The Cost of Financing Sustainable Entrepreneurship

Research Paper Title:

“Financing sustainable entrepreneurship: ESG measurement, valuation, and performance”

Authors:

Sasan Mansouri

Paul P. Momtaz

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.

 
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