Catalysts for Climate Solutions: Corporate Responses to Venture Capital Financing of Climate-tech Startups

Abstract

We study whether incumbent firms increase their product focus on climate solutions in response to venture capital (VC) financing of climate-tech startups. Using large language models to measure a firm's focus on climate solutions, we find that incumbents in similar product markets as VC-backed startups increase their product focus on climate solutions. Consistent with VC investment serving as a signal for future demand and commercial potential of climate solutions, the increase is more pronounced when the VC investment demonstrates more promising financial prospects and has higher visibility. Additionally, incumbents with a pre-existing focus on climate solutions are more likely to respond, and their stock prices respond positively in anticipation of future benefits from the commercial potential of climate solutions. Overall, the results suggest that VC financing of climate-tech startups serves as a signal of the commercial viability for climate technologies, thereby catalyzing incumbents' investments in climate solutions.

Keywords: venture capital, innovation, climate change, climate solutions, technology

JEL Classification: G24, G31, Q54, Q55