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INTRODUCTION

The road a firm takes on its way to an initial public offering(IPO) is never well paved or clearly marked. But for a firm in an emerging industry, such as biotechnology, that road can be treacherous. Entrepreneurs in biotechnology, whose firms are generally in the early stages of a long and involved product development, process face unique challenges. Their companies have very few tangible assets. The value of their firms reside in intangible and complex scientific/research capabilities, making them particularly difficult for analysts and investors to evaluate.  Under these conditions, the success of a biotechnology firm's IPO depends upon the managers ability to convince the financial markets of the legitimacy of  their firm.

An organization is deemed to be legitimate by the extent to which its means and ends appear to conform to social norms, values and expectations (Dowling & Pfeffer, 1975). Legitimacy is attributed to an organization by its constituents (Perrow, 1970). It helps the organization attract resources (Parsons, 1960), and can be assessed by the level of resource transactions flowing into an organization (Terreberry, 1968). Most importantly for the field of entrepreneurship, legitimacy is a valuable resource which enhances an emerging organization's odds of survival (Aldrich & Fiol, 1995; Rao, 1994; Singh, Tucker & Meinhard, 1991; Suchman, 1995).

In this paper we'll use several firm and industry level variables that predict a firm's legitimacy and then use structural equation modeling to test the impact of the latent variables of firm legitimacy and industry legitimacy on the amount of capital raised in their IPO.  Among the firm level variables are the number of  times the firm was mentioned by the business and industry press in the year prior to the IPO and the public and private institutions with which the organization has identified itself.  Several measures of the industry's legitimacy are also taken into account, including the number of regulatory successes the industry has achieved in the 12 months prior to the IPO, the growth in the number of  regional biotechnology centers, and the level of press attention provided to the industry.
 
Our research makes four important contributions.  First, to extend our understanding of legitimacy by developing a predictive model of the determinants of firm legitimacy. Second, we extend prior research by directly linking legitimacy to a desired organizational outcome?the acquisition of investment capital. Third, we examine the impact of both industry level phenomena and firm level characteristics upon the legitimacy of individual firms.  Finally, we provide entrepreneurs with practical suggestions on actions they might take to maximize the capital they raise in an IPO.

THEORETICAL BACKGROUND

Institutional theory has frequently been interpreted as deterministic and hostile to the core tenet of  entrepreneurship?the actions of the entrepreneur/manager are a determinant of  firm performance and survival. According to this interpretation, an organization operating within an institutional context is powerless and compelled to conform to the pressures exerted upon it by the institutional environment (Donaldson, 1995; Oliver 1991). Recently, several authors (Suchman, 1995; Oliver, 1991; Aldrich & Fiol, 1994; Powell, 1991; Scott, 1995) have suggested that there is room within institutional theory for strategic choice in response to institutional pressures. Recent empirical research has suggested that the strategies organizations pursue in response to institutional pressures and the level of organizational responsiveness to institutional pressures vary across technical environments (Goodstein, 1994).

When faced with institutional pressures organizations can choose among a wide variety of responses. These choices include compromise, avoidance, defiance, decoupling, dissembling, reinterpretation, manipulation, challenge, identification or choosing to operate in a different environment (Dowling & Pfeffer, 1975;Oliver, 1991; Scott 1995; Scott, 1991; Suchman, 1995). Given the wide variety of responses, firms are likely to achieve different levels of legitimacy based upon the choices made by the entrepreneur/manager. The outcome of this process is that within the same industry or sector, some firms will have higher levels of legitimacy than others.   Given the desirability and benefits, obtaining legitimacy is an attractive strategic goal which entrepreneurs are likely to pursue.  The recognition of these circumstances has lead to the development of the concept of 'strategic legitimacy'.

Strategic legitimacy "adopts a managerial perspective and emphasizes the ways in which organizations instrumentally manipulate and deploy evocative symbols to garner societal support" (Suchman, 1995:572). Organizations still operate within a social context, but this context provides both constraints and opportunities for an organization. The managers/entrepreneurs within the organization can attempt to improve its circumstances by strategic action within the environment (Aldrich & Fiol, 1994; Andrews, 1996; Oliver, 1991; Scott, 1991; Suchman, 1995). Therefore, if legitimacy can be actively pursued by entrepreneurial managers and provides access to resources, particularly the always scarce resource of capital, then institutional theory may well have a major contribution to make to the study of new ventures.

A primary assumption of institutional theory is that legitimacy is conferred upon firms which conform to the demands of institutional context. This has lead to a focus on the pressures created by the institutional environment on the organization to conform and the spread of organizational structures and forms through mimetic isomorphism. Firms which  conform by mimicking legitimate firms are granted legitimacy which enhances the resource flows to the firm and in turn the firm's chances of survival (Meyer & Rowan, 1977).  Omission of  some of the prevailing practices and procedures institutionalized by society makes the firm vulnerable to claims it is negligent, irrational or unnecessary and being denied legitimacy. (Meyer & Rowan, 1977).  Prior research has confirmed that increased legitimacy provides access to survival enhancing resources for non-profit organizations(Singh, Tucker & Meinhard, 1991) and that winning certification tests enhanced the survival of firms in the early years of the auto industry (Rao, 1994).  However, the question of what actions an entrepreneur can take to increase the legitimacy of his particular firm has yet to be addressed in an empirical study.

 
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