The Approach of Three New Chinese EV Automakers Shows the Value of Legitimacy for Building Ventures; These companies were able to reach volume production only two to four years after their inception, compared to Tesla which took 9 years. They raised nearly $7 billion in venture capital and all three recently listed in the US. How did you do that? By implementing three actionable strategies to manage the legitimacy to access the resources you need: leveraging existing sources of legitimacy, aligning actions with resource owner expectations, and redefining resource owner perceptions or assumptions.
In order to start and grow their businesses, entrepreneurs need many things from other people. They require investor funding, the skills and commitment of a founding team, regulatory approvals, vendor collaboration, and customer attention and demand, among other things. But in order to tap into these, entrepreneurs must establish their legitimacy in the eyes of each of these resource holders or “audiences”. They have to show that they can be trusted, that they have a good product and that they can bring it to market. This effort is particularly challenging as each of these diverse audiences has their own set of criteria for what makes a venture legitimate.
In our research In terms of legitimacy strategies, we looked at China’s high-growth and highly competitive electric vehicle (EV) market (which also happens to be the world’s largest), where a new group of market entrants are challenging incumbent automakers, including Tesla. Three underdogs in particular – NIO, XPeng and Li Auto – appear poised to emerge as local champions. All three were typical startups faced with significant novelty risks and a lack of key resources. But these three companies were able to reach volume production just two to four years after their founding, compared to Tesla’s nine years. They raised nearly $7 billion in venture capital, and all three were recently listed in the US. And while all three had ties to the auto industry, designing and manufacturing electric vehicles was a whole new venture for them.
How did you achieve that? We have found that successful entrepreneurs—particularly newcomers—employ three strategies to build legitimacy and access the resources they need: leverage existing sources of legitimacy, align actions with resource holder expectations, and define (or redefine) perceptions or assumptions ) held by resources holder.
This is how these strategies work.
Use of existing sources of legitimacy.
The first step for the founders of all three firms was to use their personal resources as a source of legitimacy to attract key resources, including a core founding team and sufficient seed funding. NIO founder William Li leveraged the personal networks he built while building BitAuto, a web portal for automotive news, deals, transactions and social communities for car buyers and drivers. Li Auto’s Xiang Li leveraged relationships formed while building AutoHome, a similar website. Li also brought AutoHome’s existing top management team on board, further boosting investor confidence in the new company. While the founders of NIO and Li Auto brought money and people to the table to build legitimacy, the original founders of XPeng brought experience; both had worked as senior researchers in the field of EV control systems and autonomous driving at the state-owned manufacturer Guangzhou Auto Corporation (GAC). They used this to attract Xiaopeng He, first as an angel investor and then as co-founder and CEO. He used his leadership experience, money and professional connections with Alibaba, which had acquired his previous internet browser company, to build the new company’s resources and access.
Comparison with requirements, standards and expectations.
In some cases, entrepreneurs must align their actions with the “rules of the game” to project legitimacy and gain access to critical resources, including formal regulations and informal but strong norms. For example, even if the executive team has impressive credentials, investors typically expect them to have significant skin in the game. The leaders of these three ventures echoed that expectation, each personally investing over $100 million in their ventures. Every company also required a license to manufacture automobiles. To meet this regulatory requirement and get to market sooner, NIO and XPeng first outsourced production to an existing automaker, while Li Auto acquired a manufacturer with the necessary license.
Redefine perceptions and assumptions.
Ultimately, all three founders created a new paradigm for what an electric vehicle can be that sets them apart from other competitors, including Tesla. They have gone beyond Tesla’s vision of an “intelligent” electric vehicle – based on the operating systems, over-the-air software updates and driver assistance features – and have integrated platform-based connectivity between customers and online service providers. While Tesla’s smartphone app is integrated with the car’s navigation and functions, those of NIO, XPeng and Li Auto are also a platform for their users to make friends and share reviews, photos, experiences and news about upcoming events. For example, NIO has over 200,000 daily active users and 50% of new customers are recommended by existing customers. These online relationships are supported by each company’s network of offline direct sales and experiential stores, which differ greatly from typical 4S retailers.
Entrepreneurs often ignore the importance of dealing with the perception of legitimacy when starting a new business, entering a new industry, or launching a new product. Without legitimacy, entrepreneurs have to meet with cold, unfriendly investors for funding or regulators for permits, waste lots of dollars and effort to win users, and contend with opportunistic co-founders or mediocre suppliers. Such efforts are unlikely to be effective or efficient. Entrepreneurs without legitimacy with key audiences can bootstrap for years, and only a small number of lucky ones will finally get off the ground.
The approach of these three new Chinese EV manufacturers demonstrates not only the value of legitimacy in building businesses, but also all three effective strategies for gaining legitimacy: leveraging existing sources of legitimacy, aligning actions with expectations and requirements, and redefining perception of what is “normal” and legitimate. These examples show that entrepreneurs should consider building legitimacy as a key element of the venture building process, essential to increase the effectiveness of their resource finding and growth acceleration.