Impact Investing and Venture Capital Industry: Experimental Evidence

Abstract

Utilizing an experiment with real US venture capitalists, this paper finds that aiming for environmental and social impacts lowers investors’ expectations of a startup’s financial returns, especially when evaluating attractive startups. However, there exists a taste-driven preference towards impact investing, which is correlated with investors’ social preferences. Also, sorting based on ESG might occur between investors and startups. Interestingly, impact ventures are correlated with better ex-post fundraising and business performance, suggesting that investors might underinvest in impact ventures. A dynamic Bayesian model is used to demonstrate how these identified preferences may affect impact investment in the US venture capital industry.

Keywords: Venture Capital, Entrepreneurship, Sustainable Finance, Field Experiments, Greenwashing

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