Preparedness and Cognitive Legitimacy as Antecedents of New Venture Funding in Televised Business Pitches

By Pollack, Jeffrey M.; Rutherford, Matthew W. et al. | Entrepreneurship: Theory and Practice, September 2012 | Go to article overview

Preparedness and Cognitive Legitimacy as Antecedents of New Venture Funding in Televised Business Pitches


Pollack, Jeffrey M., Rutherford, Matthew W., Nagy, Brian G., Entrepreneurship: Theory and Practice


This research addresses the question of what specific entrepreneurs' behavior increases the propensity for resource acquisition. Within the context of business "pitches," we explore subtleties in the process via a theoretically derived model linking entrepreneurs' preparedness behavior, perceived cognitive legitimacy, and amount of funding received. We test this model using data coded from two sources: 14 episodes of the television show "Shark Tank" that aired in 2009, as well as 84 episodes of "Dragons Den" that aired from 2005 to 2010. Within these episodes, we specifically examine the 113 individual business pitches that received funding. Overall, results suggest the relationship between entrepreneurs' preparedness behavior and the amount of funding received is mediated by cognitive legitimacy. Specifically, entrepreneurs' increased preparedness behavior was positively related to increased cognitive legitimacy. Cognitive legitimacy, in turn, was positively related to amount of funding received. We offer thoughts regarding implications from both theoretical and practical perspectives.

Introduction

To sustain and grow their ventures, it is crucial for early stage entrepreneurs to engage in behaviors related to acquiring financial support. Unfortunately, the efforts of these entrepreneurs to acquire crucial resources often fail due to inherent liabilities of newness and smallness (Aldrich & Fiol, 1994; Delmar & Shane, 2004). Consequently, the prospects for the success of new ventures are precarious (Timmons, 1999).

Over 40 billion dollars is awarded each year to entrepreneurs in the United States by equity financiers, including angel investors and venture capitalists (Angel Capital Association, 2012; National Venture Capital Association, 2012). These investments enable entrepreneurs to create new jobs, develop innovative products, and speed economic growth. Accordingly, from both practical and theoretical viewpoints, research regarding entrepreneurs' behavior that can facilitate the attainment of resources from financiers is among the most pressing issues for entrepreneurs and scholars (Aldrich & Fiol, 1994; Baron, 2007; Delmar & Shane, 2004; Maxwell, Jeffrey, & Levesque, 2011). Though it is widely accepted that "Asking for funds is a behavior ..." (Bird & Schjoedt, 2009, p. 335), as researchers we know little about what specific entrepreneurs' behavior increases the propensity for this type of resource acquisition.

One emerging area of study on resource attainment behavior that resides at the confluence of research and practice relates to the "business pitch." The business pitch represents efforts on the part of an entrepreneur (i.e., the pitcher) to entice an investor (i.e., catcher) to provide resources (e.g., capital). In the present research, consistent with calls for behaviorally anchored inquiry, we examine subtleties of entrepreneurs' communication-focused behavior of pitching (e.g., Bird, 1989; Bird & Schjoedt, 2009). As Bird and Schjoedt (p. 342) noted, "Communication is critical to overcoming the liabilities of newness since actions taken to legitimize, create positive perception or reputation, and establish reliable production, delivery, and accountability systems all involve communication or display." In sum, entrepreneurs who seek resources from investors via pitching engage in a form of communication that constitutes behavior. (1) And, this behavior (of pitching) is critical as objective organizational performance measures that can demonstrate to potential investors that a venture is a viable investment option are generally not available. The lack of information related to operating revenues and expenses can severely deter the investment process, as the basic axiom of investment theory remains that an investor will invest only when the present value of the future returns from the new venture is calculated and known to be greater than the proposed present value of the investment (Brealey & Myers, 1991). …

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