Impact Investing and Venture Capital Industry: Experimental Evidence

This paper studies the effect of startups’ ESG characteristics on venture capitalists’ investments by linking investors’ behavior in an incentivized experiment to their real-world portfolio data. I find that investors perceive impact ventures to be less profitable and harder to evaluate than similar profit-driven startups. Investors’ interest in impact ventures positively correlates with their social preferences, supporting the non-pecuniary motivation for impact investing. Impact ventures are also associated with better ex-post performance at the global level. The paper uses a dynamic Bayesian model to demonstrate how these identified beliefs and preferences affect impact investment in the venture capital industry.