By Tracey Lien Los Angeles Times
WWR Article Summary (tl;dr) Not wanting to be associated with their disgraced peers, several companies in Silicon Valley have been focused on doing everything they can to clean up their own houses.
Los Angeles Times
Venture capitalists have long had godlike status in the tech industry.
Founders venerate them because they need their money. Limited partners eagerly throw billions of dollars their way, enamored by their outsize investment returns.
But now, after allegations of sexual harassment and misconduct have led to the resignations of Justin Caldbeck of Binary Capital and Dave McClure of 500 Startups, and the dismissal of Steve Jurvetson of DFJ, the industry's once-celebrated kingmakers are facing pressure from founders and limited partners to clean up their act.
"There's so little transparency in venture capital," said Kiki Mwiti, the Bay Area founder of tech startup Globerly, who in July teamed up with industry peers to build a platform to remove some of the secrecy from the venture capital industry.
There have always been whisper networks, Mwiti said. In private Facebook groups, Slack channels and one-on-one meetings, women have shared experiences and warned each other of bad players. But in venture capital, money is concentrated in the hands of a few, and many investment firms don't even list their portfolios or contact details online. That has contributed to sexism, discrimination and harassment going unchecked.
"When I saw these stories coming out about sexual harassment, I felt like something needed to be done," said Samantha Friedman, who with around a dozen women in tech co-founded FairFunders.
FairFunders is a kind of buyer's guide for entrepreneurs seeking ethical investors. The bare-bones website offers a curated list of venture capital firms that meet its criteria for transparency and have records of investing in diverse founders. Investors hold phone calls twice a month in which entrepreneurs can ask questions. Investors cannot buy their way onto the list.
A rating and review system that allows entrepreneurs to share their venture capital experiences is in the works.
Pressure from founders might put some venture capital firms on notice, but to change the culture of venture capital, people up and down the chain of power need to roll up their sleeves, said Beth Steinberg, founder of talent advisory firm Mensch Ventures.
Not wanting to be associated with their disgraced peers, some companies have been cleaning up their own houses. "I had a couple of venture capital investors come to me wanting to think through how they do things internally," said Steinberg, who is now chief people officer at Zenefits.
But it takes more than ousting a bad player here or there to change an industry's culture, said Freada Kapor Klein, a partner at Kapor Capital, an Oakland, Calif., firm approved by FairFunders.
"We've seen women come forward against Binary Capital, and the Binary guy is gone, and that doesn't stop systemic harassment and bias," she said. "My honest belief is that at this point in time, there needs to be a complete disruption of the entire tech ecosystem."
In venture capital, women hold only 11 percent of investment partner roles, according to a 2016 survey conducted by the National Venture Capital Association. Of the 217 companies surveyed, participants were also overwhelmingly white; only 3 percent of the workforce was black and 4 percent Latino.
It's little surprise then that few female founders or other underrepresented people get funding. In 2016, only 16 percent of companies funded had at least one female founder, according to data from Crunchbase.
"We shouldn't need outside pressure," said Hunter Walk, a partner at venture capital firm Homebrew. "As human beings we should realize it's an existential threat to our industry to not be diverse, to not behave properly. So I put that all on us."
In the event that venture capitalists do need outside pressure, limited partners may have the most influence. Limited partners manage the money of college endowments, foundations and pension funds, and their holdings constitute much of the funding that venture capital firms hand out.
As their name suggests, limited partners have traditionally played a quiet role in venture capital, with many taking a hands-off approach. That's because the power dynamic runs both ways, said Chris Douvos, managing director of Venture Investment Associates, a fund manager that invests in venture capital and private equity.
Limited partners might hold the money, but big-name venture capital firms, the kind that got in early with the Googles, EBays and Facebooks of the world _ hold the promise of increasing investments 10 times or more.
"Venture capital has more of an ego per dollar return than any other asset class," Douvos said. "There are so many LPs clamoring for so few landing spots at the great firms that they will kowtow and go on a bended knee just for some of the golden bread crumbs."
But limited partners are realizing bad behavior isn't just unsavory, it also could hurt their returns.
"People thought Uber was worth less after its whole fiasco," said Kate Mitchell, co-founder and partner of Silicon Valley firm Scale Venture Partners. "Its brand took a hit. If you look at Binary Capital, it wasn't just that immoral things happened, there was value destruction."
So a growing number of limited partners are starting to ask tougher questions.
"One of the ways we can affect change is to stop funding them, to not give them money," said Jessica Archibald, managing director at Top Tier Capital Partners. "Maybe they will get money from somewhere else. But if there's something we don't like, we just don't fund them when they come back to market."
In the past two months alone, Archibald has been on advisory boards that have asked venture firms what they plan to do about their lack of women. Such a question asked five years ago may have been met with a laugh in the boardroom. But now it's considered a "black mark" against a venture firm if it lacks a female partner.
"Questions on diversity carry more weight today than they ever did," Archibald said. "(Venture capital firms) are now thinking, 'If I answer inadequately, they might not invest."
For lasting change to happen, founders such as the entrepreneurs behind FairFunders understand that it has to start at the top, with the limited partners putting pressure on the venture capitalists, and with the venture capitalists putting pressure on each other. Tired of waiting for change to trickle down, though, they've taken matters into their own hands.