This study explores the impact of venture capital on technological innovation and environmental sustainability in Chinese manufacturing Small and Medium Enterprises (SMEs), addressing the critical need for balancing economic growth with environmental conservation. Utilizing data from China’s Growth Enterprise Market (GEM) from 2009 to 2019, the research categorizes enterprises based on their involvement with corporate and government-backed venture capital. By employing multiple regression techniques and the Propensity Score Matching (PSM) method, the study effectively addresses potential selection bias, ensuring the reliability of its findings. The results demonstrate that venture capital significantly enhances innovation in manufacturing SMEs, with corporate venture capital exhibiting a more substantial impact compared to government-backed or traditional venture capital. Notably, the study establishes a link between venture capital-driven innovations and environmental sustainability, highlighting how these innovations contribute to the development of sustainable manufacturing processes, including improved energy efficiency, reduced emissions, and better compliance with China’s environmental policies. The paper underscores the pivotal role of financial mechanisms in fostering environmentally friendly technologies within the manufacturing sector, providing valuable insights for policymakers and investors seeking to reconcile economic progress with ecological conservation.