I’m attending the Techstars Summit this week in Torino, Italy. It’s the annual meetup of this international network of startup accelerators (I’m a mentor in the Montreal AI program). I was recently named “All-Star Mentor” in the global Techstars network and the organizers invited me to network and speak on a mentorship panel.

There were many interesting discussions over the three days of the Summit, but one presentation stood out for me. Dr. Johannes Lenhard, an anthropologist of ethics, gave a presentation on “the ethics of venture capital”. Having spent a lot of time thinking about the ethics of technology over the last two years, I was curious to learn more about how this can apply to venture capitalists (VCs) as well. I’ll share below my personal notes from Lenhard’s presentation, but you can also read his three blog posts.

The ethics of venture capital:

Johannes Lenhard has been interviewing VCs to better understand what they do and how they see the world. He explained to us the importance of researching the VC industry:

• Venture capital is much more than money (they’re not bankers).
• VCs are the first filters of the future economy
• 7 of the 10 most-valued companies were VC-backed
• Because VCs are kingmakers, we need to understand their motivations, incentives and value systems
• And historically, there’s been tension between “doing good” and “doing well”. VCs are in the business of breaking things.

So, that leads to the following questions:

• Is there room for ethics in this?
• What kind of ethics would make this model better?
• Where do incentives come from?

Recently, the zeitgeist has been about reinventing capitalism. The Financial Times called for a reset of capitalism, saying “Business must make a profit but should serve a purpose to. Harvard Business Review recently suggested the era of “move fast and break things” is over and proposed the idea of a “minimum virtuous product”.

Lenhard said that changes in tech industry could be driven by various stakeholders:

• Consumers (and the growth of ethical consumption). They put pressure on companies via impact on revenue.
• Governments. They put pressure via fines and regulations.
• Employees (ex: the recent Google walkouts). They put pressure via retention.
• VCs and Limited Partners (LPs). They put pressure via reputation.

He also wondered if a new model of financial incentives was in the making and gave the following examples:

• Beyond Meat is doing good and well
• Uber has turned from startup poster child to loss-maker, partly based on ethical issues
• Zenefits. Started out as a perfect company and had to be fully restructured after 2016 because of cheating.

Lenhard suggested that, in the startup world, you can be a temporary pirate, but you need to eventually become “navy”. You should never be a psychopath (doing illegal or unethical things), committing fraud, lying, creating bad company culture as these types of behavior now lead to economic consequences. You have to be better now to do well financially. Diversity matters too.

So, what roles can venture capitalists play to help with this?

1. Ethical due diligence
2. Strategic advisor (culture building, sounding board, etc.)
3. Board member (oversight, checks/balances, etc.)
4. Patient capital (avoid pressure, be in it for the long term)

He did call out VCs’ blind spot in all diversity dimensions: gender, race educational background and suggested that to fix those blind spots, VC funds should be i) start early, ii) be intentional and iii) don’t rely on personal networks too much.

Lehman’s key takeaways were:

• Ethics matters, behaving badly can have immediate economic consequences, like lost valuation, no exits, reputational damage, disruption in leadership structure.
• So far, investors and many startups have been not proactive. They’ve been fined, sued, moving forward until stopped.
• But things are changing. More stakeholders, consumers, employees, LPs, are starting to care; the financial incentive model might turn even further.