Bridging the Asymmetry Gap : Signaling in Sustainability-Oriented Venture Capital

Sammanfattning

Despite the need to address sustainability-oriented grand challenges, the ventures that are designed to tackle these complex global issues face a $4 trillion financing gap. This is largely due to the complex and uncertain nature of grand challenges, where traditional venture capital evaluation metrics often come to fail. As a result, heightened information asymmetry emerges between the entrepreneur and investor, leading to adverse selection and hesitancy to invest in the venture. This thesis explores information asymmetry shapes venture capital investment decisions in sustainability-oriented grand challenge ventures, and how signaling mechanisms function to bridge the information gap between entrepreneurs and venture capitalists in this highly uncertain context. The study adopts an abductive, qualitative approach that draws on the empirical material gathered from the semi-structured interviews which consists of four venture capitalists and three entrepreneurs that operate within the Swedish market. The empirical material was analyzed using a thematic analysis to analyze the perspectives of the venture capitalist and the entrepreneur. The findings show that when the uncertainty is high, the evaluative weight shifts from the business model to the entrepreneur, whose observable qualities then comes to serve as the primary signal of venture quality. Furthermore, the findings show that transparency and complementary team composition can act as a multidimensional signaling device to mitigate pre-investment adverse selection, highlighting that investors actively evaluate knowledge gaps within the founding team itself. Additionally, the study reveals that bridging the knowledge gap is a bilateral process, entrepreneurs proactively manage knowledge gaps and engage in reverse screening of investors. However, the evaluation of these signals remains distorted by investor familiarity bias and shifting market narratives, which can systematically disadvantage sustainability-oriented grand challenge ventures. Finally, this study contributes to the literature on signaling and information asymmetry in sustainability-oriented grand challenge ventures by extending both frameworks into the specific context of sustainability-oriented grand challenge ventures, showing how the absence of traditional venture quality indicators transform the signaling process, which therefore shifts the evaluative weight from formal credentials toward the observable qualities of the entrepreneur, transparency, and the composition of the team as the primary mechanisms through which investment decisions are sparked under high uncertainty.