Three upgrades for startup and venture capital governance
In recent months, the news has been filled with examples of unethical and sometimes criminal behavior occurring across the technology industry, inside startups, and inside investment firms. This is a wake up call for VCs and entrepreneurs to put more time and effort into culture, values, and better governance systems at the earliest stages of startup formation.
If you want a more detailed examination of the issues, I recommend this Stanford GSB “Closer Look” paper entitled Governance Gone Wild: Epic Misbehavior at Uber Technologies.
Rather than pile onto the mountain of negative news about the technology industry, it’s time to roll up our sleeves and work on solutions.
Let’s increase our focus on purpose-driven companies. Let’s work harder to communicate and live by the core values and ethics we establish. Together, we can reimagine startup and venture capital culture as more inclusive, values-based, and diverse.
With such a bright spotlight shining on the problem, we’re starting to see solutions emerge (check out #MovingForward). Here is our short list of recommended actions. We’re taking these steps at Obvious Ventures and we hope other VCs will follow suit and share their suggestions and recommendations in the comments here.
1. Establish a Clear Whistleblower Policy
This is new to the world of venture-backed startups, but the history of whistleblower protections go back over a hundred years. Abraham Lincoln introduced the False Claims Act in 1863 to offer incentives to individuals who reported people or companies defrauding the US government.
In 1989 Congress passed the Whistleblower Protection Act to protect federal employees from workplace retaliation when disclosing fraudulent activity. In 2002 the Sarbanes-Oxley Act (SOX) emerged with guidance on whistleblowing for publicly traded corporations, providing strong protections for employees that suffer retaliation for blowing the whistle.
SOX also requires public company audit committees to provide systems that track, and act on confidential and anonymous reports from employees. So big companies (and large non-profits) all put whistleblower systems in place, yet it’s largely non-existent at early stage startups and venture funds.
Your first step: establish a whisteblower policy, add it to your employee handbook, and communicate it out to your team.
Here is the Obvious Ventures policy, as a reference / starting point:
2. Offer a Third-party Ombuds Service
Harassment in the workplace is bad for business. The 2017 Tech Leavers Study quantified the significant turnover cost to tech startups caused by harassment and toxic work culture. In addition, companies can suffer significant lawsuit costs and permanent destruction of brand value.
Enter the ombud: an independent representative that can provide counsel to employees (or students, citizens, etc.) and report directly to a CEO and board of directors outside of the company’s management hierarchy. This approach can empower employees with guidance and confidentiality, and companies with early warnings and actionable recommendations.
The ombuds solution has been used by governments for hundreds of years, and large corporations and non-profits for decades. It’s largely unknown to the startup world because small companies don’t have the resources to staff and train professional ombuds.
We’re working with an Oakland startup trying to solve that by creating a truly independent, confidential, and digitally-enabled ombuds service: tEQuitable.
As a pilot, we’ve purchased the tEQuitable service for three of our Obvious portfolio companies. We’re excited to partner with tEQuitable co-founders Lisa Gelobter and Heidi Williams as they launch and refine this important service.
3. Support Industry-wide Reporting of Sexual Harassment
Numerous reports of sexual harassment by investors have surfaced in the past year. Many firms have acted swiftly by signing a decency pledge and strengthening their internal code of conduct and whistleblower policies.
Firms that have not done so yet should take note: California legislators are working to close a gap in the current state law which today supports an individual’s claim against an employer or a certain type of professional defined as someone with whom the individual has a business relationship.
When founders pitch investors, they do not yet have a formal business relationship.
California State Senator Hannah-Beth Jackson is leading Senate Bill 224 seeking to amend the professional sexual harassment claim of California Civil Code Section 51.9 to add lobbyists, directors, producers, and investors to those who can be liable for sexual harassment.
SB-224 Personal rights: civil liability and enforcement
In addition to changes inside venture firms and in the legal landscape, we believe there is a need for an industry-wide platform that allows entrepreneurs to report incidents of sexual harassment or assault by investors. That’s why we’ve made a multi-year financial commitment to Callisto.
Callisto was founded by Jess Ladd while she was a graduate student at Johns Hopkins University. Jess and her team first launched the service on college campuses and it’s been up and running for 2.5 years. In their work on campuses, they learned that student sexual assault survivors with access to Callisto are more likely to report and do so three times faster. They also found that 90% of college sexual assaults are committed by repeat offenders.
Now Callisto is expanding to industry, starting with technology. In their own research, the Callisto team found over 20 percent of female founders they spoke with had experienced sexual misconduct from investors.
This misconduct is likely committed by a small number of bad actors that are serial perpetrators. Currently, founders have no way of knowing if there are other victims of their same perpetrator and no way to call out these bad actors other than going to the press.
Callisto aims to change that. They’re planning to launch the service this summer and they’ve already received financial support from a great list of investment firms including Obvious Ventures, Greylock, First Round Capital, Uncork Capital, and Data Collective.
Zooming out, we’re cautiously optimistic that we are part of a bigger movement working to improve the technology industry. Ultimately, healthy culture to promote the good combined with early detection to weed out the bad feels like a recipe for long-term success and value creation.