Intangibles and start-ups

Another oldie but goodie. I found this 2005 interview on start-ups and intangibles — How Can Start Ups Grow? — HBS Working Knowledge:

Assistant professor Mukti Khaire believes that small companies can grow by developing intangible social resources such as legitimacy, status, and reputation. In an interesting twist, her research on this insight is that these intangible resources may be best acquired by following a road of conformity in how your company is organized and presented to the outside world. In start-ups in established industries, conventional business titles such as Marketing Director work better than novel ones like Chief Evangelist.
. . .
Q: Can you tell us about the concept of intangible social resources and how they contribute to a young firm’s growth? How does a firm acquire non-tangible resources such as reputation and status?
A: Intangible resources are non-financial, non-material assets that a firm possesses by virtue of the social structure in which it is embedded. Although firms are economic entities, they are nevertheless affected by social variables such as legitimacy, status, and reputation because all economic transactions are embedded in a social supra-structure. Since most young firms are financially constrained, intangible assets that do not require outlays of financial resources are especially critical to new ventures.
An entity is considered to have legitimacy when its actions are considered proper, acceptable, or desirable under a widely accepted set of beliefs and norms. A new, unfamiliar activity or entity does not possess legitimacy because of its inherent novelty. A new firm, therefore, lacks legitimacy and may be looked upon with suspicion by stakeholders. In order to gain legitimacy, a new firm is required to look like existing organizations, which possess legitimacy because of their familiarity to observers. Hence, mimicry of existing organizations’ structures and activities to a certain extent is essential if new ventures wish to gain legitimacy. A new venture with legitimacy acquired in this manner is more likely to succeed because it then can channel its resources and energy towards its core activity, rather than towards establishing its propriety. By doing so, it can improve performance and grow faster than an organization that does not conform to industry norms. As one founder I interviewed put it, “Customers are used to doing things in a certain way [with established organizations], and if a new agency is too far and out, it will not do well.”
High-status organizations tend to be buffered from environmental shocks and more likely to survive adverse circumstances and perform better than low-status organizations. Organizational status is usually a function of size and good past performance. However, young firms possess neither large size nor a track record of good performance. Although the benefits of status are crucial to their performance, they are unable to avail of them. An alternate way of acquiring status is through high-status affiliations. When a young, unknown firm has affiliations with high-status entities, stakeholders tend to impute the status of the latter onto the former, thus granting higher status to the young firm. I found that young agencies with high-status clients performed better and grew faster than agencies without high-status clients (controlling for the revenues brought in by each client). Thus, status acquired through affiliations provided young firms with the buffering advantage that larger, well-established firms enjoyed due to their status, and enabled them to compete in the same arena as much larger firms.

Bottom line: Status and legitimacy are key organizational intangible assets. I wonder how you measure that?

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