The venture capital The industry doesn’t have the best track record when it comes to ethics.
Like most professions that involve power and wealth, venture capital sometimes attracts people who don’t care about doing the right thing. Limited regulatory oversight and a lack of transparency mean investors often get away with it if they don’t incorporate ethics into their investment philosophy.
We’ve all seen startups happily taking money from investors who support companies that have a negative impact on the climate or spreading misogynist rhetoric. Sometimes we also get venture firms raising capital from foreign governments that don’t have the best track records on issues like human rights.
But of course, not every investor is a bad person, and it seems like the industry is taking steps to clean up its act — albeit slowly. Startups and investors are increasingly paying attention to what kind of people they want to work with and where they want their money to come from. Investors are also looking for startups that not only make them money, but have the potential to leave society and the planet a better place.
To find out how ethical venture capital is currently and how far it can go, TechCrunch asked six investors how they deal with ethics in everyday life. We are pleased to report that everyone said the industry is not doing enough to monitor itself on ethical issues. They also wanted more to be done to make the industry fairer and better.
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Several investors said that more transparency in the industry would help mitigate some of the ethical issues that continue to thrive, such as:
“Venture capital’s opaqueness poses significant barriers to self-regulation,” said Geri Kirilova, partner at Laconia Capital. “More transparency in decision-making processes and cash flows, whether voluntary or required by law, would help.”
Logan Allin, Founder and Managing Partner at Fin Capital, agreed. He said it would be nice to see some ramifications and accountability from industry bodies like the National Venture Capital Association (NVCA) or government agencies like the SEC to prevent such issues from recurring frequently.
But without regulation, many companies are taking matters into their own hands. While they cannot be solely responsible for fixing the industry, they personally keep ethics in mind when investing and raising capital.
To get a feel for how some players deal with various ethical issues, we conducted a poll:
- Geri Kirilova, Managing Partner, Laconia
- Vital Laptenok, Founder and General Partner of Flyer One Ventures
- Logan Allin, Managing Partner and Founder of Fin Capital
- Check Warner, co-founder of Diversity VC and partner Ada Ventures
- Laura González-Estéfani, Founder and CEO, TheVentureCity
- Soraya Darabi, co-founder and general partner of TMV
Geri Kirilova, Managing Partner, Laconia
How much does a company’s potential to make a positive social or societal impact influence your investment decisions? What if the impact of a startup could be negative?
Negative externalities, particularly adverse social and environmental impacts, are often a deal breaker for us. We’re particularly averse to corporations that exacerbate human exploitation, social and economic inequality (irony comes from a VC, I know) and environmental degradation.
Capital is never enough to make a business or relationship successful. Laura González-Estéfani, Founder and CEO, TheVentureCity
How much should VC incorporate ESG metrics into their investment decisions?
The application of ESG frameworks to VC has been fuzzy. Venture capitalists typically have a fiduciary duty to maximize returns on their LPs. If you believe that ESG, however defined and applied to your investment process, will positively impact returns, consider incorporating it.
If ESG is relevant to an LP’s mission, it seems logical that the venture capitalist’s investments should at least not be counterproductive to those efforts. But this question is better suited to the LPs themselves.
Do the ethics or reputation of another VC firm affect your willingness to follow or co-invest in their investment?
Yes, they are a factor in our decision-making process, particularly in relation to our risk analysis of the company.
How do you feel about ethics in raising and accepting LP funds?
Beyond following standard KYC/AML procedures, we have a high bar for aligning ethics and values with our LPs. Our LPs are also included in our Anti-Harassment, Non-Discrimination and Diversity Policy.
Is the venture capital industry doing enough to control itself? What could be done to remove bad actors or dissuade them from their platform?
The opacity of venture capital poses significant obstacles to self-regulation. Greater transparency in decision-making processes and capital flows, whether voluntary or mandated by regulation, would help.
How often do founder-related red flags fail because of an otherwise attractive investment in a startup?
If we do not have confidence in a founder’s credibility and judgment, we will not invest.
Do you think founders can learn from past mistakes? Would you invest in a company run by someone with a colorful past?
We believe that founders are able to learn from their mistakes.
Financials aside, what compels you to invest?
Given our pre-seed and seed investment focus, finance is never the most exciting element for us. We are drawn to mission-critical solutions, with some form of market demand validation, led by founders who have a deep understanding of the customers they serve and the ability to effectively build a large business.
How do you prefer to get pitches? What’s the most important thing a founder should know before they call you?
We review all incoming submissions. The easiest way to submit is via this form. Founders can learn more about our investment process and strategy here.
Vital Laptenok, Founder and General Partner of Flyer One Ventures
How much does a company’s potential to make a positive social or societal impact influence your investment decisions?
We believe that technology should be destined to change the world we live in for the better, not the other way around. Unfortunately, this is not always the case – for example, facial recognition technology can be used for both positive and negative purposes.
For us it is crucial that the company, which we consider an investment, uses the technology for good and good [do so] responsible. This is why we have a large number of edtech startups in our portfolio – we believe this industry is being transformed by startups around the world.
What if a startup’s social or societal impact is potentially negative?
Technology is first and foremost a tool that can do both good and harm. That’s why we examine the moral guidelines of the founding team very closely – they ultimately determine the direction of the startup.
If we find out that the founders are willing to compromise on some points, we will definitely reject the deal.
How much should VC incorporate ESG metrics into their investment decisions?
The VC industry has a huge impact on what our world will be like 10-15 years from now, so we believe the industry should have higher ESG standards than today.
Because startups that are supported by VCs today will be large corporations in seven to ten years, whose products are used by hundreds of millions of people.
Do the ethics or reputation of another VC firm affect your willingness to follow or co-invest in their investment?
