While this is the smallest lever, it is nonetheless crucial to set the right example – for your investment targets, your portfolio companies, and of course, also your employees. So, what are the key topics you need to consider day-to-day?
This chapter covers the basics across environmental, social, and governance issues that are directly linked to your everyday work.
Reduce your negative environmental impact
- Rethink your energy source (change to renewables) and manage your energy usage as efficiently as possible.
- establish a climate-friendly travel & mobility policy for your employees and offset travel emissions you cannot avoid.
- implement a few quick wins with regard to the food you provide to employees and at events (at least vegetarian, try local and seasonal), reduce printing, and reduce/avoid and separate waste.
Your carbon footprint
To measure, reduce, offset, and manage your business carbon footprint, you can use digital platforms such as Plan A’s to create an optimized roadmap towards carbon neutrality: Get started with Plan A.
Manage Your Impact on People and Society
Social sustainability is about understanding and managing the business impacts on people and society – i.e., the impacts of processes, products, and activities on employees, customers, local communities and also workers in the value chain.
Usually, these include topics such as human rights, working conditions, employee health & safety, social equity and diversity, product responsibility, and many more. Although some of these issues are not easily quantifiable, the material issues to each company are relatively easy to identify.
For almost all VCs, the material social issue (in regards to your daily operations) will be social equity and diversity, above all. Across the globe, the venture capital industry is staggeringly homogeneous. As it is a very topical issue at the moment, we devote a little more attention to it.
The more similar the investment partners, the lower their investments’ performance.
– Harvard Business Review
Why care about diversity?
Various studies show diverse teams produce better results. As an HBR article writes, in the venture capital context, diverse teams are better equipped to help young companies succeed as thriving in a highly competitive and uncertain environment requires creative thinking.
The evidence is clear: Diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level and overall fund returns.
– Harvard Business Review
The big issue with the homogeneous VC environment is that it also results in quite homogeneous investments, meaning that a large share of promising entrepreneurs is left out of venture capital funding (In 2018, only 3% of venture capital in the U.S. went to companies with a female CEO!), and – what should trigger all VCs – a lot of money is being left on the table.
Further, VCs with a higher proportion of female partners have, on average, higher overall fund returns and more profitable exits.
Why diversity pays off in Venture Capital:
- Harvard Business Review: The Other Diversity Dividend
- Morgan Stanley: Why Gender Diversity May Lead to Better Returns for Investors
- Forbes: Should Diversity Matter to Investors?
- The Boston Consulting Group: Why women-owned startups are a better bet
The hidden hurdle to greater diversity – unconscious bias
Changing the course towards greater diversity will take time. As most VC teams are small and fluctuation rates are low, each hiring decision has a great and long-lasting impact, and, unfortunately, reinforces the homogeneity if there is no clear course of action.
While hiring is the most evident, and clear step to take, eliminating bias, especially unconscious bias, is a much bigger hurdle.
Not convinced that bias is an issue in VCs? Read on here:
- TechCrunch: The Surprising Bias of Venture Capital Decision-Making
- Insead Knowledge: Getting Rid of Gender Bias in Venture Capital
- Harvard Business Review: How the VC Pitch Process Is Failing Female Entrepreneurs
- Harvard Business Review: Male and female entrepreneurs get asked different questions by VCs and it affects how much funding they get
Everyone of us is inherently biased. We are biased towards similarity (in terms of education or work experience), locality, gender, and tend to “anchor” (focusing too heavily on one aspect if that one aspect has failed us in the past).
But similarity to yourself has nothing to do with another person’s entrepreneurial prowess.
Investors prefer pitches presented by male entrepreneurs compared with pitches made by female entrepreneurs, even when the content of the pitch is the same.
– Harvard Business Review: How the Pitch Process is Failing Female Entrepreneurs
Further, a study found that when pitching to investors, women are also asked different questions than men. While men are asked more ‘promotion’ questions (upsides, potential gains), women are asked more ‘preventive’ questions (losses, risk mitigation). As a result, men raise more money.
Bias is preventing funds from being allocated to the best investment opportunities.
Get started to tackle diversity:
- Harvard Kennedy School: Advancing gender equality in venture capital
- IFC, Oliver Wyman and RockCreek: Moving Towards Gender Balance in Private Equity and Venture Capital.
- Diversity VC & Atomico: Diversity & Inclusion in Tech: A Practical Guidebook for Entrepreneurs
Most likely you have already taken some steps to increase (gender) diversity.
Realizing you are biased, even unconsciously, however, is the most important one. Only then you will take the right actions to install more objective decision-making.
Here are the key steps towards greater diversity – in your team and for your investment decisions:
- Clear and communicated commitment from the top that diversity is a priority
- Set goals to increase diversity (at least in terms of gender) internally and among your portfolio company leadership teams
- Manage the talent pipeline: Adjust your recruiting practices to reduce bias in recruitment processes and hiring decisions (e.g. through AI-based recruiting tools or gender targets for each application pool)
- Create a welcoming and inclusive culture for a diverse workforce
- Increase awareness on unconscious bias through trainings and workshops
- Develop flexible work policies, i.e. around work hours, home office, child care benefits, etc. to make the workplace attractive for parents
- Allow for a more unbiased investment screening process: Think about ditching the pitch, introducing female founders quota for each investment meeting or allocating pools of money explicitly by gender.
Do you have better ideas?
If you have developed or implemented other measures to increase diversity which we should share here, let us know: firstname.lastname@example.org.
Implementing sustainability across a business, tracking performance and progress, and ensuring regular and transparent reporting needs stringent governance. A VC is only a small business, so with only a few and simple measures you can install sound governance:
- Ensure clear and communicated commitment from the top that sustainability is a priority.
- Clear Accountability & Responsibility: Appoint a GP to steer and manage overall sustainability and an additional team member to support with integrating sustainability across all five sustainability levers of a VC.
- Make sustainability a regular topic on board meeting agendas.
- Install reporting & monitoring systems towards LPs and for board meetings with portfolio companies on sustainability issues.
Internal alignment on this topic is crucial. Most likely, different people have different understanding of what sustainability actually means. Start internally with
- creating a mutual understanding of sustainability, then to
- align on the importance for your VC, and last to
- decide on the ambition level.
Reportings towards your LPs should include objectives, progress and activities
- regarding the integration of sustainability aspects in the investment process,
- on sustainability across your portfolio companies,
- regarding your own operations.
Reportings by portfolio companies should include:
- the management approach for the material sustainability issues, i.e. the biggest sustainability opportunities and risks,
- progress on ambitions and objectives for prioritized key issues (with measurable KPIs), incl. activities conducted as well as minimum standards implemented for those topics that might constitute risks to the startup.
- Integrating sustainability considerations in your day-to-day work is the smallest lever, but nonetheless important to lead by example.
- This entails environmental considerations (such as reducing emissions, and waste), social aspects (most relevant will be to tackle the topic of diversity), and implementing a good governance structure (clear accountability, reporting structures) to make sure sustainability is not a flash in the pan.