Opportunities and risks of ESG factors in early-stage ventures: evidence from the software sector

Abstract Early-stage software startups face increasing pressure to integrate Environmental, Social, and Governance (ESG) principles, yet most research on ESG performance focuses on established, publicly listed firms. This study examines how ESG creates opportunities and risks for nascent software ventures and how its role changes across funding stages. We employ a qualitative interview study combining semi-structured interviews with representatives of German software startups and venture capital investors, complemented by document analysis. Using a content-structuring approach, we analyze how entrepreneurs and investors perceive, implement, and evaluate ESG practices. Findings show that ESG functions primarily as a hygiene factor in early venture stages, supporting credibility with customers, employees, and regulators. Around the transition from seed to Series A, ESG takes on a signaling role as investor attention rises through limited-partner mandates and sustainability screening. Internal ESG practices are typically secondary to a product’s external impact unless required by due diligence or regulation. Startups report opportunities in cost control, risk management, and sales enablement, but also risks in symbolic compliance and misalignment with growth priorities. We interpret these findings through a stage-sensitive lens that distinguishes hygiene and signaling logics and highlights an investor bifurcation between impact-oriented and financially driven funds, shaped by limited partner mandates, due diligence requirements, and stage-specific expectations. The study refines boundary conditions in the ESG–performance debate and offers practical guidance for aligning ESG practices with venture maturity.