MB on VC: The Decline of Ethics in Venture Capital (and What to do About it)


The loss of ethical perspective among certain venture capital firms, especially Silicon Valley industry leaders, is a growing concern in the tech industry. This issue is especially notable because so many technology startups innovate to solve problems and improve people’s lives. The loss of ethical perspective can lead to unintended negative and harmful consequences, particularly when combined with a ‘growth at all costs’ mentality that has become the norm in too many large VC firms and tech leaders. (Consider the blowback to Facebook for mishandling user data and spreading misinformation. That’s not at all where Facebook began. Other examples of ethical lapses include Uber's labor practices, the licensure dodging of Zenefits, or, more recently, the massive fraud that was FTX.    

The Current State of Ethics  

In recent years, we have witnessed incidents where VC firms have overlooked important ethical considerations in their quest to win a ‘beauty contest’ with founders. While it was not necessary to confirm what we have known to be the case, the downfall of the cryptocurrency exchange and crypto hedge fund FTX is the most salient example of what happens when a lack of ethics is allowed. Prior to its bankruptcy, the firm acted as a Custodian for deposits of value for individuals. Reports show that FTX did not have a Board of Directors. What's more, their major investors (some of the most venerable venture capital firms) did not demand that FTX put a Board in place even though, as Custodians, they had (at least) an implied obligation to provide oversight.  

When it did occur to these investors to ask Sam Bankman-Fried about establishing a Board of Directors, he allegedly answered with a simple “F... you!” and hung up the phone.  

The FTX situation is noteworthy given its size and the scale of its impact. Still, it’s hardly the only entity that bears responsibility. Prominent Silicon Valley investors are not the only ones whose behavior is raising serious questions about a lack of governance, supervision, and transparency. Even small VC firms working at the local level must answer to investors in their community. Without ethics driving their fiduciary activities, they put individuals’ wealth at serious risk.  

The media has been noticeably quiet on even severe ethical issues. In three recent banner cases, the lack of a public watchdog allowed major investments to continue to come in and bad behavior to go unchecked until the consequences were dire. Theranos raised billions from prominent VC firms and investors, even as it began to emerge that the technology was not as revolutionary as the company had claimed. Without media coverage exposing its actions, the company operated for years without being held accountable. Now, as its founder, Elizabeth Holmes, starts her 11-year prison sentence, it’s thought that greater public scrutiny could have exposed the fraud sooner.  

Theranos is not the only story of a high-flying company that was able to operate despite ethical issues because oversight, Board governance, and media coverage were lacking. WeWork canceled its IPO after investors raised concerns about the company's governance and financial practices. Uber was forced to pay $148 million to settle a lawsuit alleging that the company had discriminated against female drivers.  

Reassessing VC Ethics  

The failure to establish a Board of Directors is a clear sign that the VC lacks an ethical perspective, regardless of whether it’s a marquee Silicon Valley firm or a local fund. At every level, a Board exists to provide oversight, checks and balances, and assurance that the startup is accountable to stakeholders and operating with transparency. Without that oversight, it’s simpler for the startup (and VC) to prioritize growth and profit over ethics. The result is a situation where retail investors are left unprotected from the risks associated with investment. Ultimately, when founders, first-time CEOs, and fledgling companies are left without governance, the odds of fraud or damage to investors go up... significantly.    

Not surprisingly, industry experts have expressed concerns over this issue. William Black, a professor of economics and law at the University of Missouri-Kansas City, has observed that "VC firms are responsible for ensuring that the companies they invest in adhere to ethical standards. When they fail in this duty, the consequences can be severe for small investors."  

Similarly, Richard Levick, CEO of Levick Communications, warned that "VC firms must prioritize ethical considerations over short-term gains."    

Despite these urgings from experts, I am still somewhat sanguine about the possibility of change. When asked about why FTX did not have a Board or better corporate controls, the response from the leader of one of the most venerable venture capital firms in the world was, “We still want to allow founders the ability to dream. We are in the dream business. We do not want to lose... our true belief to align ourselves with you and to dream with you – I think we lose that and we’re out of business.”    

As if having a Board and thoughtful corporate controls somehow diminishes dreams. If done right, the governance should improve the odds of achieving dreams, not impede them. He closed by saying that their firm had made an evaluation and “we would not have done much differently.”    

Wow! Perhaps that explains the massive decline in performance over the last few vintages.  

Tech VCs should adopt a more comprehensive framework of ethics. The businesses we launch impact people’s lives. We should never deprioritize ethical considerations to compensate for the underdeveloped ethical frameworks of a small subset of self-important founders and venture capitalists. (Mark Buffington)

Proposed Ethics Guidelines for VC  

As part of the process of reclaiming ethical responsibilities with an eye on both short and long-term security for its participants, all VCs (including those in Silicon Valley) should adopt a set of ethical guidelines. These criteria prioritize transparency, accountability, and responsibility.  

  • Establish a Board of Directors for all firms that VCs invest in and ensure the Board has adequate oversight over the company's operations.  
  • Prioritize ethical considerations over short-term gains and ensure all investments are made with an eye towards basic, universal ethics.  
  • Encourage companies to adopt transparent reporting practices and provide greater access to information for investors.
  • Implement strict guidelines on conflicts of interest and require VCs to disclose potential conflicts to investors.  
  • Implement Audit procedures once a company surpasses a given milestone in capital raised.  
  • Support founders, especially young ones, to develop their ethical practices as much as we support their operating and leadership development.  

VCs have a responsibility to adopt a set of ethical guidelines that prioritize transparency, accountability, and responsibility. They have a responsibility to put in place accountability structures, like a Board of Directors. Failure to do so should be called out for what it is – a loss of (or disregard for) ethical perspective.  

The public examples of this issue (like FTX and Theranos) have finally begun to create growing concern in the tech industry. Investors are aware they are at greater risk. Those attuned to the issues might become more sensitive to the potential risk of supporting innovation through investment, which could have lasting ripple effects throughout the economy.  

By putting ethical standards in place and adhering to them, VCs will help the tech industry by ensuring all investors are protected and freer to participate.

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