8. The social structure of new venture funding: Stratification and the differential liability of newness

Abstract

The stratification of firms was a key component of Stinchcombe's (1965) pioneering essay and of other organizational sociologists in the 1960s. Since then, organizational theory has de-emphasized its focus on stratification in favor of more structural approaches that neglect the unequal distribution of resources within an industry. In this paper, I argue for the reintegration of the two traditions to better understand the dynamics of markets. Specifically, I focus on Stinchcombe's (1965) concept of the “liability of newness” and apply principles of stratification to theory about entrepreneurship. I analyze how social, financial and reputational capital produce a differential liability of newness for the firms within an industry. In other words, not all new organizations experience the liability of newness equally. Rather, disparities in social network access, finances, and reputational capital create advantages for some new firms over others. I study funding patterns in the venture capital industry to highlight the theoretical advantages of reintegrating the study of stratification into organizational sociology.

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