Cognitive Biases in Sustainable Energy Venture Investment

An increasingly important theme in management research is how corporations should address sustainable development. It is widely recognized that innovation will play a key role as corporations move toward sustainable development, and that substantial investment will be required to align important infrastructure sectors with its requirements. Two important actors in this process are the traditional funding agents of innovation, professional and corporate venture capitalists. And herein lies a puzzle: until very recently, these investors had departed from the traditional "rational" model for investment in sustainable energy technology, foregoing tremendous opportunities for return. Yet over the past twenty-four months, the tables have turned. So much capital has poured into the energy sector that total investment in that sector now ranks third behind software and biotechnology, and that amount is still rising.

We are left with the question: Why do investment boom-bust cycles exist and persist? The predominant view in research to date is that the volatility of the venture capital industry stems not from irrational over- or under-reaction, but from the inherent volatility of fundamentals. In this view, venture capital investors are simply responding rationally to changes in investment opportunities.

Our research draws from insights from behavioural finance, which starts from the presumption that investors-venture capital investors included-are less than fully rational. We propose that what is missing from our understanding of venture capital decision-making is the undisclosed criteria used to evaluate investments, the ones "beyond the business plan" and the presumably "rational" risk/return calculus of Homo Economicus.

The project proposed here will identify and test for a collection of individual and group level behavioural criteria that influence venture capital investment decision-making. To verify our hypotheses we will conduct a stated-choice survey among a dedicated group of 75 VCs and corporate investors in Switzerland and other European countries investing in sustainable energy ventures, with a control group of 75 non-energy VCs. We will use discrete choice analysis to determine the relative importance of certain attributes of the investment context.

The proposed research makes important contributions to the literature on behavioural finance by focussing on high-uncertainty investments in new technology firms; to the venture capital literature by shedding light on behavioural aspects that influence the evolution of venture capital markets; and to sustainability management literature by increasing the understanding of clean technology innovation. It has significant practical implications for the financing of entrepreneurial firms in Switzerland and Europe.