T EC H N O LO GY A N D PU B L I C PU R P O S E P R OJ ECTResponsibleInvesting in Techand Venture CapitalAdvancing Public Purpose inFrontier Technology CompaniesSusan WinterbergFACULTY DIRECTORLaura ManleyAsh CarterKaren EjioforAmritha JayantiJoseph FridmanSam LambertMarta ZwierzPA P E RAUGUST 2020
Technology and Public Purpose ProjectBelfer Center for Science and International AffairsHarvard Kennedy School79 JFK StreetCambridge, MA 02138www.belfercenter.org/TAPPStatements and views expressed in this report are solely those of the author and do not implyendorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Scienceand International Affairs.Design and layout by Andrew FaciniCopyright 2020, President and Fellows of Harvard CollegePrinted in the United States of America
T EC H N O LO GY A N D PU B L I C PU R P O S E P R OJ ECTResponsibleInvesting in Techand Venture CapitalAdvancing Public Purpose inFrontier Technology CompaniesSusan WinterbergFACULTY DIRECTORLaura ManleyAsh CarterKaren EjioforAmritha JayantiJoseph FridmanSam LambertMarta ZwierzPA P E RAUGUST 2020
About the ProjectThe arc of innovative progress has reached an inflection point.Technological change has brought immeasurable benefits to billions throughimproved health, productivity, and convenience. Yet as recent events haveshown, unless we actively manage their risks to society, new technologies mayalso bring unforeseen destructive consequences. Making technological changepositive for all is the critical challenge of our time. We ourselves - not only thelogic of discovery and market forces - must manage it. To create a future wheretechnology serves humanity as a whole, we need a new approach.To this end, Harvard Kennedy School’s Belfer Center for Science andInternational Affairs has launched a new endeavor, the Technology andPublic Purpose (TAPP) Project. Led by Belfer Center Director, MITInnovation Fellow, and former Secretary of Defense Ash Carter, the TAPPProject works to ensure that emerging technologies are developed andmanaged in ways that serve the overall public good.Much as the reforms of the Progressive movement softened the edges of thefarm-to-factory migration a century ago, we aim to create a set of conditionsthat leaven today’s technological change across three domains: digital,biotech, and the future of work. TAPP leverages a network of experts fromHarvard University, MIT, and the Greater Boston Area, along with leaders intechnology, government, and business to work on the following priorities:ii Training & Mentorship—Training today’s practitioners andtomorrow’s leaders in the responsible development and management of new technologies. Convening Stakeholders—Convening leaders in tech, policy,academia, and civil society to develop solutions to the societaldilemmas of emerging technologies. Publishing Leading Edge Research—Conducting world-classresearch on high-risk technologies and frameworks for effectivedevelopment and governance.Responsible Investing in Tech and Venture Capital: Advancing Public Purpose in Frontier Technology Companies
ContributorsLead AuthorSusan Winterberg, Inaugural Fellow, Technology & Public Purpose(TAPP) ProjectTechnology & Public Purpose ProjectLaura Manley, DirectorKaren Obiageli Ejiofor, Project CoordinatorAmritha Jayanti, Research AssistantJoseph Fridman, Student Research AssistantSamuel Lambert, Student Research AssistantMarta Zwierz, Student Research AssistantFaculty DirectorAsh Carter, Director, Harvard Kennedy School Belfer Center for Science &International AffairsAcknowledgmentsThe authors wish to thank the following external reviewers for sharingtheir expertise, insights, and ideas for this paper: Justin Baker, Harvard Medical SchoolMelanie Fornes and Yasin Rosowsky, Arabesque AIMatthew Goodwin, Northeastern UniversityJennifer Jordan, Pickaxes and ShovelsNandini Hampole, David Korngold and Michael Rohwer, BSRMichael Langer, Old Silver VCJohannes Lenhard, University of CambridgeAnu Rames, BNP Paribas Asset ManagementJulie Richardson, SVB CapitalDeena Shakir, Lux Capital Natasha Buckley and Chris Walker, HarbourVest PartnersBelfer Center for Science and International Affairs Harvard Kennedy Schooliii
Table of ContentsExecutive Summary. 1Key Challenges. 2Potential Solutions . 3Contents. 41. Venture Capital and Frontier Technologies.5Why Venture Capital Needs Responsible Investing. 5Frontier Technologies: Venture Capital in the 2020s. 62. How ESG contributes to Venture Success.8How does ESG contribute to financial returns? . 8What drives financial returns in venture capital? . 9Success vs. Failure Factors . 113. Responsible Investing in Venture Capital Firms. 20Fundraising .21Sourcing and Due Diligence . 22Active Management. 24Exits . 254. Road Map: An Action Agenda to AdvancePublic Purpose in Venture Capital. 26Action 1: Technology & Risk . 27Action 2: Data & Transparency.30Action 3: Diversity & Culture. 33Next Steps . 35Annexes. 36Annex 1—Key Concepts: Responsible Investing & Venture Capital .36Annex 2: Future-Proofing Sample Exercises. 41Annex 3: Research, Data, and Reporting Sample Tools. 53Belfer Center for Science and International Affairs Harvard Kennedy Schoolv
Executive SummaryVenture capital firms play a critical role in shaping the future oftechnology, industry and society. Historically, venture capital firmshave been the first investors in many of the world’s largest and mostinfluential companies including Google, Facebook, Twitter, Uber andmany other global tech companies. The business model, culture, andvalues of global companies are often shaped in the early years of acompany’s development, and venture capital firms as the first investorsand board members play an important role in this process.In the last few years, the world’s largest tech companies have run intomajor challenges in managing societal issues—the result of whichhas been governments, media, and activists taking a much deeperlook how foundational values and cultures were shaped. For example, Google, Facebook, Twitter and other social media platforms havefaced increasing scrutiny into their business models of selling userdata, squashing out competitors, and their roles in upholding democracy and human rights. While other major digital platform companiesincluding Uber and Lyft have also faced challenges with ensuringliving wages, social safety nets and safety standards are maintained.The conversation around who is accountable for ensuring technologycompanies manage public purpose issues often focuses on the role ofthe company leadership team or the government. Yet another group—investors—also play a pivotal role. During the last decade the practiceof responsible investing has become increasingly mainstream. In 2018,more than 70% of institutional investors integrated ESG (environment,social, governance) considerations into the selection and managementof their investments. ESG practices now span major asset classes frompublic companies, private equity, real estate, bonds, and commodities. Yet venture capital has lagged behind other asset classes, withno systematic approach to screening, managing or reporting ESGperformance or other societal considerations specific to frontiertechnologies. This report reviews a range of dilemmas that the venturecapital industry faces in managing ESG considerations and proposespotential solutions that the industry could adopt.Belfer Center for Science and International Affairs Harvard Kennedy School1
Key Challenges2 Venture capital firms are investing in frontier technologieswith potential to be disruptive to global security, public health,democracy, and many other areas of society—making the needfor responsible investment practices urgent. During the 2010sventure capital investment focused largely on enterprise solutions andconsumer digital platforms which produced many iconic companiesincluding Uber, Lyft, Airbnb. Digital platform companies upendedlabor markets and brought new challenges to jobs and financial security. These challenges will continue into the next decade as automationsystems displace workers across the world. Venture capitalists are alsoactively investing in a wide range of disruptive technologies includingartificial intelligence, quantum computing, autonomous vehicles,drones, and frontier life sciences. These technologies will bring unprecedented challenges to privacy, inclusion, and human rights. There could be improved financial performance in venturecapital firms by better managing ESG and other societal riskissues. Research has increasingly shown that managing ESG andother public purpose issues link to better financial outcomes incompanies through lowering risks and improving brands andcustomer relationships. Although venture capital is consideredamong the highest risk forms of investment, the industry doesn’tcurrently have a systematic approach to ESG or societal risk management. Around 70% of ventures fail within the first two years.Some late stage ventures such as Theranos have filed for bankruptcydue to underlying governance and technological integrity issues.Further, recent IPOs including WeWork, Uber, and Lyft have seensignificant losses in valuation due to underlying challenges withmanaging technological issues, stakeholders, and governance. Therecould be significant potential for increased financial returns toinvestors by developing new mechanisms to uncover and mitigaterisks earlier in the investment process. The venture capital industry has limited tools and data available toevaluate societal impacts, especially for frontier technologies. Thereare limited tools for venture capital firms to use to systematicallyResponsible Investing in Tech and Venture Capital: Advancing Public Purpose in Frontier Technology Companies
evaluate and manage ESG and public purpose issues. Morespecifically, there are no standard tools for investors to evaluatefrontier technology issues like privacy, cybersecurity and ethicalAI. There is also no data currently available for investors to evaluaterisks and ESG performance of ventures, in the same way that theindustry has created databases for market and financial data. Thereis also limited technical support available to ventures. Corporatefunctions responsible for managing societal issues including RiskManagement, Corporate Social Responsibility (CSR), and CorporateAffairs (legal, government affairs, public relations) typically are notfully operational in early stage ventures. Furthermore, there is nosystematic support available for early stage tech companies or boardslooking to develop the skills needed to effectively integrate societalconsiderations into their products and business models.Potential SolutionsThe path forward for advancing public purpose in venture capital couldinvolve multiple strategies including:Technology and RiskData and TransparencyDiversity and CultureFuture-Proofing Tools &TrainingsRatingsDiverse Fund Managers &FoundersTools and trainings forVCs and founders toassess values, stakeholders, risks, and unintendedconsequences.Technology AssessmentsIndependent evaluations oftechnological readiness, product-market fit, and societalimpacts.Third party scoring of ESGperformance and other relevant data to public purposeIncrease diversity in VCfirm and portfolio companyleadershipInteroperable DataComparable data on venturesperformance on ESG andpublic purpose issuesEthical CultureTrainings for an ethical culture in VC firms and portfoliocompaniesGovernance SupportTools for venture boards andwhistleblowing mechanism.Belfer Center for Science and International Affairs Harvard Kennedy School3
ContentsThis discussion paper is not intended to be a comprehensive study of theventure capital, ESG, or frontier technology industries. It highlights severalchallenges and some potential solutions for advancing managing societalimpacts of venture capital firms and portfolio companies.This paper includes the following sections: Chapter 1 Venture Capital and Frontier Technologies: A reviewof the challenges frontier technologies pose to society Chapter 2 How ESG Contributes to Venture Success: A high-levelliterature review and framework for how ESG factors contribute tofinancial outcomes of venture capital-backed companies Chapter 3 Responsible Investing in Venture Capital Firms: Thelevers venture capital firms have to integrate ESG considerations ateach stage from fundraising to exit Chapter 4 Roadmap: An action agenda to move the venture capitalindustry forward through improved management of diversity,culture, technology assessment, risk management, and the creationand reporting of public purpose dataAnnexes:4 Annex 1: Key Concepts—Responsible Investing & VentureCapital - A review of definitions and concepts of responsibleinvesting and venture capital Annex 2: Future-Proofing Sample Exercises - A high-level concept for a tool that could be built to improve identifying, managing,and evaluating technological, business, legal, and societal issues intechnology ventures Annex 3: Research, Data & Reporting Sample Tools - A concept for atechnology assessment program, ESG ratings, and database that couldaid venture capital investors in decision-making and management.Responsible Investing in Tech and Venture Capital: Advancing Public Purpose in Frontier Technology Companies
1. Venture Capital andFrontier TechnologiesWhy Venture Capital NeedsResponsible InvestingVenture capital firms play a critical role in shaping the future of technology, industry and society. Many of today’s leading companies includingAmazon, Apple, Facebook, and Google got their starts with venture capitalfunding. These companies alone account for over 3 Trillion in marketcapitalization. More importantly, their products and operations have influence in an unprecedented number and range of industries: advertising,communication, media, retail, transportation and an increasingly manymore. Dozens of digital platform companies including Uber, Lyft, Airbnb,Instacart, and DoorDash also had their beginnings with venture capitalfunding. These companies have fundamentally transformed industriesfrom transportation, housing, retail, and restaurants.At the same time many of these companies have run into major challengesrelated to their business models and management of key stakeholdersincluding workers, communities, and government relations around theworld. Google, Facebook, Twitter and other social media platforms havefaced increasing scrutiny to their business models of selling user data andtheir roles in managing democracy and human rights. Digital platformcompanies have faced challenges with ensuring living wages, social safetynets and safety standards are maintained. These cases have had investors,governments and the general public taking a much closer look at howthe foundational values and practices related to management of societalimpacts were considered in the earliest stages of companies.Belfer Center for Science and International Affairs Harvard Kennedy School5
Frontier Technologies: VentureCapital in the 2020sDuring the 2010s venture-capital backed companies focused mostly onenterprise solutions and consumer digital platforms utilizing smartphonetechnologies to match sellers and customers of services. This led to manychallenges in labor and workforce, and challenges to ensure safety and integrity, and privacy of consumers using these platforms.1 These challenges willcontinue into the coming decade as AI and advanced robotics continue toupend labor markets and displace workers around the world. Yet this newgeneration of start-ups also pose novel challenges to societies. (See Figure 1for a sample list of frontier technologies with disruptive potential to society)Figure 1. Sample Public Purpose Challenges and Associated Frontier TechnologiesDATA PRIVACY Brain-Computer InterfacesEmotion Artificial IntelligenceELECTIONS &DEMOCRACY CYBERSECURITYAI -Synthetic Image & Speech(Deep Fakes & Disinformation)Mobile Voting 5GQuantum ComputingBlockchain & CryptocurrencyPUBLIC SAFETY &SECURITY HUMAN RIGHTSMicrosatellitesAutonomous Weapons & DronesIoTSelf-Driving CarsRemote Sensing Facial RecognitionBioSurveillanceAI Predictive AnalyticsPUBLIC HEALTH &BIOSECURITY Synthetic BiologyLongevity & Anti-AgingGene EditingGene DrivesElective Cognitive EnhancementVenture capital firms are supporting many frontier technologies2 withbroad-ranging potential for disruption.3 which could pose critical challenges to society, among which include:4, 561Madrigal, Alexis. 2019. “The Servant Economy.” The Atlantic (Available Online)2Frontier technologies are defined as: “technologies currently being developed and holding realisticpotential to not only become reality but to become socially and economically relevant in theforeseeable future.” See: Stahl, Bernd Carsten, Job Timmermans, Catherine Flick. 2017. “Ethics ofEmerging Information and Communication Technologies: On the Implementation of ResponsibleResearch and Innovation,” Science and Public Policy 44: 369–381.3The Gartner Hype Cycle tracks progress of frontier technologies annually. See: “Gartner HypeCycle 2019.” (Available Online)4For analysis of how frontier technologies map to SASB standards see: Harvard Belfer Center. 2019.“Reimagining Investing in Frontier Technology.” (Available Online)5The CFIUS Critical Technologies list also maps technologies by their abuse potential by foreignstate actors. For a review see: Carnegie, Les P. et al. 2020 “How Final CFIUS Regulations will ImpactTechnology Companies and Investors.” NYU School of Law. (Available Online)Responsible Investing in Tech and Venture Capital: Advancing Public Purpose in Frontier Technology Companies
Artificial Intelligence: Thousands of start-ups are buildingAI-enabled decision making in employment, education, health care,criminal justice, military, political campaigns and more.6 Thesesystems will increasingly decide who has access to opportunities.Pervasive biometric systems like facial recognition will also createunprecedented levels of surveillance that could limit fundamentalrights like freedom of movement and assembly. Quantum Computing: New supercomputing systems could makeexisting cybersecurity systems obsolete posing threats to individuals, companies, and governments around the world.7 Autonomous Vehic
financial outcomes of venture capital-backed companies Chapter 3 Responsible Investing in Venture Capital Firms: The levers venture capital firms have to integrate ESG considerations at each stage from fundraising to exit Chapter 4 Roadmap: An action agenda to move the venture capital
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