Social judgement theory and entrepreneurship
The Social Judgement Theory of entrepreneurship posits that a new venture's survival depends entirely on the subjective evaluations of its stakeholders. Before a startup can access resources (capital, labor, suppliers), it must first pass a "social audit."
The Core Metric: Legitimacy
The central concept in this theory is Legitimacy. According to Suchman (1995), buyers and suppliers must believe a startup is legitimate to risk committing their scarce resources to it.
To succeed, a startup must meet three institutional requirements in its market:
- Regulatory: Complying with laws and rules.
- Normative: Adhering to professional standards and values.
- Cognitive: Fitting into the "taken-for-granted" assumptions of how a business should look and act.
Legitimacy has been variously described as the right to exist, social fitness, desirability, properness, endorsement, and acceptance (Bitektine, 2011).
Descriptive vs. Prescriptive: The Role of Impression Management
Is this theory merely describing what happens, or does it tell entrepreneurs what to do?
If viewed as prescriptive, it suggests that entrepreneurs should actively engage in Impression Management—strategically curating the image they project to stakeholders to ensure a favorable judgment.
The Advantage of "Fair Play"
However, impression management is not just about "faking it." Jones et al. (2008) argue that firms gain a competitive advantage from genuinely engaging in just behaviors.
- Access to Tacit Knowledge: Gaining a reputation for fair play encourages stakeholders to trust the firm. This trust unlocks access to "tacit knowledge"—the deep, unwritten insights about market needs that outsiders rarely see.
- The Incumbency Barrier: New entrepreneurs are at a disadvantage because they lack this reputation history. This explains why Employee Spinouts often outperform cold startups; the founders bring a pre-verified reputation for fair play from their previous employment.
The Google Analogy: "Link Juice" as Social Capital
The easiest way to understand Social Judgement Theory is to look at how Google's PageRank algorithm works.
[Image of Google PageRank algorithm diagram]Google rewards pages that are linked to by authoritative pages. It is a transfer of trust:
- In SEO: A link from a trusted site (like the NY Times) gives a new blog post "Link Juice," signaling to Google that the new page is relevant.
- In Entrepreneurship: An investment from a trusted VC (like Sequoia) or a partnership with a major supplier gives a new startup "Social Legitimacy," signaling to the market that the venture is safe.
Just as a new website struggles to rank on "Page 1" without backlinks, a new venture struggles to get sales without social endorsements. Stakeholders rely on these signals not because they are always right, but because it reduces the cognitive effort of decision-making.
Video: The Psychology of Social Judgments
Academic Sources
- Bitektine, A. (2011). Toward a theory of social judgments of organizations: The case of legitimacy, reputation, and status. Academy of Management Review, 36(1), 151-179.
- Jones, T. M., Harrison, J. S., & Felps, W. (2018). How applying instrumental stakeholder theory can provide sustainable competitive advantage. Academy of Management Review, 43(3).
- Suchman, M. C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571-610.
