Venture Capital and Public Purpose

The first line of Pitchbook and NVCA’s Q3 report on venture capital states that, “[despite] the unheralded period in the US—as the COVID-19 pandemic, stay-at-home circumstances, and continued economic volatility persist across the country—the venture capital (VC) and startup ecosystem has, broadly speaking, been resilient in 2020.” During the same time frame, the US markets also saw gains, with S&P rising 8.5% and most predicting a strong Q4. This is all while 11 million people collected unemployment benefits through regular state programs during the last week of September and 8 million have slipped into poverty since May.

By now, we know the stock market is not a reflection of the real economy but we also need to talk about the disparity between VC funding and the real world/economy. Silicon Valley has played a role in exacerbating economic inequality, investing in companies with little to no real value, low profitability, and with minimal ownership over the unintended consequences of new technology and startups. To their credit and our benefit, entrepreneurs and Silicon Valley have also produced some of the most revolutionary climate, healthcare, agriculture, financial, etc. technologies we have today. But because venture capital is in the business of rapid growth and unicorn returns and is also in the business of innovating on how we work, live, and move, I don’t think a venture capitalist or a private equity investor needs to be an ESG or impact investor to care about how their investments shape our economy and lives. To quote Lauren Morrill (and then famously Dr. Fauci), "I don't know how to explain to you why you should care about other people."

Generalist VCs could use ESG or impact investing frameworks to consider public purpose or effects of society but they have been slow to do so for a variety of reasons, including a lack of time, relevance, understanding or interest. In their defense, ESG frameworks often treat public purpose in technology as a nice-to-have versus something deeply ingrained in the strategy-- a value add, a moat, a differentiator, increasing long-term value or minimizing the risk of a company. As someone who joined the world of VC after working in government and public policy, I realized how rare it is for investors to consider or understand the nuance of public purpose in diligence and managing investments, even if they set out to do so. There is a heavy emphasis in the impact investing world on positive intended outcomes (e.g. this technology will reduce greenhouse gases) but less on unintended consequences (e.g. this technology will displace indigenous communities). Those unintended consequences are not only bad for society but they could also be bad for the future success of the company. Founders should be aware of public purpose when they build these products, but investors should also be held responsible for the societal impact, both positive and negative, intended or not, that their investments make. I predict that in doing so, LPs, regulators and the welfare of society will be better off.

In the same vein, the “hard” and “soft” business cases have been made as to why it is beneficial to diversify who sits on investment committees and boards. Despite these cases and a public outcry to diversify fund managers and entrepreneurs who receive investments, VC receives a failing grade for 2020 Q3 investments, with venture funding for female founders hitting its lowest quarterly total in three years. According to All Raise, just one Black woman was named a partner at any VC firm in 2019. The world of VC still has a lot of work to do.

Venture capitalists need to reward real growth metrics over-inflated, precarious and superficially high valuations. The world of venture capital should reward companies that are thoughtful and strategic about privacy, democracy, corruption, safety, security, climate, labor and diversity in their companies and with their technology. It goes without saying, but LPs should invest more in Black and brown managers, venture capital should hire more Black and brown partners and GPs should invest in more Black and brown founders.

The trend of big Silicon Valley firms raising “impact” funds is a step in the right direction, but I would love to see all VC investments, regardless of the type of fund or technology or amount of PR the investors get, be put through an evaluation process to assess how each of the investments that are made will affect the society we all live in. Over the next few months, I will be working with TAPP on identifying and developing the specific tools that both investors and founders need to keep public purpose as a core tenant of successful investments, in diligence and beyond. I will be using existing VC metrics and diligence tools and adjusting them so intention to public purpose is not only easy but also helpful to the investors and society.