Investment firms and startups should look more closely at who’s giving them money. Similar suggestions were made in a series of tweets from venture capitalist Chamath Palihapitiya raising moral issues about sources of investment funding. His concerns were prompted by a WSJ investigation into how the Mormon Church secretly built one of the world’s largest investment firms – almost no one outside the church new about it.
- How can investors acquire an investment philosophy focused on companies that are “doing the right” thing? And can this philosophy provide a return over the long run?
- How can investment firms and startups ensure that money coming from various sources is free of ethical and/or moral issues?
- Milton Friedman, the 1976 Nobel Prize Winner in Economic Sciences, famously theorized that the cost of behaving in an ethically responsible way would outweigh the benefits over the long run. How can ethics outperform profit and growth?
- Some top-tier firms, including Andreessen Horowitz and Kleiner Perkins, are so secretive that they do not accept investments from public pension funds, which publish the results of their investments. These disclosures allow the public to know how much — or little — money the firms earned for their investors.
- On the topic of looking closely at the source of money given, venture capitalist Chamath Palihapitiya tweeted, “Why make the Harvard endowment any more money? What systemic bias do you perpetuate?”
- Fred Wilson, a partner at Union Square Ventures, a prominent firm in New York, said his fund had not raised money from repressive governments, and he called for venture capital firms and start-ups to find out whether they could be proud of their investors.
Referring to private equity firms, or general partners, and investment firms’ limited partners, or investors, Mr. Palihapitiya tweeted: “What if the LPs money was stolen by an autocratic leader? What if their family made guns or alcohol or tobacco? What if they believe in Pro-Life vs Pro-Choice or No-Guns vs Ok-Guns?”
Another tweet said, “The best GPs should know that they can pick their Capital partner and I would encourage them to ask tougher questions of their LPs.”
There were concerns over a year ago about Saudi Arabia’s investments in Uber and SoftBank’s Vision Fund after dissident journalist Jamal Khashoggi was murdered in a Saudi consulate. These types of concerns are gaining traction and these questions are likely to become a larger part of big investors’ decisions.
For example, when John Vrionis and Jyoti Bansal began raising money this year for their first venture capital fund, Unusual Ventures, industry peers advised them to go after the easy money — sovereign wealth funds like those managed by Saudi Arabia and Abu Dhabi, which have become major investors in Silicon Valley.“People would say, ‘It’s really easy — they’ll give you as much money as you want,’” Mr. Vrionis said.
But the two VCs didn’t feel comfortable making investments on behalf of repressive governments. Instead, they sought investments from nonprofit groups, historically black universities, and children’s hospitals.
This move was prudent, allowing them to avoid difficult conversations about what happened to Mr. Khashoggi after he stepped into the Saudi Consulate in Istanbul. Saudi Crown Prince Mohammed bin Salman has been linked to the killing.
Some start-up founders are now asking their investors whether they have financial connections to a foreign government with a poor human rights record. Others say that from now on, they will demand to know the source of investment money.
In contrast to traditional venture investing, there are now impact investors looking to fund profitable causes. More investors recognize that making money and making a positive impact on the world doesn’t have to be mutually exclusive.
New York-based Social Impact Capital specializes in investments that can deliver what it describes as “top decile returns” in addition to a positive social impact.
“There’s a lot of good to do in the world,” said Sarah Cone, the firm’s managing partner. “In general, we’re looking to invest in companies that will enable structural change in the broken systems that cause various social and environmental problems.”
San Francisco-based Ligandal is one of Social Impact Capital’s portfolio companies. Its goal is to lower the cost of developing human genetic therapies to $100 (currently it is around $100,000, according to Cone) while also reducing the time to create a personalized genetic therapy to days, as opposed to months.
As evidence of the growing popularity of impact investing, several large financial institutions —Bain Capital, UBS, and TPG Growth—have hopped on the impact bandwagon.