How start-ups measure up in stakeholder responsibility is as important as potential for rapid growth, requiring venture capitalists to shift focus.
The prospect of funding the next tech titan has trained many venture capitalists to focus on disruption potential and entrepreneurs with a “move fast and break things” mind-set. But newer technologies, such as genomics, blockchain, drones, AR/VR and 3D printing demand a different approach, due to the enormity of their potential impacts. As BlackRock’s Larry Fink advocated in his 2018 letter to CEOs, investors must shift their focus to companies that benefit all stakeholders.
Corporate social responsibility is no longer optional, and a start-up worth backing is one that anticipates and plans for its potential impact on individuals, society, and the environment.
Writing for Harvard Business Review, Hemant Taneja, author and Managing Director of venture capital firm General Catalyst, suggests that the future of innovation depends on companies that “test for the effect on stakeholders and build in guards against potential harms.” Taneja poses questions that venture capitalists should ask in order to better assess the impact of a start-up’s technology as well as the start-up’s capacity to understand and prepare for it.
The first, for founders who aspire to create a transformative tech firm, addresses the social change that they want to create with their offering. This helps establish the founder’s orientation towards social change, and test whether they are aware of the many issues that transformative technology can engender; for example, disruption in labour markets or inequitable access to the technology.
The company should also have a plan for sustaining its positive impact it as it grows. Facebook offers a prime example here. Most people use the platform in innocuous or even virtuous ways, but a small number have used it to cause serious harm. Taneja points out that by not taking a longer-term view of its impacts, Facebook “failed to anticipate and prevent its worst-case scenarios.” Start-ups should learn from this and, in lieu of consulting a crystal ball, apply “reasonable foresight”.
Regarding growth, the emphasis is on maintaining stakeholder accountability while scaling up. Traditionally VCs have prioritized expansion over impact, and indeed, a company may grow more slowly when its benchmarks are tied to impact. But stakeholder accountability requires more responsive and specialised solutions, which tends to yield better products. It also helps instil trust and loyalty for the business, allowing more sustainable growth.
A premium should be placed on diversity, which impacts both society and performance. And yet only a sliver of venture capital currently goes to all-female teams or ethnic minorities. VCs should find out how a company promotes gender and ethnic diversity and what measures it takes to purge bias from its hiring practices. Companies that do not actively promote diversity and inclusion do so at their peril. Investors have the same imperative when it comes to their portfolios.
In the future economy now taking shape, financial and operational due diligence must expand to include impact. The public demands corporate social responsibility. More powerful technologies that pose greater risks demand careful planning for potential impacts. Growth and innovation will continue to be primary goals, of course, but they must be pursued responsibly.