Unlocking green startup investments: How environmental policy pressures drive Venture Capital funding decisions

The urgency of addressing climate change has spotlighted the role of green startups. Independent (IVCs), Corporate (CVCs), and Governmental (GVCs) Venture Capitalists are key players in financing these startups. This study examines how public environmental policies influence the investment decisions of different VCs toward green startups, addressing a gap in understanding the interplay between VCs' behavior and policy frameworks. Drawing on Real Option, Open Innovation, Agency, and New Institutional theories and leveraging a panel dataset of 6754 VCs investments in 13,015 startups (2010–2019) from Crunchbase, Compustat, and OECD Environmental Policy Stringency data, our findings reveal that GVCs and CVCs have a positive propensity to invest in green startups, while IVCs have a negative one. Moreover, incentives do not reduce IVCs' investments while encouraging CVCs' funding in green startups. Conversely, constraints mitigate the risk perceived by IVCs, fostering their propensity to invest in green startups while discouraging CVCs. We contribute to the literature on the influence of environmental policies on investments by introducing a theory-driven classification of environmental policies and demonstrating that policy effectiveness varies across VC types due to their different investment logic. These insights guide policymakers in designing tailored incentives and constraints to mobilize private capital toward green startups.