A New Small Business Needs to Gain Legitimacy

Anyone starting a new venture has to concern him or herself with gaining legitimacy. Most often the new entrepreneur does not think about what gaining legitimacy means or how it helps gain acceptance for the business. Without legitimacy, the business can have the best idea, but go nowhere. An entrepreneur does not exist on an island and has to consider stakeholder influences that cause the business’s success or failure. New business owners often focus on opportunity and fail to see the importance of satisfying the forces that can make or break their new ventures. 

Customers are not the only stakeholders, but involve many different interests. For example, government can play a major role. Acs, Arenius, Hay, and Minnitti (2004) argued arcane laws, corrupt government, and extensive procedures can slow business formation and deter startups. Convincing government at different levels of the need for the business can lead to the success or failure of a new venture. 

Usually legitimacy depends on building trust both of people and entities that have an interest in the business’s viability. Arogyaswamy and Rodsutti (2007) explained trust involves hard-nosed realism instead of naive acceptance. The entrepreneurs must achieve two kinds of legitimacy including the cognitive and social forms. Cognitive legitimacy is the type most often thought about because it involves satisfying customers’ needs. Social legitimacy is more difficult to achieve because it entails satisfying power brokers and opinion leaders from industry, trade associations, and lawmaking bodies. Both forms of legitimacy are critical because businesses do not exist in a vacuum. Many entrepreneurs do not think about gaining acceptance from these sources until too late in the venture formation process, which can stymie acceptance of new ideas and development of the business. 

The social legitimacy of a business venture must recognize growth underlining more than just economic growth, but include a socioeconomic component to promote social justice. New ventures must have an interest in the ethical and moral characteristics besides the technical dimensions (Arogyaswamy & Rodsutti, 2007; Beirne, 2004). Brenkert (2002) argued decentralization and economic freedom offer economic equity, while promoting social wealth similar to Adam Smith and Joseph Schumpeter’s idea about the “invisible hand” contributing to new products, jobs, and higher incomes. Dwivedi, Varman, and Saxena (2003) said trust is the glue that cements entrepreneurial society together.

Arogyaswamy and Rodsutti (2007) argued a playing field tilted towards special interests hinders the efficiency of social justice. Entrepreneurs have to make sure special interests have not stacked the deck against them. Technology can help reduce disparities and improve freedom, equality, and efficiency. Technology allows society to undergo change from preexisting thought and action. The more open and flexible society is the less likely resistance will impair progress. Social justice depends on the right conditions.

Gaining legitimacy for a new venture is serious business. The founder of a new business should not relegate legitimacy to an afterthought. Legitimacy relies on influencing other stakeholders besides customers and demands a diligent effort. Legitimacy depends on building the right relations and developing trust. How a new business owner deals with gaining legitimacy is often the difference between success and failure.

by Dr Phil Harris

Acs, Z. J., Arenius, P., Hay, M., & Minnitti, M. (2004). Global Entrepreneurship Monitor. Babson Park, MA: Babson College.
Arogyaswamy, B., & Rodsutti, M. C. (2007). Entrepreneurship and national policy: Growth with justice. Journal of Small Business & Entrepreneurship, 20(2), 117-134. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=ent&AN=24488549&site=ehost-live
Beirne, C. J. (2004). Esssential New York initiative: Adding ethical, civic, creative dimension to MDA’s dynamic plan The Post - Standard, pp. 0-A11. Retrieved from http://search.proquest.com/docview/325965223?accountid=35812
Dwivedi, M., Varman, R., & Saxena, K. K. (2003). Nature of trust in small firm clusters International Journal of Organizational Analysis (2003), 11(2), 93-104. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=14074052&site=eds-live