Abstract
Green start-ups contribute towards a transition to a more sustainable economy by developing sustainable and environmentally friendly innovation and bringing it to the market. Due to specific product/service characteristics, entrepreneurial motivation and company strategies that might differ from that of other start-ups, these companies might struggle even more than usual with access to finance in the early stages. This conceptual paper seeks to explain these challenges through the theoretical lenses of entrepreneurial finance and behavioural finance. While entrepreneurial finance theory contributes to a partial understanding of green start-up finance, behavioural finance is able to solve a remaining explanatory deficit produced by entrepreneurial finance theory. Although some behavioural finance theorists are suggesting that the current understanding of economic rationality underlying behavioural finance research is inadequate, most scholars have not yet challenged these assumptions, which constrict a comprehensive and realistic description of the reality of entrepreneurial finance in green start-ups. The aim of the paper is thus, first, to explore the specifics of entrepreneurial finance in green start-ups and, second, to demonstrate the need for a more up-to-date conception of rationality in behavioural finance theory in order to enable realistic empirical research in this field.
Highlights
Theory and empirical work in entrepreneurial finance have made significant strides in the last decades in explaining the supply-side perspective of investors and attempting to illustrate the demand-side challenges involved when new and young companies seek external finance.One emerging field of entrepreneurship study, sustainable entrepreneurship, has far not received much research attention in the context of finance
While entrepreneurial finance theory can provide some insight into investment in green start-ups, there are some aspects of it that are more challenging to illuminate within the existing theoretical framework—such as motivation beyond profit and strategic considerations arising from sustainability-related goals
Green start-ups and sustainable entrepreneurs may in certain cases find “socially responsible investors” or “impact investors” who target their types of companies and are interested in achieving a societal impact with their investments by adopting a so-called blended value approach [24,25]
Summary
Theory and empirical work in entrepreneurial finance have made significant strides in the last decades in explaining the supply-side perspective of investors and attempting to illustrate the demand-side challenges involved when new and young companies seek external finance. While entrepreneurial finance theory can provide some insight into investment in green start-ups, there are some aspects of it that are more challenging to illuminate within the existing theoretical framework—such as motivation beyond profit and strategic considerations arising from sustainability-related goals. The behavioural finance literature is still in its early years, it has some crucial contributions to make here It can especially help explain why investors’ decision-making criteria include other aspects beyond such conventionally considered criteria as risk, return, liquidity and time-horizon. As is shown in this paper, we can come a long way in explaining these questions by using entrepreneurial finance theory, its theoretical framework largely holds the implicit (and sometimes explicit) assumption of rationality in investment decision-making. That is why this paper, in conclusion, draws on theory of rationality in economic behaviour to suggest how behavioural finance theory can evolve into a more realistic and holistic framework for exploring the topic of investment in green start-ups in particular as well as in start-ups in general
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