Study of the International Venture Capital (VC) Industry

For my research project at Max Cam, the Center for Ethics the Economy and Social Change based in Cambridge’s social anthropology department, I set out to investigate how venture capital (VC) investors think about the future, about ‘changing the world’, about ethics. Quoting star-investor  Reid Hoffman’s words - where on the spectrum between temporary ethical pirate and a sociopathic criminal do these investors place themselves? And even if they pretend to care, how do they actually act in turn? 

Building on my fieldwork in the rising European tech capitals Berlin and London in 2018, I spent the last four months in California’s Silicon Valley attending industry events and interviewing more than 120 investors.  Surprisingly to some, no doubt, I found ethics is becoming more and more important in the VC industry: partly because big tech – and the investors that drive it – are attracting public attention, scrutiny and regulation (e.g. Facebook & Google fines; the ban of vapes and facial recognition software in San Francisco), and partly due to an increasing number of scandals, from sexual harassment and misconduct (Uber, Google) to straight-out fraud (Theranos)).  Venture investors’ models and value creation are becoming impacted by questions of ‘being good’. As a result, ‘ethical investing’ (and ethical tech) are ‘moving into the mainstream’as FT editor and Max Cam advisory board member Gillian Tett put it recently. 

Venture impact investing has seen a surge in recent years. Impact investing is a specific – arguably the most ‘ethical’ – form of venture capital, Venture investors finance startup companies with a growing influence on our economy ; they have already brought around seven out of the ten most highly valued companies (including Microsoft, Apple and Amazon). 

When I interviewed a young venture capitalist in San Francisco, he explained, “We call ourselves impact investors because it gives us a whole lot of deal flow that the traditional VCs pass on,”  “Ultimately, we are also a venture fund. We have a duty to pay back our investors just as all the other ones do.”. “We care about existential risk – climate change for instance […] [and] we impose impact metrics onto our portfolio companies […] but when we talk to other investors, we don’t even mention impact.” 

But can the core principles, the core incentives and motivation structures of the VC industry really change? How important are (good) ethics really? Is ‘impact’ just a trend, another way of making money, that doesn’t fundamentally change anything? I am starting to explore these questions from now on journalistically (see my latest Crunchbasepiece on VC’s gender divide and my ongoing new blog), at industry events (I will be speaking at Techstars Torino in September) as well as at academic conferences (we at Max Cam are organizing a panel at AAA in Vancouver in November).

Dr Johannes Lenhard is Research Coordinator at the Max Planck Center for Ethics the Economy and Social Change.