There are real ways LPs can manage venture capital soft risks and still get rewards. Decency pledges aren’t it.
I’ve been reading some of the stories around sexual harassment in venture capital with more than a little personal skin in the game as GP at Valor Ventures. Celebrated investor Chris Sacca recently blogged, “I undoubtedly caused some women to question themselves, retreat, feel alone, and worry they can’t be their authentic selves.” Dave McClure at 500 Startups is calling himself a creep. It’s not just individual men, however, but our entire venture capital culture that is struggling. Remember Sequoia‘s Michael Moritz saying the firm didn’t have a woman partner for so long because they wouldn’t lower their standards?
Meanwhile, a few months ago, a professional investor invited me to continue the group dinner conversation we had about their partnership possibly investing in Valor’s fund, at a nearby strip club . . . Whatever type of further diligence he thought we needed that evening, I declined.
Experiences like these make me even more ready to keep reinventing our industry, which after all, is at its core about invention. I am reading with interest some of the ideas in the conversation, too, like Reid Hoffman calling for decency pledges and the NVCA calling for human capital management commitments, in an industry with hundreds of 5 person-or-fewer shops.
Most answers we’re getting about fixing VC bias aren’t bad. They just aren’t good enough.
Unenforceable. Besides, when our culture accepts hate, it’s more than debatable if we share a common standard in the first place.
HR team or human capital management strategy?
Too often, they work for the oppressors—also known as the team that provides them their paycheck. The Uber story shows you what happens when HR reports to the CEO. In case you haven’t read engineer Susan Fowler’s blog post on this point, here’s how HR responds in a bad culture–if you’re a guy reading this, this reality may come as a surprise, but it’s pretty common and it’s by no means just an Uber issue. Susan wrote:
Uber was a pretty good-sized company at that time, and I had pretty standard expectations of how they would handle situations like this. I expected that I would report him to HR, they would handle the situation appropriately, and then life would go on – unfortunately, things played out quite a bit differently. When I reported the situation, I was told by both HR and upper management that even though this was clearly sexual harassment and he was propositioning me, it was this man’s first offense, and that they wouldn’t feel comfortable giving him anything other than a warning and a stern talking-to. Upper management told me that he “was a high performer” (i.e. had stellar performance reviews from his superiors) and they wouldn’t feel comfortable punishing him for what was probably just an innocent mistake on his part . . . I began to meet more women engineers in the company. As I got to know them, and heard their stories, I was surprised that some of them had stories similar to my own. Some of the women even had stories about reporting the exact same manager I had reported, and had reported inappropriate interactions with him long before I had even joined the company. It became obvious that both HR and management had been lying about this being “his first offense”, and it certainly wasn’t his last…
Decisive actions, not decisive words like a decency pledge
Words are easy. So let’s not be naïve. The only way limited partners, leaders and entrepreneurs who want to see the VC world done right are going to get that, is a better diligence process drawn from trackable activities. Upfront Ventures Kara Nortman has compelling advice on reference checking. Karen Klein at Bloomberg Beta adds a lot to the diligence conversation, bringing up trackable startup board composition tracking and spottable gender bias in the VC firm’s pipeline.
Most of today’s professional diligence process is past-looking — drawn from past performance, past relationships, and historical cues. What’s missing is a more holistic diligence process, that incorporates the full spectrum of how VC firms create value in the present and show how they will own the potential to create that value, free from risks like blowing up like Binary Capital. Fortunately, venture capital is finance, so it’s not an insurmountable task. VC may be the inefficient frontier, but metrics are all over our industry. All you have to do, as a limited partner, is ask and know where to look. And also be willing to take a hard look at your own biases.
For example, limited partners feel comforted by the story–and that is all it is, a story– that a spin-out strategy is less risky than a net new VC. Really? Case in point, Binary Capital co-founder Justin Caldwell “spun out” of Lightspeed. Before that, he was at Bain.
Truth is, spin out might be good—or it might be really, really bad. If you don’t understand the underlying metrics of the asset–often people you are investing in–you don’t understand the threads that wove the pretty story you’re being sold. A spinout can be a papered story of partners “getting rid of a bad egg.” Or, in the case of many investors who start a fund out of another firm and are not backed by their former firm, it can also be because that original firm didn’t want to lose primary claim to those investments . . . lots of associates have to sign away rights to claim their good investment calls before they join. Stories are always those. Stories. So what do you do when you want facts?
Good news. There are fact-first ways to diligence soft risks.
These are some sharp growing pains, but I embrace them–our industry is learning even more about how to manage the process of innovation. Just like an HR policy, a decency pledge, the safe feeling of a spinout, or other “soft satisficers” which could be good, or may just be lip service, as an industry of people who want to become better investors, we have an opportunity to embrace more facts. This is a great thing. We have the technology to do it, and all we need is the will. More about how to do deeper diligence on a VC in my next blog post, How To Crack a VC Firm Wide Open.
UPDATE ONE YEAR LATER
Reviewing this blog in July 2018, it’s gotten over 4,000 unique visitors and sparked a larger conversation for Valor with investors on a national level. There’s also a lot more research being done about how bias effects returns. If this piece gets under your skin, read about the “diversity dividend” recently analyzed by Harvard Business School.