Green Start-Ups: Investors Overestimate Investments
ResearchAttention to Green Start-Ups Makes Investors Hesitate
When investors learn that they overestimate the investments of other investors in green start-ups, they are less willing to participate in green investments themselves. Following the “wisdom of the crowd”, investors interpret other professionals’ investment decisions as a market signal and therefore assume their chances at high profits are lower. These are the findings of a study from ZEW Mannheim together with the Technical University of Munich. The study combines data from an online survey among 374 German investors with information from the Mannheim Enterprise Panel (MEP) about their actual investment behaviour.
“Investors react to the investment choices of other professionals and public stakeholders. After they learn of the investment behaviours of these actors, they adapt their own valuation of green investments accordingly,” explains Dr. Marius Berger, Junior Research Associate in ZEW’s “Economics of Innovation and Industrial Dynamics” Unit. “We show that the prevalence of investments green start-ups is greatly overestimated by investors and that providing more public funding to green start-ups tends to discourage private investment.”
Public support reduces amount of private investing
Currently, green start-ups are causing a great stir, since they help to reduce CO2 emissions. This extra attention tends to warp investors’ perceptions of the scale to which investing in green start-ups is actually occurring. Consequently, these investors overestimate the volume of venture capital that is invested in these young firms. “The results urge caution in announcing the public provision of funds available to support green start-ups. Although public financing is supposed to lead to an improved supply of capital for start-ups, we find that it discourages private venture capital,” says Berger.
About the methodology and the MUP
The Mannheim Enterprise Panel (MUP) contains information on more than 9 million companies that are or have been economically active in Germany. The combination of the online survey with the MUP makes it possible to compare reported investment preferences with actual investment behaviour. To learn about investors’ assumptions regarding the investment activities of others in green start-ups, participants were asked at the beginning of the survey to estimate the average share of green start-ups in the portfolios of German start-up investors. Concerning the provision of public funding, participants were asked to estimate the amount of annual financing from the European Commission for green start-ups. Respondents who were assigned to the corresponding treatment group were later informed about the actual value.
