The venture capital industry doesn’t have the best track record when you’re talking about ethics.
Like most professions involving power and wealth, venture capital also sometimes attracts people for whom doing the right thing isn’t a concern. Limited regulatory oversight and a lack of transparency mean that investors can often get off scot-free for not factoring ethics into their investment philosophy.
We’ve all seen startups happily taking money from investors who back companies that have a negative impact on the climate or broadcast misogynistic rhetoric. Sometimes, we also get venture firms raising capital from foreign governments that don’t have the best track records surrounding issues like human rights.
But not every investor is a bad person, of course, and it seems as though the industry is taking steps to clean up its act — albeit slowly. Startups and investors are increasingly paying attention to what kind of people they want to work with and where they want their money to come from. Investors also looking for startups that won’t just make them money but have the potential to leave society and the planet in a better place.
To find out just how ethical venture capital is at the moment and how far it can still go, TechCrunch surveyed six investors about how they approach ethics in their day-to-day. We’re happy to report that all of them said the industry doesn’t do enough to police itself on issues surrounding ethics. They also wanted more to be done to make the industry fairer and better.
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Several investors said that having more transparency in the industry would help alleviate some of the ethical problems that continue to flourish, like bad actors being given seemingly endless chances and firms covering up questionable practices.
“Venture capital’s opacity presents significant barriers to effect self-policing,” Geri Kirilova, a partner at Laconia Capital, said. “Greater transparency in decision-making processes and capital flows, whether it’s voluntary or mandated by regulation, would help.”
Logan Allin, founder and managing partner at Fin Capital, agreed. He said that it would be nice to see some consequences and accountability from industry organizations like National Venture Capital Association (NVCA) or government entities like the SEC to help stop such issues from being repeated often.
But without regulation, many firms are taking matters into their own hands. While they can’t be responsible for fixing the industry on their own, they are personally keeping ethics top of mind as they invest and raise capital.
To get a feel for how some players approach different ethical issues, we surveyed:
- Geri Kirilova, managing partner, Laconia
- Vital Laptenok, founder and general partner, Flyer One Ventures
- Logan Allin, managing partner and founder, Fin Capital
- Check Warner, co-founder Diversity VC, and partner, Ada Ventures
- Laura González-Estéfani, founder and CEO, TheVentureCity
- Soraya Darabi, co-founder and general partner, TMV
Geri Kirilova, managing partner, Laconia
How much does a company’s potential to create positive social or societal impact influence your investment decisions? What if the impact of a startup could be negative?
Negative externalities, particularly detrimental social and environmental effects, are often deal-breakers for us. We are particularly averse to companies that exacerbate human exploitation, social and economic inequality (ironic coming from a VC, I know), and environmental harm.
Capital is never enough to make a business or relationship successful. Laura González-Estéfani, founder and CEO, TheVentureCity
How much should VC incorporate ESG metrics in their investment decisions?
The application of ESG frameworks to VC is hazy. VCs typically have a fiduciary duty to maximize returns for their LPs. If they believe ESG, however it is defined and applied to their investment process, positively impacts returns, they should incorporate it.
If ESG matters to a LPs’ mission, it seems logical that the VC’s investments, at minimum, should not be counterproductive to these efforts. But this question is better suited to the LPs themselves.
Do the ethics or reputation of another VC firm have an impact on your willingness to follow on their investment or co-invest?
Yes, they are a factor in our decision-making process, particularly regarding our risk analysis of the business.
How do you think about ethics when raising and accepting LP money?
Beyond following standard KYC/AML procedures, we have a high bar for alignment of ethics and values with our LPs. Our LPs are also included in our anti-harassment, non-discrimination, and diversity policy.
Does the venture capital industry do enough to self-police? What could be done to remove or deplatform bad actors?
Venture capital’s opacity presents significant barriers to effect self-policing. Greater transparency in decision-making processes and capital flows, whether it’s voluntary or mandated by regulation, would help.
How often do founder-related red flags scuttle an investment in a startup that otherwise appears to be an attractive investment?
If we are not confident in a founder’s trustworthiness and judgment, we will not invest.
Do you believe that founders can learn from past mistakes? Would you invest in a company led by someone with a troubled past?
We do believe founders are capable of learning from their mistakes.
Beyond the financials, what about a company compels you to invest?
Given our pre-seed and seed investment focus, the financials are never the most exciting element for us. We are drawn to mission-critical solutions, with some form of market demand validation, led by founders who have a deep understanding of the customers they’re serving and the ability to effectively build a big company.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
We review all inbound submissions. The easiest way to submit is through this form. Founders can learn more about our investment process and strategy here.
Vital Laptenok, founder and general partner, Flyer One Ventures
How much does a company’s potential to create positive social or societal impact influence your investment decisions?
We believe that technology should be intended to change the world we live in for the better, not the other way around. Unfortunately, this is not always the case — for instance, facial recognition technology can be used both for beneficial purposes and for negative ones.
For us, it is crucial that the company we consider as an investment use the technology for good and [do so] responsibly. That is why we have a large number of edtech startups in our portfolio — we believe this industry will be transformed by startups all over the world.
What if the social or societal impact of a startup has the potential to be negative?
Technology is first and foremost a tool that can do both good and harm. That’s why we investigate the moral guidelines of the founders’ team very carefully — it ultimately determines the startup’s direction.
If we figure out that the founders are willing to compromise on some issues, we will definitely turn down the deal.
How much should VC incorporate ESG metrics in their investment decisions?
The VC industry has a huge impact on what our world will be like 10-15 years from now, so we think the industry should have higher ESG standards than it does today.
After all, startups that are supported by VCs today will be big corporations in seven to 10 years, and their products will be used by hundreds of millions of people.
Do the ethics or reputation of another VC firm have an impact on your willingness to follow on their investment or co-invest?
As a fund with Ukrainian roots, this has always been the most important issue, because it was fundamental for us not to get involved in deals with toxic money of Russian origin.
After the full-scale war began, we were once again convinced that this approach was the right one. We will continue to avoid deals with VCs with suspicious reputations, either related to the origin of the money or unethical behavior toward startups and partners.
How do you think about ethics when raising and accepting LP money?
We collaborate only with a narrow network of entrepreneurs we know personally, and with whom we can agree with about sensitive social and political issues. LPs can influence a fund’s policies, so we believe that, by all means, both the origin of the money and the standpoints of LPs should be closely reviewed by the VC.
Does the venture capital industry do enough to self-police? What could be done to remove or deplatform bad actors?
The success of VC is, first of all, the reputation market, which quite qualitatively screens out funds that have problems with ethics.
At the same time, in my opinion, there is a lack of transparency. It is not always easy for a startup to understand which fund is worth working with and which is not.
How often do founder-related red flags scuttle an investment in a startup that otherwise appears to be an attractive investment?
We believe that the relationship between a founder and a fund is like a marriage, so we are quite mindful of researching the moral values of a founder and collecting feedback from partners and from previous jobs.
If it turns out that the founder has a history of conflict, we will no doubt turn down an attractive deal.
Do you believe that founders can learn from past mistakes? Would you invest in a company led by someone with a troubled past?
All founders are different, and we approach each of them individually. Certainly, people keep growing and changing, and the level of transparency with which a founder communicates their past mistakes is very important in these matters.
If there are details that they are hiding, that’s a red flag for us. But we understand that there are no perfect people and only those who do nothing will not make mistakes.
Beyond the financials, what about a company compels you to invest?
We are investing at the seed stage, when there is not much financial data, so we are mostly interested in the founder and their team, as well as the scale of the problem they are solving. Everything else we can change together in the future.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
We are not fond of listening to standard pitching at all — I prefer a conversation about the company, the product and the founders.
It is very important that a founder is intrinsically motivated to deal with the product not just for the money, because often, the first five to seven months at a startup involve a lowering of the founder’s financial position compared with a full-time job.
It is very important for us to see the founder’s awareness and sincerity.
Logan Allin, managing partner and founder, Fin Capital
How much does a company’s potential to create positive social or societal impact influence your investment decisions? What if the impact of a startup could be negative?
As ESG managers, we utilize a clear ESG framework we have developed using best practices that includes 10 metrics when evaluating prospective companies, as well as in ongoing portfolio monitoring and reporting. Examples of these metrics include: ESG policy in place with management sponsorship/oversight, CO2 footprint monitoring and composition at company and board level.
As companies mature, we want to see trackable metrics that show how ESG is being integrated into their culture, governance and business operations. We believe companies that track ESG impact alongside financial metrics will ultimately become more successful businesses long term.
From an investing perspective, we are also actively looking at the intersection of fintech and climate change, as well as ESG tech.
How much should VC incorporate ESG metrics in their investment decisions?
We believe ESG metrics should be a fundamental overlay across investment decisioning. We incorporate ESG metrics into our diligence, term sheets, investment documents, upfront founder calls and ongoing monitoring of the company.
If we see founders pushing back, that indicates they haven’t thought holistically about the mission or thought about the role ESG needs to play in business operations. Ultimately, it raises a red flag with respect to culture and the maturity and integrity of governance.
Do the ethics or reputation of another VC firm have an impact on your willingness to follow on their investment or co-invest?
We want to surround ourselves with peers and firms who have the same active commitment to ESG. While it isn’t always within our control, there are situations where we may choose not to invest alongside a firm either due to the sources of their LP capital, questionable historical behavior (particularly on boards) or other reputational concerns.
How do you think about ethics when raising and accepting LP money?
As an ESG manager and a registered investment advisor (RIA), we go to great lengths in understanding the KYC/AML details of our prospective LPs.
Clearly, there are FCPA and Treasury guidelines, but beyond that, we choose to avoid soliciting capital from countries or funds with policies that we nor our founders would align with.
Does the venture capital industry do enough to self-police? What could be done to remove or deplatform bad actors?
As most of the VC industry are exempt reporting advisors (ERA), they have lower standards for transparency and compliance with the SEC.
I don’t think the industry is doing enough. As it relates to LP base or other activities that are not living up to the standards of the NVCA (we are a member) or other guidelines, there need to be more formal enforcement mechanisms.
As an industry, I wish we valued ESG commitment and integrity a little closer to how we celebrate returns.
How often do founder-related red flags scuttle an investment in a startup that otherwise appears to be an attractive investment?
I like to say we have a “no jerks” policy, and we absolutely walk away from an investment when there is a leadership concern. We run extensive diligence on founders, off-sheet checks, employee and customer interviews, and formal legal/background checks.
Any historical or current red flags based on ethical, legal or regulatory issues with the founders leads to a pass. At the end of the day, we want to support and fund good people, not just great visionary leaders. Bad culture can absolutely break a company in the long term.
Do you believe that founders can learn from past mistakes? Would you invest in a company led by someone with a troubled past?
Yes, we believe people can learn from past mistakes. We exclusively back repeat founders and seasoned leaders from high-growth fintechs, many of whom have failed at their prior company. The ability to learn and grow from those experiences can often drive accelerated successes in a second act.
We look for leaders who actively self-reflect and embrace a growth mindset around personal improvement. At the end of the day, redemption also requires a level of renewed trust, an extra layer of diligence and monitoring.
Beyond the financials, what about a company compels you to invest?
First and foremost, we look for an outstanding mission. We love working with founders who are focused on double- or triple-bottom lines, recognizing that those elements will drive stronger performance long term.
Additionally, we look for companies that have an ESG policy and sponsorship at the founder and board level or are actively developing those practices.
Anything else you’d like to comment on?
Since we invest in SaaS and enterprise fintech, it might not seem obvious that mission and vision are as important as in consumer-facing businesses. But we really look for founders who see how their products can have positive macro impacts on the broader world beyond the immediate customers they serve.
Venture capital and tech will not achieve its greatest potential unless we see ESG as an ongoing practice, not just wording in a policy. The best leaders see the bigger picture and understand the impact their company has on the world around them.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
Never reach out cold or via LinkedIn — that’s not a good signal and puts you on negative footing out of the gate. Always find a warm intro via another founder (we have over 100 portfolio companies), VCs or mutual relationships. Research us, our portfolio and our investment strategy — in our case, we exclusively invest in B2B fintech SaaS.
Check Warner, co-founder Diversity VC, and partner, Ada Ventures
How much does a company’s potential to create positive social or societal impact influence your investment decisions?
Hugely. We have committed to investing 20% of the fund by value in highly impactful businesses serving underserved and disadvantaged groups, and 60% of the fund by value in impactful businesses. It has a significant bearing on our investment decisions.
What if the social or societal impact of a startup has the potential to be negative?
We won’t invest. We will never invest in businesses that have the potential to cause harm, accelerate inequality, inequity, exclusion, obesity, poor mental health, violence and climate change.
How much should VC incorporate ESG metrics in their investment decisions?
VCs should understand the difference between impact and ESG, and incorporate both into their investment decisions. Broadly — impact is the what and ESG is the how.
Do the ethics or reputation of another VC firm have an impact on your willingness to follow on their investment or co-invest?
Absolutely, and we have actually sought to co-invest with VC firms with which we align on values.
How do you think about ethics when raising and accepting LP money?
We have an extensive ethics screening process for LPs, so we think about it deeply.
Does the venture capital industry do enough to self-police? What could be done to remove or deplatform bad actors?
Definitely not. There’s no accountability, and no effective system for removing or deplatforming bad actors. Unfortunately, the most common victims of these bad actors are underrepresented people without enough context or networks to verify these people. They either have their ideas stolen from them, or are ripped off by “VC Funds” or “LP Funds” pretending to have money but charging huge introductory fees.
How often do founder-related red flags scuttle an investment in a startup that otherwise appears to be an attractive investment?
Rarely, but when they do, we take them extremely seriously.
Do you believe that founders can learn from past mistakes? Would you invest in a company led by someone with a troubled past?
Yes. I believe that people can change, can make mistakes and should always be afforded a second chance once the situation has been fully understood. However, if there is a clear and persistent pattern of behavior, we would never invest.
Beyond the financials, what about a company compels you to invest?
The market, the mission and the positive societal impact. The ethics, values and leadership of the team.
Anything else you’d like to comment on?
The nonprofit I co-founded, Diversity VC, has set up The Diversity VC Standard, which is a great way to understand if you are best-in-class on the “S” of ESG.
At Ada Ventures, we have also signed up to Project #MovingForward, which is a way to create accountability for funds, and for founders to have a way to report negative experiences with VC.
Sites like Landscape.vc are valuable for founders to report bad actors.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
Please submit using our website. We currently only invest in businesses that have a connection to the U.K.
Laura González-Estéfani, founder and CEO, TheVentureCity
How much does a company’s potential to create positive social or societal impact influence your investment decisions? What if the impact of a startup could be negative?
There are many levels at which we think about this when considering an investment:
- Is this company solving a big or huge problem? Huge problems are basically those that touch billions of souls and therefore have the most impact.
- Can we work together with the founder and his leadership team in the worst-case scenario? Do we share ethics, diverse thinking and the same passion to solve problems?
- Are they going to be diverse talent magnets? Age/gender/culture/experience?
If the problem is not big enough, or the founder and their team seem uneasy to work with in a complex situation, or the team is too similar to each other and therefore won’t be able to look outside the box, we may not invest.
Or let’s put it in a different way: The relationship between an investor and a founder should not be like getting married just for the money. There must be something else both parties are excited about so that the relationship thrives. Capital is never enough to make a business or relationship successful.
How much should VC incorporate ESG metrics in their investment decisions?
I personally don’t believe in the ESG framework. I am sorry. We’ve practiced diversity since day one. That is what I believe in: facts over promises or quotas.
We have always believed in a diverse pool of founders and operators investing in the next generation. Diversity of regions, industries and experience: That is what we do. Not because of an ESG number or percentage we have to target, but because this is who we are. This is the best way to meet the returns our LPs want and the support our founders choose us for.
Do the ethics or reputation of another VC firm have an impact on your willingness to follow on their investment or co-invest?
I am not sure if we impact others. What I can tell you is that when we invest in a company, the cap table matters a lot. Depending on who is in there, you can understand if they are there because of the wisdom they have in the space and they can help the business, or if it is just capital.
Both are OK, of course, as long as the mosaic with the founder and the leadership team works. A cap table or a round with just capital would not be enough.
I would never be part of a reporting/transactional board. I would love an execution-first board, where everyone at the table contributes with different perspectives. I assure you that the latter is far more successful and difficult, but tremendously rewarding for the founder and the business.
How do you think about ethics when raising and accepting LP money?
We would never accept capital from someone that does not share our principles. We have investors from Europe, the U.S. and LaTam — very different cultures but very similar principles, and it should be the same with founders.
Does the venture capital industry do enough to self-police? What could be done to remove or deplatform bad actors?
I think they do, yes. It’s just that not everyone has the same ethics. In our case, it’s easier to work with people that share your principles when trouble arises, and that’s impossible with people with different principles.
One could think that raising a fund with the wrong capital could make your life easier, as easy money tends to come faster. We think that taking the longer route may be way more painful and time consuming, but it is also the most rewarding.
How often do founder-related red flags scuttle an investment in a startup that otherwise appears to be an attractive investment?
Thankfully, we haven’t met many such founders. Our process for due diligence is not the fastest because we spend a lot of time understanding the founder and their dynamics. It’s a clear no go if there is no chemistry. Too risky.
Do you believe that founders can learn from past mistakes? Would you invest in a company led by someone with a troubled past?
Absolutely! You learn a lot more from the mistakes you make than from the successes. I co-founded a company back in the 2000s, and we did not do well, but we learnt enough.
Beyond the financials, what about a company compels you to invest?
Engagement and retention rates from customers are key for us. Financial plans and projections are key so that you understand their path to monetization, but the real success comes from how many times a customer comes back to you over time.
We have built a tool that helps founders track their growth, retention, engagement, churn and cohorts over 90, 120, 180 days. It is for free and helps founders understand how we see their businesses. If we like what we see, we invest. If we don’t, they get qualitative, deep feedback.
Anything else you’d like to comment on?
Culture eats strategy for breakfast.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
I hate PPTs. I love meeting founders in person for 30 minutes.
Soraya Darabi, co-founder and general partner, TMV
How much does a company’s potential to create positive social or societal impact influence your investment decisions?
It’s at the core of our thesis. At TMV, we invest in founders who are building businesses beyond the bottom line — those with the potential to change industries, inspire new ones and move us collectively forward. This may sound like a catch-all, but to us, it’s not. It’s the lens through which we see everything, starting with our top of funnel (deal flow).
What if the social or societal impact of a startup has the potential to be negative?
No matter how brilliant the founder, how breakthrough the idea, if the model could in any way contribute to social injustice or cause harm to the community at large, that’s a hard no — a laughable no.
We’ve seen some pretty interesting decks, and somehow, the decks that seem the most egregious to us still get funding.
How much should VC incorporate ESG metrics in their investment decisions?
It’s no longer a matter of how much, but how well. VCs need to look at ESG in every investment decision, no matter the sector. Not simply because it’s a critical element of sound business practice, but because climate science tells us the future depends on it.
Do the ethics or reputation of another VC firm have an impact on your willingness to follow on their investment or co-invest?
Without question. We invest in relationships as well as companies, and there is no room in our communities for those who behave unethically. The company we keep reflects our own ethics, which in turn, supports our work with LPs, partners and founders. We try to keep our side of the street as clean as possible.
How do you think about ethics when raising and accepting LP money?
We maintain stringent standards in recognizing our fiduciary responsibility to our LPs, alongside our commitment to helping the next generation of founders realize a more aware, more human world.
We can’t accomplish any of this without a strict code of conduct and a sense of how we wish to operate. I can tell you we would have much more AUM were we not so rigid about where and how we accept capital. I entered into this industry wide-eyed, and they aren’t as wide these days.
Does the venture capital industry do enough to self-police? What could be done to remove or deplatform bad actors?
I’d say it depends largely on the firm, but as an industry, we can always do more and better. As for deplatorming bad actors: if each VC commits to sharp focus on self-policing their own firms, those bad actors will see fewer spaces to act at all.
That said, we would never represent ourselves as being absolutely perfect. Rather, we commit ourselves to trying our best — ensuring a diverse investment team, investing equally among men and women, and aiming to have as diverse of a founder population as possible. Most of all, we keep dialogue open to ensure we are learning and constantly aware of when and where we can do better.
How often do founder-related red flags scuttle an investment in a startup that otherwise appears to be an attractive investment?
It happens, and every circumstance is unique. It’s why we look to founders first and also why robust, nuanced due diligence is so important. The most innovative ideas don’t stand a chance of seeing the market without a deeply committed founder behind them.
Sometimes, that commitment looks like passion and other times, it’s borderline Machiavellian. We have most certainly turned down follow-on financing when a founder gives us pause.
Do you believe that founders can learn from past mistakes? Would you invest in a company led by someone with a troubled past?
Everyone can learn from past mistakes. We appreciate founders who have been in the trenches, experienced the consequences of poor decisions, learned from them and applied that learning to viable new business models.
This shows awareness, imagination, resilience, persistence and the willingness to remain teachable. That said, before we finance a comeback tour or a second swing for the fence, we discuss internally: Is this a person with whom we want to go on a 10-year journey?
It’s as simple as that.
Beyond the financials, what about a company compels you to invest?
We look to identify people and ideas that break ground for the future, because we know they have the ability to shift the course of entire industries, create better systems and implement new solutions for institutions that inarguably need to move forward.
With permission, we track a lot of things, including the diversity of a board, the cap table and the employee base. Digging deeper, we look to see how much equity “non-obvious” founders and early employees have compared with the chairperson or co-founder of a business. There is still so much tokenism in tech, we’ve barely scratched the surface of unearthing it. A conversation needs to be had, as well as activism.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
We care about the clarity, delivery and key message of the pitch. Whatever format a founder chooses to tell their story, we’re all for it. I like a nice, succinct email to hi@tmv.vc with a link to a DocSend deck that is no longer than 20 slides.