Ethics of VC — Why does still nobody care about VCs? (Anniversary post #10)

The investment world was recently shaken by the ‘Deliveroo disaster’ but why is still nobody talking about the ‘ethics of VCs’ and so much focus is on the tech companies funded and controlled by them?

I was interviewed yesterday by a reporter from Citywire in London; she reached out because she is writing a piece on the ripple-down (or up) effects of the total flop which the long-awaited Deliveroo IPO in London had quickly turned into. For background, in late March, a number of institutional investors refused to back the delivery-gig-company in its initial public offering amid concerns around workers’ rights (as well as governance issues and other more general ESG concerns). They foresaw big risks for Deliveroo’s business model, at least partly driven by recent regulation of Uber in the UK who is forced to reclass its drivers as workers, including granting them the respective rights. What the reporter wanted to know from me: why is nobody talking about the venture capital investors that have financed Deliveroo for the last decade (and sit or at least sat on the company’s board), including well-known VC industry heavyweights?

Deliveroo riders protesting in 2017; Source: Lawyer Monthly.

We can even broaden this question further — as I am doing in my research — and in fact, in one of his recent newsletter iterations Ben Evans made a point which underpins my frustration: he argues that AI in general and facial recognition specifically are overscubscribed topics of conversation, while there are so many other, more basic ethical issues in the world of tech which warrant our attention and are under-analysed, under-scrutinized and under-researched. His example is about a prison-release-system gone awry in Arizona. Mine is venture capital at large.

So far, few people seem to care. Outside of the tech press circles of Techcrunch, Sifted, Wired, and Co. (see this New Yorker piece on WeWork for an exception), most people couldn’t even answer whether VCs invest their own money (no, they don’t, mostly); they would also not be aware that they engage with a multitude of VC-backed companies on a day to day basis (think about it: Google, Amazon, Apple, Facebook and Instagram will likely have touch points with most of us every day — and they are all VC-backed). I already went into detail on why this all matters terribly (see here). But what are VC ethics, concretely? Let me give you some concrete answers.


Whenever I meet a VC investor for the first time, I usually ask them two simple questions: why do you do what you do and how do you really decide whom to give money to? In my over 400 interviews between San Francisco, New York, London and Berlin since 2017, these prompts have been very effective and led to revealing conversations with the people I call the ‘kingmakers’ at the (intransparent) top of the digital economy.

Yes, there is the profit motive and there are jockey/horse conversations (founding team versus business model) — as we would assume. Many, mostly American VCs, admit their submission to ‘fiduciary duty’ (hiding behind their limited partners’ intentions); others talk boldly about how ‘all venture capital is impactful’ — because it creates jobs and innovation. But there are also thoughts (and confessions) about the role of luck, gut feeling, excitement, FOMO, herd instinct and the outsized reliance on (personal) relationships and networks. In other words: when it comes to VC decision making, unconscious bias is not necessarily so unconscious and has been a driving force in VC since its inception.

But the (financial) bottom line is not so clear as it might be for some other ‘financial intermediaries’ — or at least it is not a question of a discounted cash flow analysis how to get there: how VCs act in this world goes far beyond a simple profit-maximizing, rationally calculating actor (or: homo oeconomicus). Perhaps for some surprisingly, I would argue that VCs’ ‘ethical horizons’ are more complex than we might think. What drives their decision making is not only a triple-north-star of making more money from their LPs money (something that most VCs are pretty bad at anyway…see Bill Janeways’ elaborations on this). VCs rarely run XLS models to come to a conclusion about an investment; they are more likely to ask their friend from Harvard on search for the next Mark Zuckerberg. We could go as far as: VCs are not really investors or finance professionals at all but relationship and network managers (in fact, many bankers and buyout managers look down at VCs indeed for this).

Let me pick up on just one issues related to this, the VC ethics. This cocktail (or black box) of driving factors (laden with many layers of unconscious bias) has so far naturally led to a reproduction of both the VC ecosystem and the startups they fund. The venture industry is tiny — there are only about 1,300 funds in the US for instance managing about $440 billion — and when it comes to who these people are, the statistics are blatantly obvious. Venture capital investors — both in the UKand the US — are predominantly white men with elite university degrees. Men make up over 85% of GPs in the US (87% in the UK); 80% of US GPs are moreover white and 40% of them went to either Harvard or Stanford. These networks replicate and reproduce themselves with unsurprising consequences as to where venture capital goes. Under 3% of VC dollars ends up in the hands of all-female teams for instance (~10% goes to mixed founding teams); less than 1% of the money goes to black founders.

Now, given that this is the structural makeup of the industry (and the board seats of startups the investors occupy) is it altogether surprising that some startups run into issues of sexism, racism or ESG much more generally? From AirBnB and Google’s search engine to various facial recognition software companies — and the aforementioned issues of workers’ rights — many of today’s new tech companies have indeed had issues with what I argue is a structural problem in the ecosystem as a whole. These companies are mostly run by (white) men and their boards are (at least initially) predominantly white and male and elite-educated. The likely effect: a uniformity of world-views and opinions that can easily lead to myopic action without the necessary checks-and-balances.

Probing the connections which I tentatively sketched above based on my interviews and participant observation in the industry further seems like a crucial thing to do and something that will bring to the fore important insights. That is where my call for action comes in: more research on this — on the ethics of investors, on their ethical horizons, their decision making, their diversity, on their LPs’ agendas — is desperately needed. In order to understand how technologies (by the way: including much of the heavily scrutinized AI) will look like, this is a crucial puzzle piece nobody is thinking about.

Writing on the ethics of venture capital @Cambridge_Uni; visiting Stanford and NYU; former: PhD on homelessness at Cambridge, MSc at LSE, BA at ZU

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