned in dustry veterans, and large and established cus tomers validate the potential of the venture signaled through its business concept and focal opportunity. They also provide legitimacy de rived from the relative status of these affiliates, as high status actors exert a disproportionate amount of influence on the choices of others (Rao, Davis, and Ward, 2000). New ventures with social ties to high status partners have been found to perform better because their social ties provide them with a credible ‘‘stamp of approval’’ (Stuart, Huang, and Hybels, 1999).
Founders’ human capital. Entrepreneurs possess different prior knowledge and experience that can be more or less useful for the new venture (Shane, 2000; Venkataraman, 1997). These varying levels of skills, training, and ex perience constitute entrepreneurial human capital (Becker, 1975; Davidsson and Honig, 2003; Gimeno et al., 1997; Mosakowski, 1998) (see entrepreneurial human capital). Major sources of entrepreneurial human capital are formal education, informal training, work experience, general management experience, and especially previous start up experience (Davidsson and Honig, 2003). Researchers dis tinguish between general human capital, which results from formal education and prior work experience and incorporates skills useful across a range of activities, and specific human capital, which is highly specific to the function ing of the venture, such as knowledge of industry customers and suppliers (Gimeno et al., 1997). The human capital of the founders entrepreneurial reputations 109 provides important cues about the new venture’s future prospects, because publics tend to believe strongly in the importance of leadership for the success or failure of any organizational form (Meindl, Ehrlich and Dukerich, 1985; Meindl and Ehrlich, 1987). The role of the entrepren eur’s human capital for the public evaluations of the new venture is more pronounced than that of managers in established firms, because the effects of founders on organizational character istics and performance are well documented (Boeker, 1989). Together, the symbolic, social capital, and human capital of the venture enable it to make credible promises that it will create value for its stakeholders, and thereby build its reputation more effectively.
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