Heterogeneous Effects of ESG Signaling on Private Venture Capital Funding and Subsequent Exit Outcomes

ESG (Environmental, Social, and Governance) is widely used as a framework for making investment decisions in public capital markets, yet its role beyond these markets remains less understood. Prior research primarily focuses on public firms and aggregate ESG measures, leaving it unclear which ESG dimensions are most influential in private venture capital settings characterised by having high information asymmetry and limited disclosure. This study examines the relationship between ESG performance and both private venture capital funding amounts and subsequent exit outcomes. ESG scores for each firm are calculated by extracting text from archived firm websites and inputting the cleaned text into an ESG scoring algorithm. These scores are merged with Pitchbook funding and exit data across 16,688 venture capital funding rounds between 1984 and 2021. They are analysed using correlation analysis, univariate t-tests, and multivariate OLS and logistic regressions with firm level controls and fixed effects. The analysis shows that ESG performance is positively associated with funding amounts and exit outcomes. Environmental and governance performance drive larger private funding rounds, governance performance is strongly associated with IPO likelihood, while social performance is the primary driver of acquisition likelihood. Overall, these findings suggest that ESG communication functions as a strategic signal in venture capital markets, although investors prioritise different ESG dimensions at funding and exit stages. Importantly, the ESG measures used in the study are derived from firm level communication rather than directly observed ESG performance.