When does it pay to be green for startups? Sustainability signaling and venture funding

This study examines the relationship between sustainability and financial performance for startups. Startups must decide how to integrate sustainability considerations into their business model early on. Thereby, they suffer from scarcer resources compared to large firms and liability of newness, while familiar sustainability data are unavailable. Based on stakeholder and signaling theory, we test this relationship on a dataset of over 27,000 startups, combining Crunchbase data with sustainability signaling data – generated via natural language processing – as a sustainability indicator. We find a robust ∪-shaped connection between sustainability signaling and venture funding, with the most and least sustainable startups attracting more funding than their peers. This pattern is persistent for just-green and just-brown subsamples, suggesting investors discriminate for strategic sustainability differentiation in general and within subgroups. Our findings confirm the crucial role of strategic differentiation for startups, extending it to sustainability.