'It's convenient to look the other way': Here's why startups are starting to ask tough questions about where VC money comes from
- Scrutiny surrounding the Vision Fund's ties to Saudi Arabia is sparking a new conversation within Silicon Valley: Many investors argue that venture funds should be more transparent about where they get their money from.
- Some investors also say that entrepreneurs should start asking the funds that invest in them about the identity of their limited partners.
Since journalist Jamal Khashoggi was killed inside a Saudi Arabian consulate in early October, there's been increased scrutiny surrounding SoftBank's $92 billion Vision Fund which counts Saudi Arabia's crown prince, Mohammed bin Salman, as its single largest contributor.
This has sparked a debate among tech investors about whether or not the identities of their funds' contributors should be disclosed to the companies they benefit. Typically, venture firms provide limited partner agreements which stipulate that they won't reveal the identity of their investors, who are known as "limited partners" or "LPs." In the majority of agreements, both the names and the size of the endowments the LPs contribute to the venture fund are treated as confidential.
It's unusual that a startup's founders would have a complete understanding of where the money that funded their company comes from, or that they would ask about the identities of a fund's limited partners, even after the checks are written.
On Sunday, prominent venture capitalist Fred Wilson wrote in a blogpost that, in nearly three decades of investing, he could not recall a single time an entrepreneur had asked him to reveal who his fund's limited partners were until last week, when a founder sent him an email which read: "I need to know if any of your LPs include...entities/interests."
Similarly, former Lightspeed general partner John Vrionis, tells Business Insider that in his ten years of investing experience, entrepreneurs seldom, if ever, inquired about where Lightspeed's funding came from. "They never asked," Vrionis said. "Entrepreneurs absolutely never asked who our investors were."
But now, with Softbank's funding causing the tech industry to carefully consider where it gets its money, investors say the conversation is changing.
"I expect to get more emails like this in the coming weeks as the startup and venture community comes to grip with the flood of money from bad actors that has found its way into the startup/tech sector over the last decade," wrote Wilson.
Vrionis, who recently founded a new fund, Unusual Ventures, along with serial entrepreneur Jyoti Bansal, said that he expects the conversation to shift course in the upcoming years.
"Entrepreneurs should absolutely ask where their money is coming from," he said. "They should know who their business is benefitting."
"People are sanctimonious but hypocritical"
Vrionis's co-founder Jyoti Bansal said he believes that venture funds should provide greater transparency when it comes to disclosing their investors.
"Look at what's happened over the past year," said Bansal. "Look at how the conversation about diversity in venture capital has started. Now, people are saying, 'Let's look at the LPs. Is their money coming from Russian oligarchs that don't align with our values? Let's look for LPs who are aligned with our values.'"
At Unusual Ventures,Vrionis said that they'd made an intentional choice to disclose the identity of their limited partners from the get-go: some of the fund's investors' names are prominently displayed in the firms various conference rooms, and both Bansal and Vrionis said they encourage their entrepreneurs to ask questions about the fund's limited partners.
The best founders are picky when it comes to securing funding, and aren't afraid to ask tough questions, said Vrionis. "People are sanctimonious but hypocritical," said Vrionis. "To say you are mission driven but not to care that there are are human rights violations happening within the country that gave money to the fund that invested in you...Really? It’s convenient to look the other way."
He continued: "Silicon valley is probably the biggest wealth creator in the world. As VCs, we work for our LPs, and as entrepreneurs, we are working for our investors. I would want to know who I'm working for: Who are my investors? Do I want to give them part of the biggest share of wealth creation in the world?"
SEE ALSO: 12 startups that failed this year and took $1.4 billion in VC funding with them
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Monday, November 05, 2018
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