The Cost of Financing Sustainable Entrepreneurship
Research Paper Title:
“Financing sustainable entrepreneurship: ESG measurement, valuation, and performance”
Authors:
Background:
The authors examine whether sustainable entrepreneurship leads to higher startup valuations and startup investor returns. They also develop a machine-learning approach that quantifies startups' ESG properties from pitch decks and whitepapers
Highlights:
The paper examines the economic attractiveness of Sustainable Entrepreneurship (SE) for entrepreneurs and investors in the context of Initial Coin Offerings (ICOs).
Startups with salient Environment, Society and Governance (ESG) goals raise financing at higher valuations.
However, startups with salient ESG goals underperform post-funding.
Overall, high valuations incentivize entrepreneurs to adopt ESG goals in the first place, while investors incur a relative financial loss for backing SE.
Our machine-learning approach to quantify startups' ESG properties from text data is available via an easy-to-use web application.
Methodology:
Number of studies: 1
Sample description: Startups that conduct initial coin offerings over the 2016-2020 period
Sample size: More than 1,000 startups
Hypothesis:
The relationship between ESG properties and startup firm valuation is positive.
The relation between ESG properties and post-funding performance is negative.
Results:
Startups with salient ESG goals raise financing at higher valuations.
However, startups with salient ESG goals underperform post-funding in terms of investor returns.
Overall, high valuations incentivize entrepreneurs to adopt ESG goals in the first place, while investors incur a relative financial loss for backing sustainability-oriented entrepreneurs.
Our machine-learning approach to quantify startups' ESG properties from text data is available via an easy-to-use web application: https://SustainableEntrepreneurship.org/
Conclusion:
This study has sought to shed light on the role of startups' Environmental, Social, and Governance (ESG) properties for their valuation and post-funding performance in token offerings, using a machine-learning approach to quantify startups' “ESG-ness” from whitepapers. Our results suggests that ESG is positively related to valuation and negatively related to post-funding performance, suggesting that it is economically attractive for entrepreneurs to adopt ESG goals in the first place, while investors incur relative financial losses post-funding. Our study spearheads the emerging literature on how ESG affects entrepreneurial finance and suggests several promising avenues for future research.