Corporate sustainability addressment in business
plans and its influence on venture capital investment
and firm survival
ABSTRACT:
By using a database with over 400 business plans written in the United States this research attempts to find out what the influence of corporate sustainability addressment in business plans on venture capital investment and firm survival is. Using two different constructs to account for environmental and for social concerns a regression analysis is conducted. First, to find out the constructs’ influence on venture capital investment and second, the constructs’ influence on firm survival. No significant effect of corporate sustainability addressment on venture capital investment or on firm survival was found.
Keywords: Business plan, Venture Capital, Corporate Sustainability
Milou Noordveld S2026414
University of Groningen Faculty of Economics and Business
MSc. Business Administration: Small Business and Entrepreneurship
Supervisor: Dr. Ir. J. Kraaijenbrink Co-assessor: Prof. Dr. P.S. Zwart
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Table of contents
1. Introduction p1
2. Theoretical framework p4
2.1 Venture capital and its role in the investment world p4
2.2 Business plans p6
2.3 Important factors in business plans for venture capitalists p7
2.4 Corporate sustainability p9 2.5 Conceptual model p11 3. Methodology p13 3.1 Data collection p12 3.2 Measurement p12 3.2.1 Dependent variables p12 3.2.2 Independent variables p13 3.2.3 Control variables p14 3.3 Analysis p16 4. Results p17 5. Discussion p21 5.1 Analysis of results p22 5.2 Implications p23 5.3 Limitations p24 6. Conclusions p26 7. References p28 8. Appendices p30
A. List of synonyms independent variables p30
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1. Introduction
Each year, thousands of business plans are written in the United States alone. These plans are written by entrepreneurs that start a new business, or by entrepreneurs with an existing business and a new business idea. Business plans come in many forms, lengths, levels of detail and they serve different purposes. One important purpose of a business plan is to attract external capital. An important source of external capital, especially for young businesses, is venture capital. This type of investment is especially suitable for high-risk, high-growth companies that want to fuel growth or fuel the development of a new product (Black & Gilson, 1998).
Venture capitalists base their decisions on whether or not to invest in business ideas primarily on the business plans that entrepreneurs submit. MacMillan, Siegel & Narasimha (1986), Hall & Hofer (1993), Zacharakis & Meyer (1998), Mason & Stark (2004) and many other studies were conducted in an attempt to identify important factors in the decision-making process of venture capitalists. These studies already identified some key decision-criteria in this decision-making process such as entrepreneurial experience, entrepreneurial education and the level of detail in financial projections.
A concept that did not receive much attention in the venture capital literature is the concept of corporate sustainability. The concept of corporate sustainability basically states that corporations have non-monetary responsibilities too. That is, a business should look out for and pay attention to its surroundings in addition to trying to run a profitable business (Atkinson, 2000). Atkinson (2000) explained that at the beginning of the 1990s, conferences and studies, amongst others from the United Nations, highlighted the importance of sustainable development. Afterwards, countries over the whole world started setting goals for their country as a whole and for different sectors to improve sustainability. Dyllick & Hockerts (2002) explain this as a form of ‘societal evolution’ towards a world where wealth is more equally divided and were a large emphasis is put on the preservation of resources and of the natural environment for the generations that are yet to come.
This trend towards increased awareness of sustainable business-making has large implications for entrepreneurs that want to start a business. If they want to start operating, they need to make sure that they comply with the regulations that a country sets in terms of sustainable production. These regulations are becoming stricter over time. Therefore, entrepreneurs that think about sustainability and the consequences of their business on its surroundings and address these consequences in their business plan will have an advantage later on over entrepreneurs that started operating without thinking about sustainability concerns. For the latter, it will be harder to implement changes to comply to these regulations when they are already operating.
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production is becoming more and more important, businesses with sustainable production processes, high social norms and values, and low impact on climate change are likely to prosper in the near future, since they will not experience difficulties complying to government rules, regulations and targets in terms of sustainability. Therefore, one would expect venture capitalists to be supportive of these ideas. After all, this potential prosperity of these businesses will increase venture capitalists chances of a substantial return on investment from these businesses. Put differently, sustainable production could be a predictor for firm success, and if so, it is important that venture capitalists signal corporate sustainability in business plan.
In this research, I want to investigate whether venture capitalists value the addressment of corporate sustainability in business plans. Additionally, what the effect of addressing corporate sustainability on short- and long-term firm survival is.
The question that I will attempt to answer in this research is the following:
“To what extent does addressing corporate sustainability in a business plan influence businesses' chance of venture capital funding and businesses’ chance of survival?”
The purpose of this research is to find out whether addressing corporate sustainability in a business plan influences a firm’s chances of receiving venture capital and their chances of short- and long-term firm survival. Thereby discovering more about the investment-decision criteria of venture capitalists and discovering more about the effects of corporate sustainability practices on businesses.
The significance of this research from a managerial perspective is two-sided. On the one hand, it could be beneficial for entrepreneurs and managers to know whether addressing corporate sustainability can help them to obtain external capital and whether it increases their chances of business success. Also, research has proven that venture capital-backed businesses perform better than new businesses in general (Davis & Stetson, 1984). Therefore, finding out which factors are important to venture capital firms can help entrepreneurs and managers to find out what factors are essential for new venture success. On the other hand, it will show venture capitalists whether or not addressing these concerns increases the chance of business success and, thus, if it increases their chance of (higher) positive returns on investment. Additionally, for venture capital firms identifying important factors that lead to success can lead to more efficient information processing (Hall & Hofer, 1993) and better communication between venture capitalists (Zacharakis & Meyer, 1998).
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addressing corporate sustainability can be beneficial for chances on venture capital investment and firm survival, thereby helping to strengthen the relatively undeveloped literature field of corporate sustainability. Using a database with observations collected between 1990 and 2004, this research can contribute by investigating the effect of corporate sustainability on venture capital investment, short-term firm survival and long-short-term survival all in one research.
This research will proceed with a theoretical framework in which the current literature on business plans and venture capital is addressed. This research will follow a theory testing approach. A conceptual model is designed and hypotheses are stated and will be tested. This approach is chosen since the literature field of venture capital and business plans is relatively well developed. The literature review will be followed by a methodology section and a results section. Afterwards, in the discussion, an analysis, implications and limitations are provided. In the end, a conclusion is provided. Using a multiple regression analysis, no evidence that supports the proposed hypotheses was found.
2. Theoretical framework
In this section the research question that I posed in the introduction will be developed into testable hypotheses. To do so, I will commence by explaining venture capital as a form of investment, especially venture capital as it is known in the United States. In section 2.2, the use of business plans in business-making will be explained. In section 2.3, I will discuss the current literature on important factors in the investment decision of venture capitalists, especially those factors that can be identified in business plans. In section 2.4 I will discuss the current literature on corporate sustainability and how this can be linked to identifying new factors that are important in the investment decision of venture capitalists and to firm-survival. Here, I will also set up testable hypotheses based on the aforementioned literature. Section 2.5 illustrates these insights by means of a conceptual model.
2.1 Venture capital and its role in the investment world
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capital organizations in high-growth, high-risk, often high-technology firms that need capital to finance product development or growth and must, by the nature of their business, obtain this capital largely in the form of equity rather than debt’ (p. 245). This definition of venture capital is the one that will be used throughout this research.
Jeng & Wells (2000) explain that in the United States, venture capital can be divided in three different categories: (1) seed capital, (2) startup capital and (3) expansion investment. Seed capital is often used to do research and to invent a product, also it is used to research how a product can be commercialized. Startup capital is required when a firm wants to market a product. In this stage, not much revenue, if any at all, is generated, and therefore cash is essential. Expansion investment is essential for growing companies that want to fund innovation or the expansion of capacities.
The partners of a venture capital firm are called ‘venture capitalists’. Their money typically comes from institutional investors, for example, pension funds. They offer these investors a diversified investment portfolio. In exchange, they demand fees from these investors between 20 and 30 per cent of all positive returns (Berk, Demarzo, & Harford, 2009, p431). Black & Gilson (1998) mention in their definition that venture capital firms often investment in high-growth, high-risk and high-technology firms. Gompers & Lerner (2001) add that these firms are often characterized by a low level of tangible assets and that these firms are active in very dynamic markets.
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Figure 1: Venture capital investment in the United States
Source: National Venture Capital Association, 2016
2.2 Business plans
Honig & Karlsson (2004) define a business plan as: ‘a written document that describes the current state and the presupposed future of an organization’ (p. 29). There exists quite some academic controversy about the necessity of writing a business plan. Although most starting companies do write a business plan, it is undeniable that some well-performing companies never wrote a business plan at all. Honig & Karlsson (2004) investigated 396 nascent entrepreneurs in Sweden to find out what factors lead them to write a business plan. Also, they investigated whether writing a business plan actually yields positive business results. Their results showed that formal pressures, such as rules opposed by governmental institutions, and mimetic forces, copying behavior of entrepreneurs in an attempt to copy the success of well-performing businesses, do push entrepreneurs to write a business plan. Surprisingly, they did not find evidence that proved that writing a business plan yields a higher chance of profitability. In later research, Karlsson & Honig (2009) even argue that writing a business plan is highly institutionalized behavior with no rational purpose. They draw this conclusion after they find that entrepreneurs tend to derail from their plan and intentions when time goes on, and that this does not necessarily has an impact on firm performance. Another argument against writing a business plan that they find is that they take up ample resources in the form of payments to external consultants, paper and printing, and of course, time (Karlsson & Honig, 2009).
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2.3 Important factors in business plans for venture capitalists
Venture capital firms have been investigated in more than a few studies. These studies were often aimed at finding out factors in business plans that influence the investment decision of venture capitalist firms. The first studies in this field used mostly self-reporting as a tool to find out what venture capitalists found important.
Tyebjee & Bruno (1984) interviewed 46 venture capitalists and sent out a survey to 156 venture capital firms in the United States to find out which factors they found important in business plans. They conducted a factor analysis and found that characteristics that venture capitalists look at can be divided in five dimensions. These dimensions are: (1) market attractiveness, (2) product differentiation, (3) managerial capabilities, (4) environmental threat resistance, and (5) cash-out potential. Their regression analysis found that market attractiveness and product differentiation have the largest impact on the expected return. Managerial capabilities and environmental threat resistance have the largest impact on perceived risk. The expected return and perceived risk together determined the investment decision.
Using a questionnaire that was answered by hundred venture capitalist firms, MacMillan et al. (1986) attempted to determine the most important factors that influence the investment decisions of venture capitalist firms. Their main finding is that, although a business plan is generally seen as decisive, it actually is the entrepreneur and his or her characteristics and experiences that are the most important. When it comes to entrepreneurial characteristics and experience, MacMillan et al. (1986) found that especially evidence of staying power and the ability to take risk are important factors for venture capitalists. Additionally MacMillan et al. (1986) find that it is considered very important by venture capital firms that a business consists of an adequate management team that, together, possesses all essential characteristics and experience that is necessary in a particular market and for a particular business idea. MacMillan et al. (1986) argue that because it is so hard to measures the capabilities and characteristics of an entrepreneur, a business plan should indicate as clearly as possible that the entrepreneur, or the entrepreneurial team, is capable of leading the business and capable of obtaining positive business results.
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All previously mentioned research used data collection methods in which venture capitalists were asked about their own behavior. Zacharakis & Meyer (1998) argue that this might not be completely objective, since reporting about your own decision-making process is often biased. Therefore, in their study a different research method was chosen. In this study, venture capitalists were asked to make real-time decisions. Different information factors were used in different combinations. Afterwards, the researchers could find weights of the information factors through a regression analysis. This led to different findings. First of all, it confirmed their opinion that venture capitalists self-reporting is not objective. Additionally, it was found that venture capitalists decision-making is often very consistent, however, venture capitalists often are not able to clarify what exactly are the important criteria in the decision-making process. Besides these findings, the information factors also indicated that the more information available, the harder it became for venture capitalists to make a well argued decision. In their real-time decision research, they used different criteria divided in two categories: (1) cognitive cues and (2) task cues. Of the cognitive cues, familiarity with the market of the entrepreneurial team and competition turned out to be the most important information factors. Of the task cues, product superiority turned out to be the most important information factor.
Shepherd, Ettenson & Crouch (2000) use criteria often used in the industrial organizational strategy literature and test which of these criteria are most important in the decisions of venture capitalists. They find, monitoring the decision-making process of venture capitalist firms in Australia, that industrial competence is the most important criterion. The second most important criteria are competitive rivalry, timing and educational capability.
Mason & Stark (2004) conducted a research to identify which differences exist in the way that banks, venture capitalists and business angels evaluate business plans. They argue that venture capitalist firms value more highly the capabilities of the management team, the product or service and the market. That is because, unlike for example banks, venture capitalist firms have downside risk as well. In a case of bankruptcy, they will not receive back their initial investment. Besides characteristics and experience of entrepreneurs, financial considerations are very important for venture capitalists. After all, their primary goal is to make money and therefore, positive returns are needed. A thorough market analysis in a business plan was also found to be important. Indicating that proper market research was performed, competitors were recognized, and a niche was identified all helped in convincing venture capitalist to provide capital.
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that were found to be important in some research, however not in all, include the perceived risk of the investment, an extensive market analysis and profitability of the concerning industry.
2.4 Corporate sustainability
Corporate sustainability is a relatively new concept that knowns many definitions. In this research, I will work with the definition of Van Marrewijk & Werner (2003). The definition that they provide is the following: ‘a company’s activities - voluntary by definition - demonstrating the inclusion of social and environmental concerns in business operations and in interactions with stakeholders’ (p. 107). At the end of the 1990s, the responsibility for sustainable production made a large shift from governments to entrepreneurs and managers (Dyllick & Hockerts, 2002). In this period, corporate sustainability became increasingly important.
As explained in the introduction, corporate sustainability did not yet receive much attention in the venture capital literature. However, if corporate sustainability has an influence on firm performance and firm survival, it could very well be a factor that is important in the investment decision of venture capitalists. Therefore, I want to investigate whether the addressment of corporate sustainability in business plans has an influence on the financing decision of venture capitalists. The ‘societal evolution’ that Dyllick & Hockerts (2002) explain is going on for some decades now. In this time, many climate tops have been held in which countries exchanged ideas on how to work on preserving our planet for future generations. I expect that venture capitalists are well aware of the trend towards more sustainable business-making. If more firms nowadays address these concerns, it is likely that venture capitalists signal them. If they observe this trend towards increased sustainability, I expect that they see that firms that elaborately address sustainability concerns could thrive well in the future, when this trends continues. If that is the case, they should be more willing to help finance businesses that already thought about corporate sustainability. Because these firms have a higher chance of survival, and thus, venture capitalists will have a higher chance that they will receive their returns.
Van Marrewijk & Werner (2003) divide the concept of corporate sustainability into social and environmental concerns. They state that besides an economic responsibility, companies also have an environmental responsibility and a social responsibility. In other words, they mention that corporate sustainability consists of a ‘people’ a ‘profit’ and a ‘planet’ dimension.
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natural system to absorb and assimilate these emissions. Finally they do not engage in activity that degrades eco-system services.” (p. 133).
If the trend towards increased sustainability, also ecologically, as was emphasized by Atkinson (2002), Dyllick & Hockerts (2002), Van Marrewijk & Werre (2003) continues, I expect that venture capital investors signal the addressment of environmental concerns that indicate that entrepreneurs are willing to produce ecologically sustainable and that this addressment will increase chances on venture capital investment.
Therefore, focusing on the environmental aspect, the first hypothesis is as follows:
𝐻1𝐴: Addressing environmental concerns in business plans positively affects businesses’
chance of venture capital investment.
Because firms that think about environmental concerns before they start operating will have less problems complying to stricter rules and regulations in terms of environment sustainability in the near future than firms that did not think about these concerns, I expect that this increases businesses’ chances of short-term firm survival. Therefore I state:
𝐻1𝐵: Addressing environmental concerns in business plans positively affects businesses’
chance of short-term survival.
For long-term firm survival, the same line of reasoning holds. If the trend of increasing concern for sustainability continues, environmental concerns will become increasingly important and therefore, entrepreneurs who thought about these concerns and addressed them before starting operating will likely have a better chance on long-term firm survival than entrepreneurs who do not think about these concerns. Therefore, the following hypothesis is:
𝐻1𝐶: Addressing environmental concerns in business plans positively affects businesses’
chance of long-term survival.
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communities. They manage social capital in such a way that stakeholders can understand its motivations and can broadly agree with the company’s value system.” (p. 134).
The line of reasoning for social concerns is basically the same as that for environmental concerns. If the trend towards increased sustainability, also socially, as was emphasized by Atkinson (2002), Dyllick & Hockerts (2002), Van Marrewijk & Werre (2003) continues, I expect that venture capital investors signal the addressment of social concerns that indicate that entrepreneurs are willing to operate socially sustainable and that this addressment will increase chances on venture capital investment. Therefore, I hypothesize:
𝐻2𝐴: Addressing social concerns in business plans positively affects businesses’ chance of
venture capital investment.
Firms that address social concerns before they start operating have an advantage over firms that do not address these concerns. If rules and regulations in terms of social sustainability become stricter, firms that are already socially sustainable (to some extent), will have less problems with these changes than firms that do not operate socially sustainable. I expect that addressing these concerns increases businesses’ chances of short-term firm and long-term survival, since it is expected that this trend towards more sustainable production is not expected to stop in the upcoming years. Therefore I state:
𝐻2𝐵: Addressing social concerns in business plans positively affects businesses’ chance of
survival.
𝐻2𝐶: Addressing social concerns in business plans positively affects businesses’ chance of
long-term survival.
2.5 Conceptual model
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Figure 2: Conceptual model
3. Methodology
This section will first explain in section 3.1 which data will be used and how it was collected. In section 3.2, the choice of dependent variables, independent variables and control variables will be explained. In section 3.3, the data analysis will be explained and descriptive statistics will be provided.
3.1 Data collection
For this research I will use a database that was constructed by Dr. Ir. J. Kraaijenbrink & Dr. T. Ratinho. The database consists of approximately 420 business plans gathered by venture capitalist firms in the United States between 1990 and 2004. The advantage of this database is that it consists of a large number of observations. Moreover, since the data was collected around 20-25 years ago, it provides an insight in whether firms ‘survived’ in the long-run. The businesses that arose from the business plans were checked twice, both in 2004 and in 2014 to verify whether they were still operating.
3.2 Measurement
This subsection will explain how the constructs mentioned in the conceptual model will be translated into variables that can be obtained from the database or that can be coded from the business plans. Additionally, the choice of control variables will be explained.
3.2.1. Dependent variables
13 Venture capital investment
This variable measures whether or not the business idea received investment from a venture capital firm. I will use an existing variable in the database. This is a binary variable. If the idea received investment the value is 1, if it did not receive investment, the value is 0.
Short-term firm survival
This variable measures whether in the short-run, firms ‘survive’ and thus, are still existent and operating. I will use an existing variable in the database that measures firm survival in 2004. It is a binary variable. If the business is still operating in 2004, the value is 1, if the business is not operating anymore, the value is 0.
Long-term firm survival
This variable measures whether in the long-run, firms ‘survive’ and thus, are still existent and operating. I will use an existing variable in the database that measures firms survival in 2014. It is a binary variable. If the business is still operating in 2014, the value is 1, if the business is not operating anymore, the value is 0.
3.2.2. Independent variables
To measure the constructs ‘environmental concerns’ and ‘social concerns’, I created two scale variables that are explained below. I conducted a search through all business plans based on two lists of synonyms that are associated to respectively environmental and social concerns. I then looked at all hits within a business plan and noted the appropriate scales. The list of synonyms I searched for can be found in appendix A.
The addressment of environmental concerns
The variable ‘environmental concerns’ measures whether or not environmental concerns are mentioned in a business plan. It is a scale variable with the following categories:
1. No environmental concerns and/or consequences are addressed.
(No environmental concerns, consequences or experience in environmental issues are/is stated.) 2. Some addressment of environmental concerns and/or consequences is stated.
(Environmental concerns, consequences or experience in environmental issues are/is stated, no argumentation is provided.)
3. Addressment of environmental consequences and/or concerns is elaborate.
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argued reasoning is used, expenses to account for environmental consequences are included in the financial projections.)
4. Solving an environmental problem is one of the main goals of the venture.
(Clearly stated in mission/vision that one of the largest goals or motivations is care for the environment or to solve an environmental problem.)
5. The entrepreneurs aims to solve an environmental problem. This goal is more important than profit-maximization.
(Clearly stated that the venture has no motivation to make large profits. Solving an environmental problem is the only goal.)
A more elaborate explanation on the differences between the five scales, including examples, can be found in appendix B.
The addressment of social concerns
The variable ‘social concerns’ measures whether or not social concerns are mentioned in a business plan. It is a scale variable with the following categories:
1. No social concerns and/or consequences are addressed. (No social concerns, consequences or experience are/is stated.) 2. Some addressment of social consequences and/or concerns is stated.
(Social concerns, consequences or experience are/is stated, no argumentation is provided.) 3. Addressment of social consequences and/or concerns is elaborate.
(Elaborate addressment can be: examples are given, evidence from trustworthy sources is given, well-argued reasoning is used, social expenses are given in the financial projections.)
4. Solving a social problem is one of the main goals of the venture.
(Clearly stated in mission/vision that one of the largest goals or motivations is to solve a social problem.)
5. The entrepreneurs aim to create a social venture. Solving a social problem is more important than profit-maximization.
(Clearly stated that the venture has no motivation to make large profits. Solving a social problem is the only goal.)
A more elaborate explanation on the differences between the five scales, including examples, can be found in appendix B.
3.2.3. Control variables
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important in venture capitalists’ decisions-making process. Based on these factors, I identified control variables that I will account for in this research. In this subsection, the choice for these particular control variables and how they are measured is explained.
Financial information
Mason & Stark (2004) highlighted the importance of financial information in venture capitalists decisions. I argue that financial information is the most reliable when it is thought of extensively by the entrepreneurs. Therefore, I include the variable ‘precision of financial projections’ as a control variable. This variable has already been coded and is available in the dataset. It is a scale variable that measures how detailed the financial projections in a business plan are. The different scales are as follows: (1) no financial projections at all, (2) short-term and general financial projections (a balance sheet and/or income statement), (3) long-term general financial projections (balance sheet and/or multiple income statements), (4) extensive financial projections (balance sheet, income statements and also more detailed projections such as operational expenses and/or planned investments), (5), very extensive and detailed financial projections (also monthly calculations).
Industry-related competence
To measure how competent entrepreneur(s) are in the industry that they want to operate in, industry-related competence is accounted for by including the variable ‘industry experience’ that measures the amount of years of experience of entrepreneurs in the industry that they will operate in. This variable has already been coded and is available in the dataset. It is measured as the sum of the years of experience of all entrepreneurs in the entrepreneurial team. The line of thought here is that entrepreneurs that have been operating in an industry for a while gained knowledge that makes it easier for them to operate in this industry again. Macmillan et al. (1985), Shepherd et al. (2000) and Mason & Stark (2004) all found evidence that entrepreneurial experience in the concerning industry is an important decision-criteria of venture capitalists.
Another form of experience is ‘start-up experience’. This variable indicates the total amount of business started prior to this business idea by the entrepreneur(s). This variable calculates the sum of all businesses started prior to this particular business by all entrepreneurs together.
Education of entrepreneur(s)
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sum of all entrepreneurs/managers of the business that held a higher education degree in the field of Business Administration or Economics.
Market analysis
Mason & Stark (2004) find that a thorough market analysis is an important factor in the decision-making process of venture capitalists. To account for this finding I use two variables. First the variable ‘market analysis pages’. This variable measures the amount of pages, rounded at half pages, that is dedicated to a market analysis. Second, I use the variable ‘market analysis complexity’ to account for the level of thought and effort that is been put into the market analysis. The variable ‘market analysis complexity’ is a scale variable. The division between scales is as follows: (1) no market analysis at all, (2) short and superficial market analysis, (3) general market analysis based on own projections, (4) extensive market analysis including external data, (5) very extensive and precise market analysis mostly based on external data. Both variables are already coded and are available in the database.
3.3 Analysis
The data analysis will commence with a correlation matrix to check for strongly correlating variables. To test this, I will conduct a Pearson correlation test, since I am interested in linear associations between variables.
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Table 1: Descriptive statistics
Nr. of observations Mean Standard deviation Min. Max. Environmental concerns 382 1.06 0.365 1 4 Social concerns 382 1.17 0.687 1 5
Venture capital investment 199 0.19 0.390 0 1
Short-term firm survival 262 0.44 0.497 0 1
Long-term firm survival 264 0.22 0.415 0 1
Precision of financial projections
347 3.2 1.259 1 5
Industry experience 183 9.40 14.660 0 130
Start-up experience 339 0.98 1.328 0 10
Market analysis pages 375 2.91 3.019 0 24
Market analysis complexity 375 3.16 1.130 1 5
Business competencies 347 1.32 1.416 1 10
4. Results
In this section, all research results will be provided. It will follow the steps as explained in section 3.3. First, a correlation analysis will be conducted. Afterwards, regression analyses will be provided.
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Table 2: Correlation matrix
a b c d e f g h i j k a Environmental concerns x 0,222** -0,703 0,000 -0,037 -0,080 0,107 0,034 -0,048 -0,039 0,005 b Social concerns 0,222** x -0,017 0,048 0,161** -0,011 0,063 0,011 0,009 0,056 -0,069 c Venture capital investment -0,703 -0,017 x 0,050 0,014 -0,009 -0,151* -0,039 0,082 -0,026 0,092 d Short-term firm survival 0,000 0,048 0,050 x 0,603** 0,032 0,126 0,002 -0,005 0,026 0,012 e Long-term firm survival -0,037 0,161** 0,014 0,603** x 0,053 0,225** -0,048 -0,043 -0,022 -0,104 f Precision of financial projections -0,080 -0,011 -0,009 0,032 0,053 x 0,012 -0,004 0,225** 0,290** 0,029 g Industry experience 0,107 0,063 -0,151* 0,126 0,225** 0,012 x -0,099 0,082 0,032 -0,055 h Start-up experience 0,034 0,011 -0,039 0,002 -0,048 -0,004 -0,099 x 0,012 -0,044 0,113* i Market analysis pages -0,048 0,009 0,082 -0,005 -0,043 0,225** 0,082 0,012 x 0,678** -0,026 j Market analysis
complexity
-0,030 0,056 -0,026 0,026 -0,022 0,290** 0,032 -0,044 0,678** x 0,039 k Business competencies 0,005 -0,069 0,092 0,012 -0,104 0,029 -0,055 0,113* 0,039 -0,026 x
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The first regression analysis that was performed is the one that measures the effect of environmental and social concerns on the chance of venture capital investment. The explained variance in the model is 0,085 and the predictive capacity of the model is 79,7%. The results are presented in table 3.
From the figure, it can be seen that no significant results were found. Neither the independent variables ‘environmental concerns’ and ‘social concerns’ nor the control variables are found to have a significant effect on the dependent variable ‘venture capital investment’. Therefore, these results do not support hypothesis 1a ‘addressing environmental concerns in business plans positively affects businesses’ chance of venture capital investment’ and hypothesis 2a ‘addressing social concerns in business plans positively affects businesses’ chance of venture capital investment’.
Table 3: Regression on venture capital investment
B S.E. Wald Df Sig. Exp(B)
Environmental concerns -0,990 1,264 0,614 1 0,433 0,372 Social concerns 0,070 0,288 0,060 1 0,807 1,073 Precision of financial projections -0,057 0,168 0,116 1 0,733 0,944 Industry experience -0,050 0,025 3,893 1 0,048 0,952 Start-up experience -0,122 0,143 0,729 1 0,393 0,885
Market analysis pages -0,017 0,131 0,018 1 0,894 0,983
Market analysis complexity -0,173 0,253 0,468 1 0,494 0,841
Business competencies 0,145 0,129 1,258 1 0,262 1,156
Constant 0,499 1,560 0,102 1 0,749 1,647
The second regression analysis calculates the effect of environmental and social concerns on firm survival in 2004. The explained variance in the model is 0,053 and the predictive capacity of the model is 52,8%. The results are presented in table 4.
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Table 4: Regression on short-term firm survival
B S.E. Wald Df Sig. Exp(B)
Environmental concerns 0,372 0,532 0,490 1 0,484 1,451 Social concerns 0,247 0,273 0,818 1 0,366 1,280 Precision of financial projections 0,021 0,144 0,021 1 0,885 1,021 Industry experience 0,016 0,014 1,363 1 0,243 1,016 Start-up experience 0.035 0,119 0,088 1 0,767 1,036
Market analysis pages 0,085 0,137 0,380 1 0,538 1,088
Market analysis complexity 0,039 0,249 0,024 1 0,876 1,040
Business competencies 0,035 0,121 0,082 1 0,775 1,035
Constant -1,358 0,979 1,925 1 0,165 0,257
The third regression analysis measures the effect of environmental and social concerns on firm survival in 2014. The explained variance in this model is 0,146. The predictive capacity of the model is 74%. Regression results can be found in table 5. As can be seen in the figure, no significant results were found.
As no significant results were found, these outcomes do not provide support for hypothesis 1c ‘addressing environmental concerns in business plans positively affects businesses’ chance of long-term survival’ or hypothesis 2c ‘addressing social concerns in business plans positively affects businesses’ chance of long-term survival’.
Table 5: Results regression on long-term firm survival
B S.E. Wald Df Sig. Exp(B)
Environmental concerns -0,711 0,662 1,154 1 0,283 0,491 Social concerns 0,446 0,274 2,637 1 0,104 1,561 Precision of financial projections -0,070 0,163 0,186 1 0,666 0,932 Industry experience 0,030 0,015 4,035 1 0,045 1,031 Start-up experience -0,033 0,152 0,048 1 0,827 0,967
Market analysis pages 0,038 0,147 0,067 1 0,796 1,039
Market analysis complexity 0,089 0,283 0,100 1 0,752 1,093
Business competencies -0,206 0,158 1,695 1 0,193 0,814
Constant -0,810 1,114 0,529 1 0,467 0,445
To measure environmental and social concerns together, to see whether any form of ‘sustainability addressment’ positively affects venture capital investment or firm survival, I construct a variable that merges both the variable ‘environmental concerns’ and the variable ‘social concerns’. In this variable, only the scales 2-5 are included. This can show whether, when social or environmental concerns are addressed, the degree of addressment matters. In merging the variable, I ran into two observations were both ‘environmental concerns’ and ‘social concerns’ were addressed, however, they were rated on different scales. Here, I took the average of both scales and round up the numbers. I named the variable ‘sustainability concerns’. I ran all regressions again to see what the effect is.
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The regression results of the regression on venture capital investment with the independent variable ‘sustainability concerns’ can be found in table 6. The explained variance in the model is 1 and the predictive capacity is also 100%. As can be seen in the table, no significant results were found.
Table 6: Results regression on venture capital investment with one independent variable
B S.E. Wald Df Sig. Exp(B)
Sustainability concerns 69,370 9948,421 0,000 1 0,994 1.399E30 Precision of financial projections 34,379 5417,140 0,000 1 0,995 8.522E+14 Industry experience 0,014 475,575 0,000 1 1,000 1.014 Start-up experience -17,590 3753,191 0,000 1 0,996 0,000 Market analysis pages -34,327 6223,508 0,000 1 0,996 0,000 Market analysis complexity 17,396 7885,329 0,000 1 0,998 35883832.43 Business competencies -34,321 5692,927 0,000 1 0,995 0,000 Constant -347,081 53567,271 0,000 1 0,995 0,000
The results of the regression with one independent variable, ‘sustainability concerns’, on short-term firm survival can be found in table 7. The explained variance in the model is 1 and the predictive capacity is also 100%. As can be seen in the table, no significant results were found.
Table 7: Results regression on short-term firm survival with one independent variable
B S.E. Wald Df Sig. Exp(B)
Sustainability concerns 3,970 53002,067 0,000 1 1,000 52,967 Precision of financial projections -4,041 11043,409 0,000 1 1,000 0,018 Industry experience -3,002 3248,260 0,000 1 0,999 0,050 Start-up experience -10,575 6741.750 0,000 1 0,999 0,000
Market analysis pages 26,120 18202,261 0,000 1 0,999 2.208E+11 Market analysis complexity -28,043 54114,357 0,000 1 1,000 0,000 Business competencies 30,141 17568,659 0,000 1 0,999 1,231E+10 Constant 84,249 42128,696 0,000 1 0,998 3.882E+16
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Table 8: Results regression on long-term firm survival with one independent variable
B S.E. Wald Df Sig. Exp(B)
Sustainability concerns -0,368 1,256 0,086 1 0,769 0,692 Precision of financial projections 0,702 1,012 0,482 1 0,488 2,019 Industry experience -0,235 0,177 1,760 1 0,185 0,790 Start-up experience -1,288 0,983 1,716 1 0,190 0,276
Market analysis pages -0,308 0,759 0,165 1 0,684 0,735
Market analysis complexity -1,923 2,105 0,835 1 0,361 0,146 Business competencies 1,293 1,991 1,991 1 0,158 3,642 Constant 10,737 11,284 0,905 1 0,341 46031,961
5. Discussion
In section 4 regression analyses were performed and their results were given. In this section, I will explain the findings, their implications and also the limitations of this research. In section 5.1, the results will be analyzed. In section 5.2, both theoretical and managerial implications will be addressed. In section 5.3, limitations to this research and suggestions for further research will be explained.
5.1 Analysis of results
In this section I will analyze the results that were found in section 4. Since all regression analyses showed insignificant results, none of the hypotheses were supported. That is, this research failed to prove that they were correct.
Besides the insignificant results, all models where environmental concerns and social concerns were measured separately had a very low explained variance. This could imply that the model was not a good fit of the data. Also, it can be an indication that a large percentage of the influence on respectively venture capital investment, short-term survival and long-term survival is not caused by the variables in the model. And thus, that there are other factors that largely influence the dependent variables, however, they are not yet identified.
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survival’ these models did not show significant results, however, they did have an explained variance of 1 and a predictive capacity of 100%. A logistic regression analysis, especially one with multiple predictors, needs to be performed with a fairly large sample. A small sample can lead to extremely biased results (Steyerberg et al., 2001). In this case, by taking out all observations for which there were missing values, a sample of only 15 observations was left. This small sample explains the somewhat strange outcome that all variance is explained in a model and the predictive capacity is 100%, although no significant result is found.
The regression analyses with one independent variable with the dependent variable ‘long-term survival’ did not result in significant outcomes either.
Overall, we can thus conclude that this research did not provide any evidence for the hypotheses. The research question that I posed in this research was: “to what extent does addressing corporate sustainability in a business plan influence businesses' chance of venture capital funding and businesses’ chance of survival?”. This question should be answered as follows: no significant effect of corporate sustainability addressment in a business plan on businesses’ chance of venture capital funding and businesses’ chance of survival was found in this research.
In addition to this conclusion, I also conclude that none of the control variables were found to have a significant effect on the chance of venture capital investment decision or in the chance of firm-survival. This finding is contradictory to the findings of Tyebjee & Bruno (1984), MacMillan et al. (1986), Shepherd et al. (2000) and Mason & Stark (2004) who did find that financial projections, market analysis, relevant experience and relevant education are important factors in the decision-making process of venture capitalists.
One note I want to make here is that it is possible that corporate sustainability does have an effect on firm survival, however the addressment alone is not enough. More specifically, action upon this addressment of corporate sustainability while being in business could influence firm survival, whereas only addressing it in a business plan does not. Additionally, outcomes could be affected by the period in time in which observations were collect. Lastly, the concept of corporate sustainability is relatively new and not well-developed yet. Van Marrewijk & Werre (2003) states that many definitions for corporate sustainability exist and that most definitions, including the one that they suggest, are relatively vague and not all definitions include the same phenomena. Further elaboration on the last two reasons can be found in section 5.3.
5.2 Implications
In this section I will explain the implications of the results of this study from a managerial and from a theoretical perspective.
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and/or social concerns positively affects venture capital investment and/or firm survival. From a managerial perspective, these insights affect both entrepreneurs and managers of businesses on the one hand, and venture capitalists on the other hand. For entrepreneurs that write a business plan to convince venture capitalists of their business idea, these results imply that it does not pay off to address environmental and social concerns in a business plan. This does not increase their chances on venture capital investment or on firm survival. However, sustainability concerns are often also addressed based on motivations from entrepreneurs themselves personally, such as the urge to mean something for society and other personal beliefs and values (Van Marrewijk & Werre, 2003). If an entrepreneur is very concerned with social and/or environmental problems, he or she might not value the fact that addressing these problems does not increase chances on venture capital investment and/or firm survival.
For venture capitalists, this research provides more insights in their own decision-making process. It tells them that the addressment of environmental and/or social concerns is not an important factor when they make a decision about whether or not to lend capital to entrepreneurs. Moreover, since there is no support for the hypotheses that stated that the addressment of environmental and social concerns affect short-term or long-term firm survival, they do not need to value the addressment of these concerns, if it does not lead to better chances of firm survival, it quite possibly does not leave them with higher returns either.
From a theoretical perspective, this research especially has implications for the literature on venture capital. It adds to the literature on factors in business plans that are valued by venture capitalists, studies such as Tyebjee & Bruno (1984), MacMillan et al. (1986), Shepherd et al. (2000) and Mason & Stark (2004), in the sense that corporate sustainability is found to not be valued by venture capitalists. This provides further insight in their own decision-making, the importance of which was highlighted by Hall & Hofer (1993). It also adds contradictory results to the current literature on factors such as financial projections, market analysis, relevant experience and relevant education. This research also showed that only a very small percentage of all entrepreneurs addressed corporate sustainability concerns in their business plans. This showed that awareness of this concept amongst entrepreneurs is still low, or that the importance of sustainability is not yet clear to entrepreneurs. This might indicate a task for governments that want to increase sustainability in their countries.
5.3 Limitations
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First, I will start with the limitations to the database. Since the database consists of observations from approximately fifteen years ago, it is difficult to generalize these findings to observations from the last years. However, this database provided the opportunity to look at both short-term and long-term firm survival. This would not have been possible with a database were data was recently collected. Another limitation to the database is the amount of missing values for multiple variables. For example, only for the first 220 observations information on whether or not the venture capital investment was granted is available. Additionally, due to changes in names and ownership changes such as mergers or acquisitions, it was not possible for all observations to find out whether these businesses were still operating. A last limitation of the database is the period in which it was constructed. The last years of the old millennium and the first years of the new millennium were also known as the ‘dot-com era’. This period was characterized by a financial bubble due to the invention and commercialization of the internet (Goldfarb, Kirsch & Pfarrer; 2005). It is estimated by Goldfarb et al. (2005) that between 1998 and 2002, 50.000 new ventures were created that wanted to dive into the new market that was created due to this new and popular technological invention. Therefore, it can be expected that a fairly large part of the sample used for this research consisted of business ideas that wanted to become active in the internet industry, especially, the e-commerce industry. In this industry, environmental consequences are relatively low compared to industries such as, for example, the fossil fuel industry. Over time, after the internet bubble burst, the amount of companies active in the e-commerce industry decreased in relative terms, that is, in terms of the amount of companies active in other industries (Goldfarb et al., 2005). With a sample were a smaller part of all observations consists of companies active in the e-commerce industry, results could therefore be significantly different.
Another limitation to this research, as already mentioned in section 5.1, is the concept of corporate sustainability that is relatively new and therefore a solid and concrete definition is not yet agreed upon (Van Marrewijk & Werre; 2003). A suggestion for further research is to further develop the definition of corporate sustainability, to be able to reach consensus on the exact scope of the concept and on how it can be measured, as was also recommended by Atkinson (2000).
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investment. In the United States the term ‘venture capital’ only covers investments from specialized venture capital firms that invest solely in high-growth, high-risk and often high-technology firms that need capital to fuel product development or firm growth (Gompers & Lerner, 2001). Since this research is based on a sample that exists only of observations from the United States, these findings do not necessarily hold for venture capital in other parts of the world.
Additionally, as emphasized by Gompers & Lerner (2001), a study that describes the revolution of venture capital, the market of venture capital is relatively new and changes rapidly. Adding the fact that this dataset originates from 1990-2004 and therefore likely contains a relatively large number of internet-companies (Goldfarb et al., 2005) and the fact that the importance of sustainability has largely increased over the last years, we should be careful drawing conclusions about venture capital firm decision-making behavior as it is today. A suggestion for further research is to conduct the same research with a relatively young database. That way, firm-survival could not be measured. However, it could provide more insights in venture capital decision-making of the last few years.
6. Conclusions
The most important conclusion of this research is that no evidence was found that corporate sustainability addressment in business plans positively affects the chance of venture capital investment or firm survival. Additionally, no evidence was found that the control variables affect the chance of venture capital investment and or firm survival.
The most important implication of this finding from a managerial perspective is that for entrepreneurs with a new business (idea), addressing sustainability concerns does not increase their chances of obtaining venture capital investment or their chances of firm-survival. The most important implication from a theoretical perspective is that the addressment of environmental and social concerns is not an important factor in the decision-making process of venture capitalists.
An important limitation of this research is that the database that was used is relatively old and the time frame in which observations were collected overlapped with the dot-com era, possibly leading to a large percentage of companies active in the internet industry. Additionally, the market for venture capital was found to be rapidly changing (Gompers & Lerner, 2001). Because of these two limitations, one should be careful drawing conclusions based on this research on venture capital decision-making of the last few years.
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since this is not possible with observations from the last few years. Another important suggestion is to further develop the concept of corporate sustainability. Especially reaching consensus on the exact scope of the concept and how it can be measured is essential.
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7. References
Atkinson, C. (2000). Measuring Corporate Sustainability. Journal of Environmental Planning and management, 43(2), 235-252.
Berk, J., Demarzo, P. & Harford, J. (2009). Fundamentals of corporate finance. International Financial Reporting Standards Edition. Boston: Pearson Education.
Black, B.S. & Gilson, R.J. (1998). Venture capital and the structure of capital markets: banks versus stock markets. Journal of Financial Economics, 47(3) , 243-277.
Davis, T.J. & Stetson, T.C. (1984). Creating successful venture-backed companies. Journal of Business Strategy, 5(3), 45-58.
Dyllick, T. & Hockerts, K. (2002). Beyond the business case for corporate sustainability. Business strategy and the environment, 11(2), 130-141.
Goldfarb, B.D., Kirsch, D.A. & Pfarrer, M.D. (2005). Searching for ghosts: business survival, unmeasured entrepreneurial activity and private equity investment in the dot-com era. (Robert H. Smith School Research Paper No. RHS-06-027). Maryland: Robert H. Smith School of Business. Gompers, P. & Lerner, J. (2001). The venture capital revolution. The Journal of Economic Perspectives, 15(2), 145-168.
Hall, J. & Hofer, C.W. (1993). Venture capitalists’ decision criteria in new venture evaluation. Journal of Business Venturing, 8(1), 25-42.
Hellmann, T. & Puri, M. (2000). The interaction between product market and financing strategy: the role of venture capital. The review of financial studies, 13(4), 959-984.
Honig, B. & Karlsson, T. (2004). Institutional forces and the written business plan. Journal of Management, 30(1), 29-48.
Jeng, L.A. & Wells, P.C. (2000). The determinants of venture capital funding: evidence across countries. Journal of Corporate Finance, 6(3), 241-289.
Karlsson, T. & Honig, B. (2009). Judging a business by its cover: An institutional perspective on new ventures and the business plan. Journal of Business Venturing, 24(1), 27-45.
MacMillan, I.C., Siegel, R. & Narasimha, P.N.S. (1986). Criteria used by venture capitalists to evaluate new venture proposals. Journal of Business Venturing, 1(1), 119-128.
Mason, C. & Stark, M. (2004). What do investors look for in a business plan?: A comparison of the investment criteria of bankers, venture capitalists and business angels. International Small Business Journal, 22(3), 227-248.
National Venture Capital Association. (2016). Yearbook 2016. New York: Thomson Reuters. Shepherd, D.A., Ettenson, R. & Crouch, A. (2000). New venture strategy and profitability: a venture capitalist’s assessment. Journal of Business Venturing, 15(5), 449-467.
Steyerberg, E. W., Harrell, F. E., Borsboom, G. J., Eijkemans, M. J. C., Vergouwe, Y., & Habbema, J. D. F. (2001). Internal validation of predictive models: efficiency of some procedures for logistic regression analysis. Journal of clinical epidemiology, 54(8), 774-781.
Tyebjee, T.T. & Bruno, A.V. (1984). A model of venture capitalist investment activity. Management Science, 30(9), 1051-1066.
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Appendices
Appendix A: list of synonyms of the independent variables
Synonyms for environmental concerns Synonyms for social concerns
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Sustainable
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Appendix B: Clarification of scales of the independent variables
The addressment of environmental concernsThis variable measures whether or not environmental concerns are mentioned in a business plan. It is a scale variable with the following categories:
1. No environmental concerns and/or consequences are addressed.
Observations in this scale are business plans that fail to address any environmental consequence.
2. Some addressment of environmental concerns and/or consequences is stated.
Observations in this scale do address some environmental concerns, consequence or experience with environmental issues or environment-friendly production. However, no argumentation or explanation is given.
Examples can be:
- Mentions that one of the founders has a degree in environmental sciences or experience in solving environmental problems or environment-friendly production.
- Mission states that owners care about nature.
- Business plan states that entrepreneur(s) aim(s) at environment-friendly production.
3. Addressment of environmental consequences and/or concerns is elaborate.
Observations in this scale do address some environmental concerns, consequence or experience with environmental issues or environment-friendly production. They also provide argumentation and/or explanations.
Examples can be:
- Mentions that one of the founders has a degree in environmental sciences or experience in solving environmental problems or environment-friendly production and explains how this can help the business.
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4. Solving an environmental problem is one of the main goals of the venture.
Observations in this scale clearly state that environment-friendly production or solving an environmental problem is one of their main goals and/or motivations.
An example can be:
- An entrepreneur that wants to recycle medical tools to reduce medical waste.
5. The entrepreneurs aims to solve an environmental problem. This goal is more important than profit-maximization.
Observations in this scale clearly state that they do not need to make profits and/or do not have an aim to grow. Solving an environmental problem is their only goal.
An example can be:
- An entrepreneurial team that wants to invent a machine that can filter plastic out of an ocean, for the sole reason that they really care about the oceans and want to use their knowledge to clean them.
The addressment of social concerns
This variable measures whether or not social concerns are mentioned in a business plan. It is a scale variable with the following categories:
1. No social concerns and/or consequences are addressed.
This scale includes all observations were no social concern, social consequence, social goal, or social experience was mentioned.
2. Some addressment of social consequences and/or concerns is stated.
This scale includes all observations were a social concern, social consequence, social goal, or social experience was mentioned, however, it was not explained.
Examples can be:
- Mentions that one of the founders has a degree in social sciences or experience in working with minorities or in solving social problems.
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3. Addressment of social consequences and/or concerns is elaborate.
This scale includes all observations were a social concern, social consequence, social goal, or social experience is mentioned and is also explained. Examples are the same as in scale 2, however, observations in this scale also argue why this is important or why they find this important and what the implications are.
Building on the examples in the previous scale:
- Mentions that one of the founders has a degree in social sciences or experience in working with minorities or in solving social problems and explains what he or she can contribute to the business with this particular education or experience.
- Mentions that entrepreneur(s) care(s) about providing jobs for minorities in society, such as people with a disability and explains how the entrepreneur(s) will act upon these feelings.
- The financial details of a social goal are given. Social expenses are accounted for in the financial projections.
4. Solving a social problem is one of the main goals of the venture.
Observations in this scale clearly state in their mission/vision that one of the largest reasons they operate is that they want to solve a social problem.
Examples can be:
- An entrepreneurial team that wants to create online communities for elderly people that feel lonely.
5. The entrepreneurs aim to create a social venture. Solving a social problem is more important than profit-maximization.
This scale includes the same examples as in scale 4, however, now the ones where profit maximization is not important anymore. These ventures are aiming to become a non-profit
organization that can break-even or that can survive based on funding from, for example, government grants.
An example can be:
