(Illustration by Vreni Stollberger)
A record amount of capital is fueling private tech as investments in emerging technology companies grow at a faster rate and with more generous early-stage seed funding than ever before. This wave of unprecedented investment promises to remake the infrastructure of how we live, work, and play over the coming decade. Too often, venture capital (VC) firms mirror the diversity and quarterly challenges well documented in other areas of Big Tech where an elite, homogeneous group of founders and investors with short-term growth priorities continue to define the field. Many serious and well-documented harms are a direct byproduct of the past 20 years of technology investments—algorithmic bias, misinformation, loss of personal privacy, mental health concerns, reduced labor standards and many others. Unchecked, tech companies have the power to disproportionately define, perpetuate, or exacerbate existing racial, gender, social-economic, and labor inequities. To disrupt these trends it is imperative for philanthropy, impact investors, ESG investors, and forward-thinking venture capitalists (VCs) to collaborate to reshape the future of the private sector. This is just one reason why it’s vital to invest in the next generation of tech companies that seek to embrace a more “public interest” approach to innovation, either by adopting more responsible, stakeholder-driven approaches and business models or by focusing more explicitly on social impact.
Prior to 2021, venture funding never reached $100 billion in a single quarter. In 2021, it exceeded $100 billion every quarter. Even with increasing calls for responsible and ethical tech; stakeholder value; environmental, social, governance (ESG); and ongoing pushes for diversity, equity, and inclusion (DEI) in tech, the prevailing culture of “growth above all” persists. For example, a study conducted by Coworker.org found that in the past two years there has been a growing unregulated marketplace of technology companies they’ve dubbed “Little Tech” to differentiate the hundreds of other tech companies, vendors, and startups that tend to fly under the radar and due to their size are able to escape the oversight that we are beginning to see happening with Big Tech. The study found most Little Tech companies continue to develop products without sufficient due diligence and impact assessments to ensure their products do not have unintended consequences such as discriminating on the basis of protected classes under federal law.
We’ve too often seen the human consequences of “move fast and break things” and “growth above all” mindsets. Innovation is critical, but it cannot come at the expense of the public interest. As described in an earlier article in this series, the private sector must embrace public interest technology within its companies to avoid unintended consequences, strengthen customers’ and workers’ trust, and shape a more just future. That starts not only with policy and regulatory interventions but also by investing in early-stage companies that embrace the public interest as part of their mission or approach.
The strategies and infrastructure necessary to support these types of companies are developing and being piloted. Examples include: the investment management firm Blackrock’s advocacy for stakeholder capitalism; an increasing focus on ESG assets; and the launch of the Long-Term Stock Exchange, which has listing requirements that include stakeholder value plans and ethical risk assessments and includes major tech companies Twilio and Asana as new listees. These advancements in the field are a positive sign, but the early-stage funding ecosystem for public interest tech companies is still weak and underdeveloped.
Going Beyond ESG Investments
Many mission investors hope or intend to address the culture of “growth above all” via ESG investments in the public markets, but those contributions generally come too late to have the desired impact. The most fruitful time for shaping a company’s ethos and approach to technology is at earlier, more malleable stages of development and growth. Founders establish the DNA of their product, business model, hiring practices, and workplace culture at the earliest stages of company-building (i.e., Seed to Series A funding). For founders who are driven by the public interest or stakeholder interest, this is when they are most in need of core funding, as well as technical resources, support, and access to networks. By the time tech companies mature and enter the public markets through an initial public offering (IPO), their infrastructure has been largely formed, making ESG harder to retrofit, integrate, and implement.
ESG investing is important, but too often these funds are ineffective at addressing fundamental issues with products, practices, or business models that can have negative, unintended consequences for consumers, workers, and broader society. Further, ESG practices can be both cumbersome and inapplicable for early-stage companies. According to a survey by 500 Global, a prestigious accelerator and $2 billion early-stage investment fund, 37 percent of early-stage founders without an ESG policy say they are “too early” in their development to focus on this, 31 percent say they don't have the resources, and 26 percent say they simply have never thought about adding them.
Claire Shorall, who founded Topknot, an online personal development platform for women, and raised $650k in pre-seed funding from a diverse and prestigious slate of investors, recently crystallized this phenomenon with the phrase, “You can’t retrofit equity.”
Ensuring that the next generation of tech companies are led by diverse, underrepresented, and stakeholder-focused founders requires early-stage capital from the same groups of investors who often overlook these very founders. For instance, even in the historic funding of the past year, only 2.4 percent of the total venture capital raised went to Black and Latinx entrepreneurs. Comparing these amounts to those received by white and male entrepreneurs is a negligible amount, a rounding error. Therefore, while it is encouraging that DEI is a central focus area of ESG, it is not enough. To build true equity in the VC and tech landscape, we need to build new systems with sufficient resources necessary to support diverse founders at the earliest stage, when they are most likely to face financial barriers and lack the resources and support to grow their companies.
Building a Pipeline of More Just and Sustainable Companies
For mission-driven investors, as well as philanthropy, early involvement and exploration of blended capital models to support a new generation of public interest-focused tech companies are not only urgent but possible. Here are five ways to help create an early-stage funding ecosystem that will result in a more equitable and sustainable private sector:
1. Develop the capacity to deploy early-stage social impact capital, making capital available to BIPOC and women founders in particular. Foundations should deploy program-related investments (PRIs) at the early stage when investors have greater influence over company-building practices than later-stage public-market investors and shareholders. PRIs are investments that explicitly advance the charitable purpose of a foundation. These investments may be riskier, likely to yield a lower return, or require a longer timeline. They can be structured in many ways, including equity investments, loans, guarantees, and even recoverable grants, and can move capital to both nonprofit and for-profit entities.
2. Demand more as limited partners from traditional VC funds. Limited partners (LPs) can require VCs to implement DEI and ESG standards, consider ethical risk in due diligence processes, and support portfolio companies in implementing responsible and stakeholder-driven company-building approaches. For example, at Cornell Tech, we now require each one of our 300 graduate students to complete an ethical risk assessment of their ventures. They use frameworks such as EthicalOS and Ethical Data Canvas to surface ethical risk areas such as disinformation/misinformation, economic inequalities, algorithmic bias, surveillance, and data governance. In addition to ethical risk assessments, VCs can support founders in building ethical advisory boards, building diverse and inclusive cap tables, and creating stakeholder value plans.
3. Create a community of investors, advocates, and technologists to accelerate success. Changing the way early-stage technology companies are built and funded will require tremendous coordination of different stakeholders. There is a need for convening summits, demo days, and working groups that focus on supporting public interest tech companies. For example, VentureCrush hosts salons for BIPOC investors, VentureESG brings together venture firms to advance their ESG practices. Another model is Startups & Society’s Futureproof Tech Founders' Summit that brought together founders, investors, and civil-society actors to have conversations about the business case for responsible innovation, connect with other values-aligned investors, and learn about aligning growth and values, impact as a core strategy, and more.
4. Support emerging BIPOC and women fund managers, both by becoming LPs and helping create a cross-sector community to inform and discuss the potential social, economic, and racial implications of technology in society. There are a number of new women- and BIPOC-led venture firms such as Harlem Capital, Base10, Backstage Capital, and others, that are funding more Black-, Latinx-, and women-led companies, such as Shine, Staax, Spora Health, and Lana. When endowments are considering venture allocation, they should consider supporting these funds.
5. Learn from accelerators. The speed and scale with which venture-backed tech companies are creating the future of the private sector is breathtaking. This needs to be matched by greater catalytic early-stage and follow-on capital for public interest tech founders. Famed startup accelerator Y-Combinator (YC), whose ethos is “build something people want,” provides an instructive model for mission investors. In Q1 of 2022, YC announced new deal terms: a whopping $500,000 investment for each company accepted into their program. YC also de-risks early-stage investments by bringing together follow-on funding for its portfolio, nurturing ongoing relationships with top investors, providing deep tactical support for founders to raise additional capital, including introductions, legal insight, documentation, best practices, and even occasionally intervening on founders’ behalf. For their first cohort, YC received 17,000 applications from around the world and accepted 414 companies. These companies will go on to build products and services in sectors that touch everything from financial services, consumer goods, health care, education, climate, aerospace, housing, and more. Success for these companies is generally defined in terms of growth in revenue and users, with little emphasis on creating value for the public.
Even for founders who don’t share YC’s “growth above all” ethos, the speed, runway, and support that YC offers can prove to be irresistible. While there are existing philanthropic efforts to bring together impact investors around the use of catalytic capital, such as MacArthur Foundation’s Catalytic Capital Consortium or the Audacious Project, a coalition of mission-driven funders making eight-figure grants to organizations that address the world’s most challenging problems, there is currently no such funding vehicle for founders who, rather than “build something people want,” aspire to build a more just and equitable future. We need to give founders an alternative path.
Conclusion
To avoid ongoing problems and unintended consequences of technology, we need to fund tech companies that are focused on the public interest. Anjana Rajan, a YC alumna who is currently the CTO of Polaris, one of the largest anti-human trafficking nonprofits in the country, has said that while the wave of digital innovation over the last decade has greatly benefited society, “technology companies have also been complicit in aiding human trafficking, conspiracy theories, genocide, authoritarianism, and domestic terrorism.” She further asserts that “Due to broken incentive structures, the internet has also been a conduit for the darkest sides of human behavior.” We can’t afford to make the same mistakes in the next wave of innovation. We need more models of mission-driven catalytic capital to support tech companies committed to building a more just, equitable, and sustainable private sector.
Impact and ESG investors must become exponentially more active at the seed and startup stages, matching YC’s speed and size, and learning from their playbook on de-risking early-stage investing at scale to help influence the ethos with which tech companies are encouraged to grow. Imagine, if this year’s YC crop of 414 companies was inspired to create value for public benefit, rather than simply build something that people want. The actions funders take in the next few years could help to speed the type of transformation that’s needed to ensure that the next generation of Big Tech companies is grounded in the public interest.
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Read more stories by Lyel Resner & Wilneida Negrón.