by Johannes Lenhard
7 September 2021
It’s 2019. I am in Silicon Valley, the famous Sand Hill Road to be precise, where the brand-name venture capital investors historically sit. I am here to research the ethics of venture capitalists and I am meeting a partner in one of the oldest still-existing funds, let’s call him Mitch, in his office. Mitch is very personable, welcoming, almost grand-fatherly in his big chair – a white man in his seventies who never really did anything but invest in new technology companies in Silicon Valley, including some of the big tech companies our lives are shaped by today. When I ask him about his motivation to (still) be engaged and active in venture investing, Mitch talks about impact:
“Personally, I just really like the work: it is intellectually exciting but not just an academic exercise. It has real world impact with real world decisions and consequences, that’s the most exciting thing – perhaps apart from watching a child grow up – watching a company grow.”
He is personally curious about seeing companies grow, playing a small part in this growth and ultimately enabling ‘new combinations’ to solve real-world problems through innovation. Quickly, we get to the issue of returns versus impact (or solving big problems) and Mitch has an almost surprising answer to the conundrum:
“This [his VC fund] is not a finance business. Don’t get me wrong; I am a capitalist, I am a Schumpeterian. I believe that excess return really comes from innovations. And innovations come from new combinations of known things. […] We are not in the business of creating a return on capital, however. We are in the business of enabling new combinations. Along the line, we hope that the combinations work out and we can share parts of the return but this is only part of the process of creating and executing something.”
In the process of enabling this ‘innovative recombination’ – what Schumpeter calls ‘creative destruction’ – Mitch believes companies (and investors) should very explicitly stay away from ideology and politics:
“I strongly believe that corporations shouldn’t impose an ideology on the world and intervene in the political world. […] Blackrock with their however many trillion under management shouldn’t be able to make decisions about politics – they should stay in their sphere […] if everyone respects their own world, acts in their own wide best self-interest, that’s sensible.”
* * * * * *
Mitch was one of many venture capital partners, equity investors in technology startups, I met over the last four years of research between Silicon Valley, New York, London, and Berlin who follow a similar belief system cladded in a specific narrative. On the one hand, venture capital is inherently impactful by creating jobs and innovation. From what we know, this part of the story is quite right, in fact.
It is very important for Mitch to explicitly distance himself from ‘other financial investors’ who only focus on returns on investments; he is interested in funnelling solutions, needed innovations to big societal challenges. And on the side – if successful in this task – he will be able to earn a decent (and in some cases outrageously high) income.
What people like Mitch also don’t accept is that they inherently are political actors imposing various kinds of ideologies and (capitalist) practices on society.
What Mitch doesn’t mention is that he is in fact absolutely a financial (asset) manager tasked by capital owners (the so-called limited partners, including pension funds, state funds and family offices) to achieve target returns. Systemically, this means Mitch and all other VC investors are first and foremost capitalists, only that they go about expressing their capitalism by means of Schumpeterian creative destruction, as Mitch explains himself. As a result, Mitch is truly in the business of maximising returns: for his limited partners, for himself, and for the survival of his VC fund.
What people like Mitch also don’t accept is that they inherently – with their investment decisions – are political actors imposing various kinds of ideologies and (capitalist) practices on society. Given their contractual obligations to return capital to limited partners within a 8-12 year time span, for instance, VCs are systemically incentivised to focus on (reasonably) short-term business models. Blitzscaling unicorns (companies valued at over $1bn) has become the norm to fulfil high-valuation exit expectations. As a result – as even one of VC’s biggest dogs, Marc Andreessen explained recently – VCs have mostly been focused on asset-light, software-driven businesses (the ideal: social media, like Facebook or Instagram, driven by network effects). Solving for instance infrastructural or medical challenges doesn’t fit into this model very well.
Less than 2% of global VC money went to all female teams in 2020 and 9% to mixed teams. All male teams received almost 90% of the VC pie.
When marrying this systemic bias with an investment style that is inherently affective and personal, based on networks and gut feeling and driven by the fear of missing out, a flywheel of self-reproduction is spinning fast. The effect is well documented: most VCs as well as startup founders (who received VC funding) are white men. Almost 85% of VC partners (both in the UK and the US) are men; the large majority of partners is also white (almost 80% in the US). On the other side, less than 2% of global VC money went to all female teams in 2020 and 9% to mixed teams – all male teams hence received almost 90% of the VC pie.
Given much wider societal shifts towards considerations around sustainability and stakeholder capitalism, there are many question marks around this kind of approach. Not only since MeToo and the continuing pressure through the Black Lives Matter movement, the lack of diversity and inclusion in VC and startups has been widely criticised. ESG is starting to play an increasing role, also for VCs. But a fundamental change to the business model has so far been foregone; cosmetic shifts are what we have been able to observe, possibly also because the asset owners are not pushing strongly enough.
Even if all stakeholders were embracing change, it will still take decades to change the underlying ideology of VCs (and many founders). In the meantime, what we need – and where anthropology should come in, according to Gillian Tett, much more strongly – is more transparency and scrutiny. As anthropologists, we have the right tools to excavate details that questionnaires, statistics and discourse analysis don’t see (the backstage, in Geertz’ terms). This is going to be a crucial piece of the puzzle to push for better venture capital.
Dr. Johannes Lenhard is research coordinator of the Max Planck Cambridge Centre for the Study of Ethics, Economy, and Social Change (Max Cam). He is currently working on a book on the ethics of venture-capital investors, with fieldwork in Berlin, London, New York, and San Francisco, as well as on two handbooks on diversity, inclusion, and impact in, respectively, tech and venture capital.
Johannes spoke at the 2021 Response-ability Summit in the Fintech, auditing, and blockchain session on how ESG auditing of Venture Capitalists seems to be leading to a shift in self-reproducing power structures. Johannes was interviewed for our Response-ability.tech podcast. Listen to the conversation on iTunes or Spotify, or wherever you get your podcasts.
Follow Johannes on Twitter @JFLenhard, and connect with him on LinkedIn.
The Response-ability Summit, formerly the Anthropology + Technology Conference, champions the social sciences within the technology/artificial intelligence space. Sign up to our monthly newsletter and follow us on LinkedIn.
Photo by Greg Bulla on Unsplash.