The Ethics of VC — Interlude — Will 2020 in VC all be about doing ‘better’? (#6)

Larry Fink, BlackRock CEO; Source: NYT.

Many VCs (and tech journalists) following their ‘content strategy’ have recently blasted out predictions for what is going to happen to the tech world in 2020. USV’s Fred Wilson and Albert Wenger engage the big topics (decentralization, space race, climate change, democracy, learning); AZ16 pushed out a whole collection on its own (Frank Chen on life in 2030, one list just on the future of Fintech, a conversation on the future of the internet, Julie Yoo on healthcare); the FT tech team focused their predictions on China, the smartphone and AI; GP Bullhound’s are really boring (think streaming wars, new marketing, data lakes). And then there are lots and lots of minor ones (e.g. Speedinvest on European VC, Forbes on the future of VC and work, VCs on media trends in Business Insider, Alex Danco of Social Capital on VCs yer ahead) that tend to be self-absorbed and concerned with the VC industry itself without too much of a big-picture view. But the predictions I really enjoyed were Kara Swisher’s whose RecodeDecode podcast I have been following for a while.

In a recent op-ed in the Times, Swisher was laying out her five theses for what the world of tech is going to experience over the coming year. They are — tada — all about more ethics in the sense that I have argued repeatedly in previous posts.

To give you slightly more detail, Kara thinks that

a) we are going to see much more climate change / green tech inventing and investing (her prediction: “the first trillionaire will be a green tech entrepreneur”)

b) we will learn how to not be afraid of automation killing jobs but to use it “for good”

c) there is “a business in depolarization”, i.e. for instance making social networks more nuanced and contextual (TikTok being a good start)

d) diversity will continue to very high up on the agenda — and the advent of some female-led VC funds (I have written about for Crunchbase recently) is a first good sign for change

e) we will figure out how to be less addicted to our phone

I like the direction that she is taking a lot. What I take her to be saying in VC terms is: there will be more impact investing generally and more care (and investors’ money for startups and entrepreneurs) for the environment, democracy, the workforce and diversity. I agree but want to go one level deeper — why would they?

VCs (start to) care — because customers care (and much bigger investors are ahead of the game already)

I have spoken to lots of VCs over the last two years — roughly 150 mostly partners between Berlin, London, SF and New York — and there is surely a little bit of that in the air already. More and more funds are explicitly focused on impact (Obvious Ventures, BloombergBeta, Social Impact Capital being among the more prominent ones that started in the last ~6 years) and an increasing number of founders is concerned about societal issues, ‘doing good’ and going beyond the profit motive.

That doesn’t mean that the ethical directionality of ‘returns on investment’ — the first bottom line for any VC, or any investor — is becoming meaningless, however. In fact, most of the VCs I interviewed — including the impact driven ones — still focus on making money, and more specifically on generating outsized returns (3x within 10 years seems to be the industry’s standard goal). This is their so-called ‘fiduciary duty’, i.e. the promise they made to their investors, the LPs. As one VC partner in London put it to me: Venture capital is MONEY [haha] it is a risky asset class, perhaps the wildest asset class […] and it has the biggest possible returns.

So, if Swisher is right and more and more people will shift their attention to ‘good tech’ — and I think she is, while potentially within the next decade rather than just the next year — what is going to drive this development? How do ‘outsized returns’ and ‘good tech’ come together? The answer is simple: there will be more outsized returns to be made with impact investing.

And interestingly, the VCs (that are supposed to be ahead of the game), will not be the first to realise that. BlackRock’s Fink just announced a refocus of their asset management strategy on investments related to climate change (because ‘clients keep asking them about it’). Just last week, two of the biggest PE funds, KKR and TPG with $330bn under management, just two weeks ago agreed on reporting transparently about their impact funds to counteract possible allegations of ‘greenwashing’. This follows a big announcement last summer of the Business Roundtable CEOs to move from shareholder to stakeholder capitalism, arguably a step in the direction of practicing business more consciously (which could translate into ‘impact’ investing for investors).

So for the new year, I’m curious to see whether big investors (and corporates) are really going to increase their stake in the impact world significantly (with manpower and money) or whether we will just see a new wave of corporate social responsibility white-washing over us. And I am even more curious to see how long it takes for more VCs to catch onto this tail (and — in the usual VC fashion — ultimately get ahead of it).

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