Responsible Investing in Tech and Venture Capital

Executive Summary

Venture capital firms play a critical role in shaping the future of technology, industry and society. Historically, venture capital firms have been the first investors in many of the world’s largest and most influential companies including Google, Facebook, Twitter, Uber and many other global tech companies. The business model, culture, and values of global companies are often shaped in the early years of a company’s development, and venture capital firms as the first investors and board members play an important role in this process.

In the last few years, the world’s largest tech companies have run into major challenges in managing societal issues—the result of which has been governments, media, and activists taking a much deeper look how foundational values and cultures were shaped.

The conversation around who is accountable for ensuring technology companies manage public purpose issues often focuses on the role of the company leadership team or the government. Yet another group—investors—also play a pivotal role. During the last decade the practice of responsible investing has become increasingly mainstream. In 2018, more than 70% of institutional investors integrated ESG (environment, social, governance) considerations into the selection and management of their investments. ESG practices now span major asset classes from public companies, private equity, real estate, bonds, and commodities. Yet venture capital has lagged behind other asset classes, with no systematic approach to screening, managing or reporting ESG performance or other societal considerations specific to frontier technologies. This report reviews a range of dilemmas that the venture capital industry faces in managing ESG considerations and proposes potential solutions that the industry could adopt.

Key Challenges

• Venture capital firms are investing in frontier technologies with potential to be disruptive to global security, public health, democracy, and many other areas of society—making the need for responsible investment practices urgent. During the 2010s venture capital investment focused largely on enterprise solutions and consumer digital platforms which produced many iconic companies including Uber, Lyft, Airbnb. Digital platform companies upended labor markets and brought new challenges to jobs and financial security. These challenges will continue into the next decade as automation systems displace workers across the world. Venture capitalists are also actively investing in a wide range of disruptive technologies including artificial intelligence, quantum computing, autonomous vehicles, drones, and frontier life sciences. These technologies will bring unprecedented challenges to privacy, inclusion, and human rights.
• There could be improved financial performance in venture capital firms by better managing ESG and other societal risk issues. Research has increasingly shown that managing ESG and other public purpose issues link to better financial outcomes in companies through lowering risks and improving brands and customer relationships. Although venture capital is considered among the highest risk forms of investment, the industry doesn’t currently have a systematic approach to ESG or societal risk management. Around 70% of ventures fail within the first two years. Some late stage ventures such as Theranos have filed for bankruptcy due to underlying governance and technological integrity issues. Further, recent IPOs including WeWork, Uber, and Lyft have seen significant losses in valuation due to underlying challenges with managing technological issues, stakeholders, and governance. There could be significant potential for increased financial returns to investors by developing new mechanisms to uncover and mitigate risks earlier in the investment process.
• The venture capital industry has limited tools and data available to evaluate societal impacts, especially for frontier technologies. There are limited tools for venture capital firms to use to systematically evaluate and manage ESG and public purpose issues. More specifically, there are no standard tools for investors to evaluate frontier technology issues like privacy, cybersecurity and ethical AI. There is also no data currently available for investors to evaluate risks and ESG performance of ventures, in the same way that the industry has created databases for market and financial data. There is also limited technical support available to ventures. Corporate functions responsible for managing societal issues including Risk Management, Corporate Social Responsibility (CSR), and Corporate Affairs (legal, government affairs, public relations) typically are not fully operational in early stage ventures. Furthermore, there is no systematic support available for early stage tech companies or boards looking to develop the skills needed to effectively integrate societal considerations into their products and business models.

Potential Solutions

The path forward for advancing public purpose in venture capital could involve multiple strategies including:

Technology and Risk

Future-Proofing Tools & Trainings

Tools and trainings for VCs and founders to assess values, stakeholders, risks, and unintended consequences.
 

Technology Assessments

Independent evaluations of technological readiness, product-market fit, and societal impacts.
 

Governance Support

Tools for venture boards and whistleblowing mechanism.

Data and Transparency

Ratings

Third party scoring of ESG performance and other relevant data to public purpose.
 

Interoperable Data

Comparable data on ventures performance on ESG and public purpose issues.

Diversity and Culture

Diverse Fund Managers & Founders

Increase diversity in VC firm and portfolio company leadership.
 

Ethical Culture

Trainings for an ethical culture in VC firms and portfolio companies.

Contents

This discussion paper is not intended to be a comprehensive study of the venture capital, ESG, or frontier technology industries. It highlights several challenges and some potential solutions for advancing managing societal impacts of venture capital firms and portfolio companies.

This paper includes the following sections:

• Chapter 1 Venture Capital and Frontier Technologies: A review of the challenges frontier technologies pose to society
• Chapter 2 How ESG Contributes to Venture Success: A high-level literature review and framework for how ESG factors contribute to financial outcomes of venture capital-backed companies
• Chapter 3 Responsible Investing in Venture Capital Firms: The levers venture capital firms have to integrate ESG considerations at each stage from fundraising to exit
• Chapter 4 Roadmap: An action agenda to move the venture capital industry forward through improved management of diversity, culture, technology assessment, risk management, and the creation and reporting of public purpose data

Annexes:

• Annex 1: Key Concepts—Responsible Investing & Venture Capital - A review of definitions and concepts of responsible investing and venture capital
• Annex 2: Future-Proofing Sample Exercises - A high-level concept for a tool that could be built to improve identifying, managing, and evaluating technological, business, legal, and societal issues in technology ventures
• Annex 3: Research, Data & Reporting Sample Tools - A concept for a technology assessment program, ESG ratings, and database that could aid venture capital investors in decision-making and management.

Download the full report:

• Responsible Investing and Venture Capital [PDF]