Impact Investing and Venture Capital Industry: Experimental Evidence

88 Pages Posted: 10 Nov 2021 Last revised: 31 Dec 2021

See all articles by Ye Zhang

Ye Zhang

Stockholm School of Economics - Finance Department

Date Written: December 20, 2021


This paper examines the effect of startups' ESG characteristics on investors' decisions by employing an incentivized resume rating experiment with real US venture capitalists and matching investors with data on their involved deals. Investors need to evaluate multiple hypothetical startup profiles with randomized startup missions (impact ventures vs. profit-driven ventures), which they know to be hypothetical, in order to be matched with their preferred real startups in the collaborating incubators. I find the following main results: (i) aiming for environmental and social impact causally lowers investors’ expectations in the startup’s quality, hence reducing profit-driven investors' interest in contacting and investing in the startup. This effect mainly exists when investors evaluate attractive startups, emphasizing the importance of implementing high-stake experiments. (ii) Investors pay more attention when evaluating attractive impact ventures, suggesting the existence of taste-driven preference towards impact investing. (iii) Sorting may happen as impact (profit-driven) investors expect impact ventures to be more (less) likely to collaborate with them. (iv) The negative ESG effect is more salient for startups with white male founders and less educated founders. (v) Impact ventures are correlated with better fundraising and business performance during the one year period after the experiment, indicating that investors may over-reject impact ventures due to inaccurate beliefs. A dynamic Bayesian model is used to illustrate the potential evolvement of impact investment and how miscalibrated beliefs can hinder its development. Experimental evidence shows that there is still space to improve impact investing in the US private equity market.

Keywords: Venture Capital, Entrepreneurship, Sustainable Finance, ESG, Private Equity, Field Experiments

JEL Classification: C93, D83, G11, G24, G40

Suggested Citation

Zhang, Ye, Impact Investing and Venture Capital Industry: Experimental Evidence (December 20, 2021). Available at SSRN: or

Ye Zhang (Contact Author)

Stockholm School of Economics - Finance Department ( email )


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