Filling the Legitimacy Void: The Value of Sustainability Orientation Across Investor Segments in Venture Financing
Authors:
Feilian Xia (South China University of Technology), James Thewissen (UCLouvain / Shanghai University / Vrije Universiteit Brussel), Paul P. Momtaz (Whitman School of Management, Syracuse University), and Shuo Yan (Zhejiang University)
Journal:
Journal of Business Venturing (2026)
Summary:
Playing up sustainability helps a startup raise money only when it lacks other credentials — for startups already backed by professional investors, emphasizing sustainability actually reduces funding.
Research Questions:
1. When does emphasizing sustainability help a startup raise money, and when does it hurt?2. Does having professional investors on board beforehand change how the public values a startup's sustainability?
3. Do startups without such backing lean more heavily on sustainability messaging?
4. Does it matter whether those sustainability claims reflect real commitments or are just talk?
What we know:
Sustainability (ESG) has become a standard selling point for startups seeking capital, but studies have found conflicting results — sometimes it helps fundraising, sometimes it makes no difference, sometimes it backfires. No one had a clear explanation for why. The answer matters to entrepreneurs deciding how to pitch, to investors judging those pitches, and to regulators worried about hollow "green" branding.
Novel Findings:
Sustainability is not a universally good selling point; its value depends on what else a startup already has going for it. For startups with no professional investor behind them, sustainability fills a credibility gap and attracts money — a stronger sustainability message is linked to roughly 26% more funding. For startups that already have professional backing, the same message signals a possible distraction from profits and is linked to less funding. Startups without backing also emphasize sustainability more (about 20% more), and mostly through broad social-good language rather than concrete commitments.
Novel Methodology:
The authors gauge how much each startup emphasizes sustainability by scanning its fundraising document (the "white paper") for ESG-related terms. They then use an AI language model to judge whether each mention is a concrete, verifiable commitment or merely aspirational wording — among the first uses of AI to separate genuine sustainability substance from rhetoric in fundraising. Several statistical checks confirm the results and guard against bias.
Implications for Practice:
For entrepreneurs: don't assume sustainability always strengthens a pitch — it works best when you lack other credentials, and can clash with a profit-focused story once professional investors are involved.
For investors: weigh sustainability claims alongside a venture's other qualities, and look past buzzwords to whether the claims reflect real commitments.
Implications for Policy:
Rules that simply require startups to disclose sustainability orientation are not enough. Regulators should focus on the substance behind the claims and on giving investors the means to tell genuine commitments apart from empty talk.
Implications for Society:
The findings caution against taking "green" or socially responsible branding at face value, since much of it — especially social-good messaging — is aspirational rather than backed by action. Better ways to verify such claims would help money flow toward genuinely responsible ventures.
Implications for Research:
Future work could follow startups over time to see whether they keep their sustainability promises, test whether the same pattern holds in other funding settings (venture capital, IPOs, traditional crowdfunding), and use experiments to pin down exactly how investors weigh sustainability against other signals.
Full Citation:
Xia, F., Thewissen, J., Momtaz, P. P., & Yan, S. (2027). Filling the legitimacy void: The value of sustainability orientation across investor segments in venture financing. Journal of Business Venturing, 42, 106641. https://doi.org/10.1016/j.jbusvent.2026.106641
Abstract:
When and why does sustainability attract entrepreneurial funding? Drawing on legitimacy theory, we argue that prior institutional backing segments ventures into distinct contexts in which public investors value sustainability orientation differently. Without such backing, sustainability can compensate for missing commercial validation by providing an alternative source of moral legitimacy. When institutional backing already certifies pragmatic legitimacy, sustainability may conflict with return-oriented expectations. Examining 2222 token-based crowdfunding campaigns, we find that sustainability orientation is positively associated with funding among non-backed ventures but negatively associated with funding among institutionally backed ventures. Consistent with this segmented valuation logic, non-backed ventures display stronger sustainability orientation. An LLM-based decomposition shows no statistically significant difference between the extent to which substantive and symbolic sustainability attenuate the funding disadvantage of non-backed ventures; their greater sustainability orientation is most clearly concentrated in symbolic social content. Our findings position sustainability not as a universally beneficial cue, but as a compensatory source of legitimacy whose value depends on what other types of legitimacy ventures already possess.
https://doi.org/10.1016/j.jbusvent.2026.106641