One of the most effective ways to help stop this behavior is for limited partners (LPs) to cut off funding to these types of investors.
16 Jul, 2017VENTUREINSIDE.COM
Imagine a single mom has finally saved enough for a down payment on a house. She bravely gathers herself and enters a largely foreign world of white men in suits at the local bank to inquire about a mortgage. Her meeting goes well and she anxiously awaits the decision. Late that evening, she receives a text message from the loan officer saying: “I can’t stop thinking about you and I am not sure whether to date you or give you a loan. Can you meet for a drink right now?” How would we react? We would all be appalled. This clearly crosses the line.
However, this exact (and often worse) behavior has been occurring regularly by partners at several well known venture capital firms. These stories were recently uncovered and exposed thanks to some very brave women who have come forward with their experiences.
With these recent revelations, I have been struggling along with others to define the rules to help prevent powerful VCs from preying on female founders. Because this behavior does not fall under traditional definition of sexual harassment (generally boss/subordinate relationships) it has been harder to define, quantify and report. But without a doubt, it is wrong and must be stopped.
I call it Predatory Venture Investing. This is where we have powerful venture capitalist men preying on female founders raising capital in a sexual manner (sometimes subtle and sometimes overt and aggressive). While a majority of men in the VC industry are good and moral people, they should want to clean this behavior up because it affects their personal and firm brands.
One of the most effective ways to help stop this behavior is for limited partners (LPs) to cut off funding to these types of investors. In this way, LPs can act like an executive function in government, vetoing bills (or funds) so they do not pass and providing early signals so firms address problems early should they want to raise again. The good news is it looks like LPs have already kicked off this conversation as reported by Dan Primack yesterday and are ready to play an active role.
LPs are the life blood of venture capital firms as they often represent greater than 90% of the capital that venture firms have to invest. If you don’t have LPs then you essentially don’t have a venture firm and can’t invest. Who are these LPs? Many of the biggest and longest standing LPs are pension funds, state/city governments, nonprofit foundations and university endowments. Other LPs are fund of funds, corporates, and family offices. Thus, some of the biggest investors in VC firms represent universities, teachers, pensioners and non-profit causes. Meaning, LPs (should) care about the behavior of their GPs (General Partners are the people that run the VC firm and who make investment decisions) not just for financial returns purposes but to properly represent the values of their constituents.
As an early stage venture capital investor, referencing the founding team is one of the most critical things we do in diligence. Beyond diligencing the startup’s business (product, competitive positioning, customers, business model, financials, etc), we reference check the founders from various stages of their career both on and off “balance sheet.” We do this to assess founders’ strengths and weaknesses through their highs, lows, transitions and interactions with people across their past organizations’ power structure (colleagues, superiors and direct reports).
We often, if not always, receive mixed feedback on founders and it is our job to distinguish from the subjective or temporal traits (likability, leadership style, cocktail party interactions) and objective, hard-line issues that should cause every VC to say no to funding a founder (criminal behavior, abusiveness, sexism/racism, misalignment with that VC’s core values).
LPs go through similar reference checking on the partners of a fund. Many LPs undertake very rigorous referencing on personality and style, down to a VC’s responsiveness in meetings and how a VC turns down an investment. I now know about this first hand as Upfront just closed a fund in which I was the subject of such reference checking. But whatever we have all done in the past- as VCs or LPs- this is the moment when EVERYONE needs to re-evaluate how we reference harassment as a key item.
While LPs are just one piece of the puzzle, they hold one of the keys at the top end of the funnel. LPs should think about who they reach out to for references and bucket feedback into categories (gender, ethnicity) to expose abusive behavior. LPs should have written checklists of key reference checking items across these categories:
How well does that VC support its founders, both the winners and the ones that have struggled? Look (even harder) for gender and ethnic patterns.
Does the VC have access to the best founders? Define “best” as empirically as possible. From one decade to the next, the best founders will come increasingly from diverse genders, ethnicities, industry backgrounds and geographies. Funding a particular ethnicity, age or gender begets more deal flow from that founder’s closest contacts. Successful past founders will be every VC’s strongest source of deal flow over time. Those VCs that don’t actively try to break out of funding just white men will lose over time. Demographics are working against you and returns will be impacted.
What is the VC’s brand reputation from founders who have turned down that firm? LPs should seek out those entrepreneurs that received a term sheet from that VC and passed on taking that VC’s money. Make sure to find women who turned down that fund. Of course we need entrepreneurs to share the truth, but listen between the lines. You can tell when feedback is authentic and the answer *really* is “price/deal dynamics/strategic value” or if there is something more behind answers like “chemistry.” If you hear words like chemistry a lot, it is probably a sign to make more calls.
Diligence Partners, Operations and Associates- LPs should do equal referencing on newer partners. While newer partners may not have the track record, they are the future so they are potentially even more important to a fund that likely won’t make its returns for 7–12 years. Most firms have associates who have left and can reference the culture of the firm. And again, call the women. While only 7% of top VC firm’s investing partners are women, Crunchbase reported last year 22% of associates, VPs and principals are women. Make sure you talk to those people who have left the firm. This will also have the side benefit of helping promising, junior women VCs build longer term relationships with LPs.
Call the women entrepreneurs, both those that have been funded and those who have not been funded.
And if that fund doesn’t have women founders, that should be a sign unto itself.
Also call the women VCs and women angels/advisors. Look deeper in the cap tables. We want to help and are often clearing houses of information on the topic. Many of us were never called and could have helped. Personally, I have a deep desire to prevent bad behavior, celebrate good behavior and still make sure we give people room to make mistakes, take feedback and change.
To be clear, it will not always be easy to find the victims of the predatory behavior. LPs will have to work hard to find the women so it is important that LPs come up with processes to hold themselves accountable to try ever harder on this front. And its important that women in the field commit to taking the calls and arbitrating those calls with the highest ethical compass.
The good news is that in a few short days, I have had LPs reach out to me to ask more questions who are very upset they were not able to diligence these topics as well as they would have liked. I haven’t necessarily had the answers, but I have been able to brainstorm who might. And I am certain most women in our industry who can help, now feel this is a defining moment to help. We are alternatively angry, sad, helpless and empowered.
In sum, at the highest level character checks should be on the referencing check list for LPs and LPs/women must build stronger ties. There will always be disgruntled former employees or entrepreneurs so as reference checking processes extend on this topic, LPs must find their own internal ethical compass to navigate the feedback to the right answer.
I salute the strong women who suffered tremendous sacrifice to wake up the industry. The best way we can celebrate their bravery is to raise our hands to help LPs hold VCs accountable.