Unicorn Illusions: A Novel Approach to Startup Valuation Using ESG

Veda Ganesan

2025

Abstract

Overvalued startups with unsustainable business models remain a critical issue, driven by market irrationality and overlooked risks. This study introduces an ESG-integrated Discounted Cash Flow (DCF) model to address these valuation inaccuracies. By incorporating Environmental, Social, and Governance (ESG) metrics into the Weighted Average Cost of Capital (WACC), the model effectively accounts for ESG-related risks and opportunities. The analysis reveals that startups with higher ESG ratings experience reduced costs of equity and debt, resulting in a lower WACC and more accurate valuations. This approach highlights the benefits of integrating sustainable practices into business models, promoting long-term stability and investor confidence. A comprehensive review of existing valuation methods identified key gaps, particularly in accounting for qualitative ESG factors. Regression analysis of case studies demonstrated how ESG-adjusted discount rates improve valuation precision without double-counting risks. Findings suggest an inverse relationship between ESG ratings and capital costs, emphasizing the financial advantages of robust ESG frameworks. This research underscores the need for investors and venture capitalists to incorporate ESG considerations systematically, reducing the risk of market bubbles and fostering sustainable business practices. Future studies should explore nonlinear modeling and behavioral finance to further enhance ESG-integrated valuation frameworks.

Paper Citation

in Harvard Style

Ganesan V. (2025). Unicorn Illusions: A Novel Approach to Startup Valuation Using ESG. In Proceedings of the 7th International Conference on Finance, Economics, Management and IT Business - Volume 1: FEMIB; ISBN 978-989-758-748-1, SciTePress, pages 232-242. DOI: 10.5220/0013428900003956

in Bibtex Style

@conference{femib25,
author={Veda Ganesan},
title={Unicorn Illusions: A Novel Approach to Startup Valuation Using ESG},
booktitle={Proceedings of the 7th International Conference on Finance, Economics, Management and IT Business - Volume 1: FEMIB},
year={2025},
pages={232-242},
publisher={SciTePress},
organization={INSTICC},
doi={10.5220/0013428900003956},
isbn={978-989-758-748-1},
}

in EndNote Style

TY - CONF

JO - Proceedings of the 7th International Conference on Finance, Economics, Management and IT Business - Volume 1: FEMIB
TI - Unicorn Illusions: A Novel Approach to Startup Valuation Using ESG
SN - 978-989-758-748-1
AU - Ganesan V.
PY - 2025
SP - 232
EP - 242
DO - 10.5220/0013428900003956
PB - SciTePress