Attracting Venture Capital with Social Objectives: The Role of Early-Stage Funders

Abstract

Ventures with social objectives have a hard time attracting venture capital (VC) as their financial capability and social aims are questioned. In this study, we focus on early-stage funders and how their simultaneous certifications relate to the success in obtaining subsequent VC investment. Social business hybrids, i.e., social value creating for-profit ventures, utilize their dual logic to attract different types of early-stage funders. We argue that funders that prioritize public welfare (e.g., governments and foundations) certify the importance of their investees’ social aims whereas financially driven investors (e.g., angel investors) certify their investees’ financial capability to subsequent resource providers. Therefore, we hypothesize that public-welfare-driven investors play a complementary role to financially driven investors for social business hybrids in attracting VC investment. Empirical analysis of 952 ventures demonstrates that social business hybrids with an angel investment and a government grant (foundation grant) were 1.6 (1.5) times more likely to obtain subsequent VC investment compared to ones only with an angel investment. Supporting our argument further, supplemental analysis shows that receiving an accelerator investment (i.e., another financially driven investment) next to an angel investment did not increase the likelihood of subsequent VC investment.