Legitimacy and Investor Screening in the Impact Venture Equity Gap

Topic Impact ventures refer to entrepreneurial initiatives that seek to combine economic activity with explicit social or environmental objectives. They may take diverse organisational forms, including young innovative firms, hybrid ventures, cooperatives or associative structures engaged in a development trajectory. They are close to hybrid organisations, which combine several institutional logics that may be partly in tension, including economic and societal logics (Battilana & Lee, 2014). Despite the growing interest in sustainable finance, impact investing and transition-oriented innovation, these ventures continue to face significant financing constraints. These difficulties can be related to the notion of the equity gap, which refers to funding gaps faced by young innovative firms when their capital needs exceed the capacity of local or early-stage investors while still being difficult to assess, or perceived as too risky, by more institutional investors (Alperovych et al., 2020; Quas et al., 2022). In the case of impact ventures, this equity gap may also be linked to the difficulty of making a hybrid value proposition, both economic and societal, legitimate, observable and intelligible to different categories of funders. Aim The aim of the paper is to examine how the legitimacy of impact ventures is constructed and differentiated in funding interactions. Following Suchman (1995), legitimacy can be defined as a generalised perception that the actions of an organisation are desirable, proper or appropriate within a socially constructed system of norms, values, beliefs and definitions. This perspective is particularly relevant for analysing impact ventures, as they need to make a hybrid value proposition, combining economic objectives with social or environmental purposes, understandable and acceptable to different categories of funders. The paper more specifically draws on the distinction between three forms of legitimacy. Pragmatic legitimacy refers to the perceived usefulness of the venture for its stakeholders, including its economic viability, development potential and ability to meet funders' expectations. Moral legitimacy relates to the normative evaluation of the venture, namely its alignment with values, social or environmental purposes and broader conceptions of the common good. Cognitive legitimacy concerns the extent to which the venture is understandable, recognisable and embedded in stabilised categories of evaluation. This distinction makes it possible to analyse how impact ventures are assessed by different types of funders and how certain forms of legitimacy may be recognised, overlooked or insufficiently shared during investor screening.