CAN VENTURE CAPITAL BE SAVED?
There are plenty of creeps in VC, but the problems run far deeper
The stories are vile. Women entrepreneurs face sexual advances by the VCs they rely on to get their companies off the ground. They are bribed to keep quiet. They are threatened to shut up. Their supporters are labeled “whiners” and worse.
Is VC full of creeps? Probably, but that’s just the tip of the iceberg.
When Justin Caldbeck was first accused of sexual predation, his firm’s first response was to deny that it happened and to attack those who came forward. When denial was no longer possible, his co-founder lashed out against the press, his co-investors and even some of his own portfolio companies. Worse, the industry’s reaction was a rush to roll out platitudes and quick fixes that, however well-intentioned, don’t address any underlying causes. Its impact seems to be getting past the stories and getting on with business as usual.
Just yesterday we learned that Frank Artale, a managing director at Ignition Partners, has stepped down after the second report of “inappropriate behavior.” When the the first complaint was reported last year, it was simply shipped off to a lawyer who “did not substantiate the allegations.”
All of this speaks to how entrenched the values are that give rise to these behaviors in the first place. To look toward a solution, one must recognize the recent revelations as existing on a continuum of behavior that exists in the culture, rather than existing in a universe by themselves.
VC CULTURE IS BROKEN
Like capitalism, VC has produced significant wins and advances and, also like capitalism, its dysfunctions have wrought untold misery.
The combination of the single-minded pursuit of wealth above all, paired with a culture that looks the other way at its bias, elitism, and lack of accountability has become a combustible mixture. In VC there is one criterion — measured in dollars — and as they say, he who dies with the most toys wins, no matter how many people get shoved aside or trampled, and no matter how many unethical practices led there.
This is made worse by the fact that the sector is notoriously opaque. How many LPs are aware, for example, that many of the Sand Hill Road firms won’t take money from public university endowments because they require too much transparency?
VC’s single metric of dollars and the shroud of opacity allow the worst abuses to go on.
ABUSE OF POWER
The recent revelations are not simply about sexual desire; they are about conquest. Sexual harassment is a profound abuse of power. This is especially true when it involves a gatekeeper like a VC directed at a woman founder. It’s doubly true when it’s exacerbated by other factors — like when a white male VC is directing unwanted advances to a woman of color, as has been largely the case in most of the recent public disclosures.
Abuses of power exist on a continuum. It’s not just a few bad apples, not just a few despicable acts, but a culture that enables it, doesn’t interrupt it, provides no safe avenues for speaking up, and doesn’t send a message to harassers that the behavior won’t be tolerated. How can the industry celebrate people who glory in breaking all the rules, ask forgiveness not permission, and then be surprised when people are predatory, abusive and pursue their own desires at the expense and over the objection of others?
At Kapor Capital, our portfolio is made up of a high percentage of underrepresented founders — women from all backgrounds and people of color of all genders. On a regular basis, our entrepreneurs and those in the broader ecosystem tell stories of being threatened or pressured by VCs in subtle and not-so-subtle ways:
- VCs often remove CEOs and replace them with their friends, business school buddies, people they can trust, just because they can. Many CEOs, especially first time and underrepresented, aren’t supported or given a real chance to build their businesses.
- VCs pressure CEOs to hire their friends or, in some cases, the women they slept with; when challenged, their retort is a subtle or direct threat — ‘I can ensure that you’ll never raise capital again’ or ‘You’ll never work in tech again’.
Now take these existing pressures and overlay them with biases of race and gender. We already know that bias seeps into hiring, evaluating business plans, judging pitch competitions, and assessing entrepreneurs, for example.
There are other ways that bias shows up, too. Many VCs won’t take a pitch from an entrepreneur who doesn’t have a “warm intro” — someone known to the firm has to introduce the entrepreneur. This shuts out all kinds of talent from people not in existing social and professional networks. Warm intros are antithetical to meritocracy; it’s who you know that matters, not the merit of your idea. By allowing entrepreneurs to simply come in over the transom, as we do at Kapor Capital, one significant hurdle is removed.
The warm intro has other consequences as well. If the only way you get in the door to pitch is to become known and liked by the VCs, then you figure out who they are and how to get invited to their events, including their parties and social events. Once there, do you have to smile at the obnoxious compliments and flirting? Can you walk away and still expect to be invited in to pitch? Do you have to drink? There’s a slippery slope from the warm intro to hitting on women entrepreneurs. (This dynamic was actually described by a woman who wrote an apologetic confessional of sleeping with a VC.)
SO WHAT CAN BE DONE?
Some of our experiences are relevant and point the way: as an entrepreneur raising VC, as investors at Kapor Capital, as a founder of a pipeline program for diverse talent now in its 14th year, as builders of a small VC firm with a diverse team and diverse portfolio.
There is a huge opportunity for LPs to contribute to the solution. In our investing as LPs (we are in a dozen funds) we take into heavy consideration the mission and values of the GPs. LPs can broaden their criteria for deciding where to place funds and evaluating the results produced.
They can also ask the right questions. For example, What’s the diversity of the investing team? What are the demographics of the portfolio founders? Do the VCs routinely fire CEOs? At what stage? Do entrepreneurs of color get as many chances as others, or do they get replaced earlier? How often do VCs push founders aside, replacing them with friends, colleagues, or others from their network?
VCs are the gatekeepers, and it’s very important that they walk the walk, rather than just talking the talk.
At Kapor Capital we have spent many years thinking about our own house and getting it in order by diversifying our own team and working to build a culture of respect and inclusion in our firm. Our investment criteria reflects our values and our founders are held accountable to building diverse and inclusive cultures.
Here are some lessons from our experience:
- Don’t give lip service to being “founder friendly” — do it. Platitudes and pledges are meaningless. Action is what matters. Reach out to founders to assess the damage already done and correct it.
- Don’t exploit your greater experience to take advantage of founder inexperience. For example, we tell founders when they are giving up too much of their companies. We built a spreadsheet (we’re good at those) so founders can see what happens to their equity if they take investment at certain valuations over time.
- Tech is echoing some of the worst parts of Wall Street by implementing mandatory arbitration as a condition of employment. Our understanding of its use in tech companies is that it has been implemented at the suggestion of VCs.
- Similarly, while there is a role for NDA’s in protecting proprietary intellectual property, their use to silence employees from discussing their experiences in the workplace is quite different and should rarely, if ever, be employed.
- Don’t invest in companies where you don’t respect the founder’s values. You have agency. FOMO is tied to the single dimension of dollars.
Change starts with the companies themselves.
Founders can make a conscious choice about who their investors are. We realize this sounds unfair to founders who can’t even get in for a pitch meeting, but a bad early decision can lead to countless problems down the road.
Back in 1982, Mitch spelled out his philosophy to legendary Silicon Valley investor Ben Rosen in a pitch for Lotus:
While I am keenly aware of the Leo Durocher theory of management “nice guys finish last”, I am unwilling to operate a priori in an overaggressive, profit-only centered style, nor would I like to see the company as a whole begin to run that way. Rather, I am committed to trying to live with and work out as best as possible the contradictions involved in running a profitable enterprise with my other values, such as the notion that it’s better to treat people well as an end in itself, rather than only as a means of improving productivity. I bring all this up to state my concerns for the record, as it were, and to indicate that this issue will be important to me in any future expansion of our activities or active investors.
So many of those suggesting solutions to VC’s broken culture hail from firms and organizations in the ecosystem that have a limited track record in their own right.
It just doesn’t make sense to pontificate if your own firm or portfolio lacks diversity, or if you have never held your colleagues or your companies accountable to building an inclusive culture with diverse teams. In other words, if you haven’t implemented any fixes, you can’t hold yourself out as an expert to create change.
The fixers need to represent the entire ecosystem, including those who have been left on the sidelines or out altogether. Those who have demonstrated that they can build something different need to have a bigger voice than those who built what many agree is broken.
Let’s meet the daunting nature of this challenge with the best of what Silicon Valley has to offer: the notion that no problem is too big, that sometimes complete disruption is what’s required over incrementalism, and that sometimes incumbents — or at least their way of thinking and doing business — need to be toppled.