The Influence of Regulatory Risk on Sustainability-Related Venture Capital Investment Decisions

Venture Capital (VC) investments are an important source of financing for innovative entrepreneurial firms. While the largest share of VC has traditionally been invested in a few sectors such as information and communication technologies (ICT) or biotechnology, sustainability-related (or cleantech) ventures are recently attracting increasing amounts of capital. However, these investments, in areas like sustainable energy technologies, still represent a small percentage of the overall VC market. One of the distinguishing factors between traditional VC target sectors and the emerging sustainability-related VC segment is that regulatory drivers play an important role when it comes to sustainability-related innovation. These drivers can be either perceived as a risk or an opportunity. Our preliminary research findings indicate that VCs tend to focus on the perception of regulatory risk rather than seeing the opportunities created by regulatory policies such as support schemes for solar energy or climate policies such as the Kyoto Protocol, which may in fact improve the competitive situation of innovative sustainable energy firms vis-à-vis industry incumbents. As a result of this perception, government initiatives that are meant to be supportive of the sustainability-related VC market might actually end up crowding out private venture capital rather than improving conditions for VC financing in this important sector.
The objective of this research project is to gain a deeper understanding of venture capitalists' perception of regulatory risks and opportunities, their influence on investment decisions with regard to sustainability-related ventures, and strategies to manage regulatory risk.