During the global financial crisis of 2008 and 2009, lenders and service providers struggled to assess the creditworthiness of small companies; even well-established small firms were hit with high interest rates and onerous collateral requirements.
I experienced this firsthand in 2009 during a negotiation for a software renewal. The renewed contract came with a steep price and a mandatory three-year term. The vendor also insisted that two employees from our biotech startup use personal bank accounts as collateral for payment. We were shocked by the request. It is inconceivable that this vendor would have asked the same of a more established company.
Even today, in our relatively healthy economy, young companies face higher transaction costs because they lack legitimacy and suffer from the liability of newness. This hurdle extends more broadly as early-stage companies compete to find and establish other types of resources such as talent, operating funds (grants, angel, venture capital), and credit lines with banks and vendors.
Yet, some founders are better than others at acquiring resources within the framework of newness. What differentiates them? Perhaps the most important way is that those entrepreneurs are able to demonstrate with confidence that their startup is legitimate.
OK, but what does “legitimate” really mean? According to Mark C. Suchman’s oft-cited scholarship on this topic, legitimacy refers to “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, beliefs, and definitions.”
Humans are very much influenced by the stories we tell and the messages that we send. This symbolism helps to craft the perception that we are operating within standard norms. Symbolic actions may include displays of academic and industrial achievements like degrees, logos of institutions, academic or industrial affiliations, or documentation of commercial successes. Or they may come in the form of managerial capabilities, financial processes that meet industry expectations, and affiliations with attorneys, banks, and other service providers with strong reputations. You also may find legitimacy from holding accreditations from trusted sources, having sufficient (but not extravagant) facilities, or using consistent messaging about the company goals and mission. Or maybe you achieve it through external advisors and advisory boards to fill gaps in knowledge or experience.
All of these “symbols” help establish legitimacy for life science entrepreneurs, who have the difficult task of navigating between showing novel features (such as new science) and conveying that they are on a solid path towards success. In fact, researchers have identified four key areas in which effective symbolic actions can make or break a company:
- Personal capability and commitment to the venture
- Professional organizing, including structures and processes
- Organizational achievement
- Stakeholder relationship quality
In short, research has illustrated how companies that can skillfully and intentionally employ symbolic actions are better able to amass needed resources than those that do not. Even simply having the knowledge that symbolic actions are important is key. Founders who were unaware of the importance fared less well than their counterparts.
Knowing is not doing, however. Companies must translate their knowledge into actions internally and externally, and customize symbolic actions to their audiences — adjusting and aligning their actions for the specific interaction (for example, deciding who presents a pitch based on the types of participants).
It does take time and effort to develop symbolic management skills. First-time entrepreneurs are often unaware of or inexperienced in how to identify and use symbols to establish and maintain legitimacy for each facet of their company. But they don’t have to go it alone. As I mentioned in a previous blog post, many valuable resources are available to support founders in establishing a biotech startup. Accessing those resources, from business incubators to attorneys, can help establish and strengthen legitimacy as it becomes part of the company story.
Another effective way to craft legitimacy into your story is to employ a highly qualified and established public relations firm to help you create the messages that will form first impressions with external audiences, including investors. Many companies fail to invest in a quality communications strategy in their early stages because it might be expensive, yet they would never consider writing their own legal documents.
Now, back to that 2009 software negotiation: Ultimately, no one on our management team was willing to agree to the software company’s demand of personal guarantees. Instead, we identified a different vendor that offered a similar product at a much lower price point. In turn, that company trusted us. Eventually, this young company captured market share from its competitor and is now one of the most widely used vendors in their market segment. That’s karma for you.
David Spellmeyer, Ph.D., is a biotechnology executive with 25 years of broad experience in the life sciences industry. He is an executive-in-residence at ShangPharma Innovation. Read full bio
Stinchcombe, A.L. (1965). Social structure and organizations. In Handbook of Organizations, J.G. March, ed. (Chicago: Rand McNally), pp. 142–193. https://www.emeraldinsight.com/doi/abs/10.1016/S0742-3322%2800%2917019-6
Suchman, M.C. (1995). Managing Legitimacy: Strategic and Institutional Approaches. The Academy of Management Review 20, 571. https://www.jstor.org/stable/258788?seq=1#page_scan_tab_contents
Zott, C., and Huy, Q.N. (2007). How entrepreneurs use symbolic management to acquire resources. Administrative Science Quarterly 52, 70–105. http://journals.sagepub.com/doi/10.2189/asqu.52.1.70