VCs should find Pegasus, not hunt Unicorns

By Jules Miller

Originally published here on LinkedIn on August 14, 2017

This month the entire LunaCap Ventures team and I have signed on to the Founders Pledge, a global community of founders and investors who have committed to donating a percentage of our personal proceeds from the business or fund to charitable causes post-exit. 

As a mission-driven fund with an “impact-light” thesis of investing in the best military veteran, women and underrepresented minority founded business, signing on to the Founders Pledge was a no-brainer for me. It’s aligned with our mission and values at LunaCap Ventures, and generally who we are as people. 

We’re proud to join more than 35 other venture firms as signatories, and believe that giving back to charitable causes is something that all venture investors should do, especially right now. 

Instead of hunting for unicorns that may lead to forgiving bad behavior from founders, and consequently normalize bad behavior for investors as well, the venture industry should focus on finding Pegasus. I’ll explain more.

What is the Founders Pledge?

By way of background, the Founders Pledge is a global initiative launched out of the UK-based nonprofit Founders Forum. Signatories legally commit to donating a minimum of 2% of their personal proceeds to charitable causes of their choice.

Since launching just over two years ago in June 2015, Founders Pledge has confirmed commitments valued at more than $310M (actualized donations of $10M) for charitable causes across 950 pledges in 21 countries. They have a partnership with Y Combinator and notable pledgers include companies such as Spotify, Shazam, Commonbond, SoFi, Funding Circle and WeWork. Though this initiative started with Founders, now partners at more than 35 VC firms have signed on, many with their full teams. Instead of equity, investors pledge their personal proceeds from the carried interest of their fund. When we win big, so do the causes we pledge to support. This structure aligns extremely well with the risk/reward profile of venture capital.

Making the World a Better Place (Sort Of)

The power of Silicon Valley, and of entrepreneurship in general, is the allure of having an outsized impact on the world in a short period of time. Entrepreneurs create new products and services that will significantly change the lives and behaviors of people and companies within a few years. The best entrepreneurs I’ve seen are almost maniacally mission-driven. The specific mission varies, but they have a clear vision of how they can make the world a better place. When I started working in Silicon Valley nearly 15 years ago, the power of these mission-driven companies was intoxicating. Everywhere I looked there were founders who truly wanted to make the world a better place, with the side benefit of creating a big business and making some money, in that order.

Lately, I’ve been getting the distinct impression that the priorities are now reversed. The entrepreneurial fever pitch has reached it’s peak. Being an entrepreneur is glamorized in the media, and people who otherwise would have worked on Wall Street, taken a corporate job or started a lifestyle business are launching new startup businesses and seeking venture investment. Many of these founders have little or no prior experience running a business of any kind or managing teams and other stakeholders. There is still a lot of lip service around being mission oriented and wanting to change the world, but making money and feeding individual egos seem to be the real priorities now.   

There is absolutely nothing wrong with wanting to make money, and as an investor that is the business I’m in. But the true magic of Silicon Valley, in my opinion, is the alignment of mission-driven idealism with ambitious growth goals. The quest to build products or services that have a world-changing impact at scale can result in massive financial success. Unfortunately it seems as if some of this original magic has been lost with the industry shifting priorities to financial success first, mission later (if at all).   

The Role of Venture Capital

Venture capital is and will continue to be a fundamental enabler of these world-changing entrepreneurs. Since the Small Business Administration Act of 1958 in the US allowed for direct investment into private companies, Venture Capital has been used to finance some of the most innovative companies in the world. Apple, Google, Microsoft, Facebook, Genentech, Intel, FedEx, Starbucks and many more household brands used venture investment to grow their businesses quickly and fundamentally change the way we do business, consume content, and enjoy daily life.  

VC-backed companies also continue to drive the U.S. and global economies. One-fifth of public U.S. companies received venture capital financing, and they account for more than 11% of total employment in the US. With $121 billion in dry powder looking for more investments, the venture industry will continue to be an important economic driver of innovation and growth. The question to me is whether venture capital will continue to be a leader in funding mission-driven companies that will change the world for good with the new single-minded hunt for unicorns, or will we fall prey to our own greed and lose the underlying soul that made our industry so special...and so successful.  

Why Now?

The venture capital industry has a real image problem right now. Historically VCs have preferred to be secretive, avoid the press and work behind the scenes. Lately we’ve been getting a lot of media attention for the wrong reasons: rampant sexual harassmentUber drama and general lack of diversity among our investment teams and portfolio.

This is not how it used to be. In the past 10-ish years, the culture of VC has notably changed.

It started with the casual acceptance that it was ok to fund jerk founders. This was a byproduct of the VC industry moving to a model of chasing unicorns, companies valued at more than $1 billion, in order to make their desired fund returns. This became one of the only ways that the venture model could provide returns higher than the S&P 500 (though many funds still don’t) by compensating for the high failure rate in a fund portfolio with one big win.

Atrocious founder ethics and offensive personalities started to be normalized as “you have to act that way to build a great company,” but this acceptance of the jerk founder didn’t used to be the case. Investors used to have a “no assholes” policy - some still say they do but in the same breath brag about their Series D or E investment in Uber. 

An example of a conversation I’ve had many times with folks who have been in the industry for years: 

A senior partner at a top firm recounted a partner meeting at breakfast recently.
“Why are we backing this guy?” he said to a younger rainmaker at the firm. “He’s an asshole.”
His partner replied: “Hey, you gotta get over it. It’s no longer about whether someone is an asshole it’s about can he make money.”
That conversation happened a year ago. Said this multi-decade veteran of the business: “It didn’t use to be that way.”  
Source: PandoDaily “ Venture Capital and the great big Silicon Valley asshole game.

The acceptance of the “jerk founder” has unsurprisingly led to more venture capitalists being assholes too. The fallout around sexual harassment in particular surprised no one in the industry, as it’s been a well known “secret” for 10+ years. The bravery of the people who have come out publicly and risked their careers and fundraising prospects - and the resulting action by LPs and firms to oust the offenders - were the biggest surprises. 

Now the VC industry faces an important challenge. The reputational damage caused by the events of the last few months is real, and there is an opportunity to repair the industry’s reputation by reminding people of our real desire to do good in the world. A little tikkun olam would go a long way these days. The consequences of not doing so are devastating: founders will stop turning to VCs for funding, LPs will stop investing in venture funds and the most talented investors will leave the industry. 

What Should We Do About it?

It should be obvious, but the most important two things that VCs can do to start repairing our industry’s reputation is to 1) stop funding jerk founders, and 2) stop being assholes ourselves. 

As a third priority, I suggest that the venture community should take it one step further and regularly commit to giving back to charitable causes. This allows the profits from our ventures to also tackle problems that are not necessarily addressable with “venture-backable” businesses. Things like poverty (paradoxically demonstrated in the Tenderloin neighborhood of San Francisco only a few blocks from many unicorn companies), education (such as tackling race and gender foundational issues at the source rather than aftermath of problems that arise once the bad habits are ingrained) and the arts (to keep creativity and performance in our culture as inspiration) are not typically able to provide the type of returns required with for-profit businesses. If the venture community gives back to these causes regularly, it will be as world-changing as funding the next Airbnb or Dropbox. 

This is not a novel concept. Many in the venture and tech startup world already generously give to charitable causes. Some trailblazers have even recognized the privileged position investors and entrepreneurs are in to create wealth quickly and have aligned the philanthropic model with the risk/return profile of startups and venture capital. 

The Salesforce 1:1:1 model of giving back 1% of time, 1% of equity and 1% of product to charitable causes solidified the importance of charity for me personally. When I was working there in 2009 and 2010 it was a revelation to see the positive impacts on culture, brand and performance from a company-wide commitment to giving back. Many VCs also donate personally, such as the partners at Andreessen Horowitz committing 50% of their income to charitable causes. There are also innovative “venture philanthropy” models such as Omidyar Network and the UCLA Ventureswhich use the venture model to have a positive impact on specific communities. Venture funds that focus on impact investing while achieving market returns are also becoming more prevalent. Finally, there are great Limited Partner examples, most notably with Legacy Ventures, a venture fund-of-funds with more than $1.5 billion AUM that is fully (principal + gains) committed to philanthropic causes. 

Many entrepreneurs and investors have signed on to the 1:1:1 model, the Founders Pledge or something else to commit to giving back. This tends to happen in pieces, with individuals making their own choices independently of their organization. I would like to see this happen on more of an organizational level at VC firms, with buy-in from the full team and co-development of a firm-wide philanthropic strategy, so that giving back becomes an integral part of VC culture as a best practice. 

Find Pegasus

As an overarching thesis of how we can do better, I propose that VCs focus on finding Pegasus instead of hunting unicorns. I mean the following:

1. Pegasus organizations lift good people up and help them achieve their potential

In the Greek mythology, Pegasus is a winged horse that is masterful both on land and in the air. With these skills he helped his rider Bellerophon, who was strong and talented in his own right, to conquer many incredible challenges, most notably slaying the fearsome Chimera monster. Similarly, investors should look to partner with businesses that are not a cult of personality around the founder, but a vehicle for allowing talented people to work together and achieve the mission of their company. This also fundamentally means contributing to and/or partnering with charitable organizations tackling problems that lift communities of people up, and may have business models that are not suited as a for-profit enterprise. 

2. Pegasus organizations don’t get carried away with hubris and greed

Bellerophon started to develop a massive ego after achieving amazing things with Pegasus at his side. He got greedy and arrogant when he attempted to fly Pegasus up to Mount Olympus, the home of the Gods, where he thought he was worthy of belonging. This was his ultimate downfall, as Pegasus threw Bellerophon from his back for this blasphemous behavior - assisted by Zeus and a gadfly - after which he wandered the Earth blind and crippled until his death, hated by humans and gods alike for his arrogance. This is a cautionary tale for investors and entrepreneurs, where hubris and greed seem to be the norm lately. (Uber, with Susan Fowler as the gadfly?) The best practice should be to focus on Pegasus companies who stay humble, with their investors as a critical part of maintaining this humility. It is difficult to predict the human reaction to success and this must be an ongoing effort between founders and investors. One excellent way to internalize this humility is to embed philanthropy into a company or VC firm’s core culture. I saw this first hand working at Salesforce, where every employee had 6 days off of work per year to volunteer for the nonprofit of their choice. This seemingly small benefit helped to ingrain a strong and grounded culture that valued giving back, and also provided incredible support to many worthy charitable organizations. This type of model can be powerful in startups and VC firms as well.  

3. Pegasus organizations inspire people and leave the world a better place

Pegasus “sprung” from the head of Medusa when he was born and whenever Pegasus put a foot to the Earth, a flowing spring of water was created. This symbolized inspiration, and one of springs (Hippocrene) even became a sacred spot for the Muses. As investors, we should filter for companies that we believe will leave an important mark on the world and inspire others, both with their products and their people. If the company is successful, the people who are involved will go on to create or grow other businesses, and if they have seen success in a culture that focuses on inspiring people and leaving a positive impact on the world, they will continue to build companies this way and the overall results will be exponential.  

There is a new sense of urgency to remind people that, despite the headlines, the vast majority of venture investors are good people. Reevaluating who we fund is an important first step. We can also escalate this effort by making a commitment that doesn’t have a 10 year waiting period to see the results - donating a portion our returns to charitable causes is an easy and powerful option. The best hope for the VC industry to continue its good work and strong performance of the past is to invest in and donate to Pegasus organizations, starting now.