Venture Capital Responsibility
By writing a check do venture capitalists also endorse the moral and ethical value of the business?
In the tech economy, venture capitalists, or “VCs”, are generally seen as enablers of new innovations and ideas, rather than a source of the ideas themselves. But the reality is that because VCs hold all the funding, they tend to hold a lot of power, too. Whether they realize it or not, the ideas they choose to back and the bandwagons they choose to jump on become the overarching tech trends of the moment.
The Bad with the Good
As a consequence of this invisible but powerful influence of VCs, many are beginning to point out the ethical and cultural responsibility that, This power extends to vetting and backing projects that are both doing good in the world and that are ethical companies to begin with. This comes in the wake of the fallout of former Silicon Valley darling Theranos. The now disgraced company—which originally promised revolutionary lab testing technology using just a single drop of blood—has laid off 40% of its workforce and shut down all of its labs after the Wall Street Journal revealed that the company’s claims were based on falsehoods.
In response to the revealed falsehoods, TechCrunch reported that one VC is striking back at the company. “Partner Fund Management (PFM), a San Francisco-based hedge fund that reportedly wrote out a $96 million check to Theranos back in 2014, is now suing the blood-testing startup and its founder, Elizabeth Holmes. It says it was duped into its investment “through a series of lies, material misstatements and omissions,”. It also accuses the firm of engaging in “securities fraud and other violations by fraudulently inducing” it to invest and to maintain its investment in the company.”
Burden of Finance
While this lawsuit suggests the fault lies with Theranos for deliberately misleading investors, there is an argument to be made that VCs have an obligation to carry out due diligence as well. Some say that when you are about to enable a company by giving them significant amount of cash, it is your responsibility to not only make sure they are capable of doing what they say they’re going to do, but also that they won’t harm anyone in the process.
While it’s common sense that an investor should vet the legitimacy of the recipient of their money in order to protect their bottom line—something that, in the case of Theranos, most companies apparently failed to do—they can take it one step further, too.
Funding for Good
Paul Arnold of TechCrunch argued that VCs should actively look to promote projects that are more diverse and reversing the image of Silicon Valley as a well-moneyed machine. “Silicon Valley has a perception problem enabled by venture,” he writes. “Tech already suffers self-inflicted wounds around inequality and its well-noted lack of diversity. If we don’t do more, we will have a future where venture capital is mentioned in the same breath as Wall Street — a perceived social ill that requires aggressive political intervention. Venture investors are well-positioned to do more, and more good.”
Venture Capital PR
Indeed, there are many ways the VC world can improve its image, other than simply ensuring they don’t back less-than-honest founders and companies. These include backing more projects which have philanthropy built into their core operating and impact. This also includes backing a more diverse array of founders including ones that exist outside of the Silicon Valley ecosystem bubble and encouraging the creation of more B Corporations – companies with a social impact is a core offering to shareholders, not last minute CSR venture.
While there is no doubt that VCs make a positive contribution to the economy by funding the ideas that ultimately have the potential to change our lives, their contribution doesn’t have to end there. By pushing up the standards regarding who gets funded and why, VC has an opportunity to avoid more situations like Theranos’ downfall and create more social impact.