Fundraising Barriers for ESG Startups: Experimental Evidence

114 Pages Posted: 10 Nov 2021 Last revised: 5 Mar 2024

See all articles by Ye Zhang

Ye Zhang

Stockholm School of Economics - Finance Department

Date Written: December 20, 2021


This paper examines fundraising by ESG startups in the private market. It first explores how startups' ESG characteristics influence investors' investment decisions using a real-stakes placement experiment with real US venture capitalists (VC) and linking their experimental behaviors to their real-world portfolio data. While the experiment reveals VCs' non-pecuniary motivation in impact investing, it finds that VCs perceive ESG startups as less profitable, especially when evaluating high-quality startups. This profitability concern dominates profit-driven VCs' decisions, leading to lower interest in contacting ESG startups. To assess the accuracy of VCs' expectations of ESG startups' profitability, an outcome test shows that ESG startups exhibit superior post-funding performance. A complementary survey with real VCs further shows that the biased expectations mainly arise from an expectation extrapolation channel and a lack of information on ESG startups. Lastly, through a dynamic Bayesian model, the paper further illustrates how VCs' financial concerns and expectations might evolve and adversely influence the fundraising outcomes of ESG startups in a venture capital staged-financing setting. This paper provides the first empirical evidence that investors' bias against ESG startups can dampen the fundraising efforts of these startups in the private market.

Keywords: Fundraising Barriers, ESG Startups, Sustainable Finance, Field Experiments, Venture Capital, Entrepreneurship

JEL Classification: C93, D83, G11, G24, Q56

Suggested Citation

Zhang, Ye, Fundraising Barriers for ESG Startups: Experimental Evidence (December 20, 2021). Available at SSRN: or

Ye Zhang (Contact Author)

Stockholm School of Economics - Finance Department ( email )


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