I met Sam while researching my forthcoming book on the ethics of venture capital (VC) investors.1 I asked all of the nearly 250 VCs I meet a simple question to start our conversation: What is the crucial factor that drives you to invest in a start-up?
Like many others, Sam explained that his decision-making was based on emotions rather than a simple business calculation:
I’m looking for [companies] where, you know, at the end of it, there’s some big payoff, there’s some big reward, some big thing that … will change things or generate value, or whatever it might be. … I … imagine when I’m meeting someone—what if I was going to get to work with this person for the next seven to ten years? … You know, would that excite me? Or not?
In order to decide for or against an investment, Sam considers his excitement, essentially imagining the feasibility of a seven- to ten-year-long relationship with the founder. In this imagining, he centers not only on the “big payoff” but also the focus on “changing things” and “generating value.” His explanation is indicatively ambivalent as to whether this value is purely financial. Other investors I interviewed described the “magic factor” as a “belief in the founder” or the process of deciding as one of “building conviction.” Some VCs were also happy to admit how they are driven by herding or the fear of missing out (on a good deal); following the VCs who are perceived to be the “herd leaders” is common practice. While certain minimal thresholds need to be met—the market for the new technology has to be big enough—the ultimate decision stands and falls based on the perception of the quality of the entrepreneurial team or what is sometimes called the jockey. And how do VCs judge that quality?
In the investment process, VC investors follow heuristic patterns rather than “financial modeling”; processes are not standardized or structured but rather unique and proprietary, depending on the firm or even the individual investor. The decision-making is mostly based on conversations between different stakeholders. The quality of the founding team is judged based on a mash-up of opinions. Talking to current and former employers, coworkers, customers, other investors, competitors, and industry experts in a process called “due diligence,” the VC investor either develops the conviction to write a check or not. Contextualized by earlier experiences and (successful) investments—either in one’s own or other investors’ portfolios—investment decisions are made communicatively. While voting on the investment within the fund’s investment committee or certain legal checks produce the impression of security in the process, the convictions are mostly developed interpersonally.
Most coverage of the tech sector underestimates the power and influence of VC investors, who I call the “kingmakers.” VC investors fund and sell tech start-ups, fire CEOs, chase and compete with one another, and drive up or down company valuations. In other words, it is VCs that make or break the start-up kings.
In 2021 alone, VCs invested $734 billion globally—or $2 billion every day—predominantly in software and tech start-ups, including e-commerce, financial tech, and health tech. Over the last decades, VCs were the investors who financed the companies that have since grown into what we call “big tech,” from Apple, Amazon, IBM, Microsoft, Google, and Meta to the next generation of Uber, Coinbase, or Airbnb. Whether examining tech or the tech kings, following the money takes us to the VC kingmakers.
Shining a brighter light on investors, like the VC kingmakers, is the purpose of Michel Callon’s Markets in the Making and Kean Birch and Fabian Muniesa’s edited collection Assetization. While Callon’s recent magnum opus is ridden with jargon (e.g., passiva(c)ted, agencement, qualculation) and overall too heavy and complex an apparatus to be used in full here, he turns our attention to the role of variables such as passions (anger, fear, envy, happiness) and structures such as formulas for influencing price formation in markets and investment decision-making. Similarly, Birch and Muniesa point toward the muddled intersection of assetizers’ logics between short-term financial profit optimization and visionary entrepreneurialism. My own research with VC investors both in Silicon Valley and Europe suggests strongly that VCs are not only profit maximizers but highly unprofessional and biased, driven by their relationships, personal preferences, and desires.
Realizing that big tech is driven not only by an embrace of scientific and technological progress but the imperfect and unprofessional emotions of VCs is the first step. But studying VCs also helps us understand some of the systemic issues better, such as the funding gaps for women, people of color, and many other groups that remain underrepresented. Most importantly, following the money back to VCs enables us to finally catch the technological future while it is in the process of being funded and made, before the companies become “too big to fail.” Understanding, starting a dialogue with, and scrutinizing VCs gives us a chance to start having an influence earlier on the next generations of big tech.
Follow the Money
Zooming in on “tech kings” or “geniuses”—whether Musk and Zuckerberg today, or earlier generations like Gates, Bezos, and Jobs—means we often miss whole swaths of stakeholders. This is why Callon argues that, in order to understand the formation of and culture of markets generally, we need to focus on the “entire set of material and textual devices … that structure and prompt commercial activities.” Considering “all the actors who participate in the process of designing and commercializing new products,” Callon casts a wide net from academic researchers, patent offices, insurance companies, regulators and religious authorities to what he calls “intermediate financiers”; in the case of technology start-ups, these financiers are the venture capital investors.
Today, innovative ideas undergo what Birch and Muniesa call a process of “assetization.” Applying this notion to the context of VCs, the investors deserve specific scrutiny as the driving forces behind it. Turning research, ideas, and knowledge into rent-yielding assets, VCs can be described as extending the logic of financialization—subsuming things under financial valuation logics—to the innovation economy. VCs, according to Callon, are key actors in “identifying similarities and differences, and producing comparisons and hierarchies” between tech products and services by distributing investment capital.
Under the traditional idea of “homo economicus”—a (financially) rational and optimizing agent—VCs within the tech ecosystem make decisions solely with the logic of maximizing profit. But focusing on VCs in their complexity as kingmakers shows just how insufficient that traditional explanation is. An analysis of VCs as assetizers who “simply” turn innovation into tangible (and sellable) financial assets to extract value2 is too fast a political-economic conclusion, particularly when talking to Sam and other real VCs.
Excitement and Bias
Matt received me for a forty-five-minute “chat” in his central London office sometime in 2019 for the first time; he was part of a VC investment team that had a broad investment remit without specializations in terms of sectors. When Matt talked me through their investment-making process, he began by describing their investment funnel—how many startup founders make it to how many meetings with his team. Similar to Sam, Matt tells me about his need for excitement and how this need is driven in a very biased way.
It’s not about money because if it was, you’d just work in a hedge fund. The negatives to that are … who doesn’t get backed in VC, that should. … Someone who’s not charismatic enough because they’re too techy or too science-y. Someone you don’t like—so that’s personal bias. … There was a construction business that came in the other day and they were doing something which was really great but I just couldn’t get excited.
A lot of biases impact investment decisions. The nature of the process, after all, is based on an explicitly emotional communicative endeavor, at the end of which stands a strong belief in one direction—writing a check—or the other. And this bias is only mitigated by the investors’ (personal) networked conversational research. Consider one such manifestation of bias, though one that is particularly obvious and dangerous.
These kingmakers frequently make kings who look just like them: white men. Since we started tracking diversity metrics—both across VCs themselves and the founders they fund—the statistics are shocking. A recent NVCA/Deloitte survey concludes that fewer than 20 percent of American VC partners are female, with almost no gains when it comes to their responsibilities, such as investment decision-making, over the last years. The same survey found that just 4 percent of decision-makers among American VCs are Black (compared to 12.6 percent of the US population); statistics for Europe or the UK are similarly lagging in diversity across ethnicity and gender (which are often the only dimensions for which data is collected). Telling, however, is that the actual “firepower” that women in Europe control is even smaller: they manage only 9 percent of capital (5 percent in the UK, 6 percent in Nordic countries). Indicative numbers for Latin America and Canada tell a similar story. Another devastating indication of bias: in the US, 40 percent of VCs went to two universities, Stanford and Harvard.
The same underrepresentation and unfair distribution is observable among the people who receive VC funding. For Europe, the State of European Tech reported that all-female start-up founding teams received less than 2 percent of total funding in 2021 (less than across the five years before on average). In the US, under 1.5 percent of VC funding went to Black entrepreneurs in the first half of 2021; just 0.34 percent went to Black women. The numbers are even more devastating in Britain, where not-for-profit Extend Ventures found that 0.24 percent of VC funding between 2011 and 2021 went to Black entrepreneurs.
In the driver seat of tech sit VC investors like Sam and Matt. And they, relying heavily on personal and biased heuristics, have produced a mirrortocracy, which, despite years of critique, has not changed at all when it comes to key decision-makers and founders. Can Callon’s or Birch and Muniesa’s analyses help us identify where more radical interventions could come from?
Venture Capitalists are not only profit maximizers but highly unprofessional and biased, driven by their relationships, personal preferences, and desires.
Change—but Only from the Top Down?
Birch and Muniesa’s model, while not resistant to it, doesn’t actively help us understand change. Callon’s account of “market agencements,” however, does consider necessary conditions for change. Agencements, like markets, are in fact “in constant motion” and “animated by forces” that are often “problems, worries, matters of concern,” inside or outside of the field. In other words, change is inherent in market systems. Callon argues that change is often driven by “alliances and convergences” sometimes leading to “the emergence of widely shared movements.” Could this also be true for venture capital?
For ten years—at least since the Ellen Pao gender-discrimination lawsuit against powerful Silicon Valley VC firm Kleiner Perkins—there have been loud and multidimensional critiques of how VCs make decisions and the resulting lack of diversity. Black Lives Matter added another dimension to the pressure from all sides—including tech and VC employees, a new generation of entrepreneurs, a new kind of impact-focused VC, academia, and the press.
What we need to carefully consider can be best encapsulated in a famous Orwell quote: “All animals are equal, but some animals are more equal than others.” The actors in the VC ecosystem that have the most powerful influence on VCs are the asset owners—endowments, foundations, pension and state funds—whose money the investors manage. And despite a strong financial rationale—we know that more diverse VC investment teams make better financial decisions—they seem to have not moved as quickly and decisively as other actors in the ecosystem with less influence would wish for.
So many of these problems with VCs can be seen, in fictional form, in HBO’s show Silicon Valley broadcast between 2014 and 2019. From sexism in the industry and the “ethics of scaling” to founder wars and the problems with techno-solutionism, already ten years ago Silicon Valley didn’t shy away from pointing at the uncomfortable issues we are still very much grappling with.
The company at the heart of the show, Pied Piper, ascends out of a big discovery: its CEO Richard Hendricks figured out a quick and cheap way of compressing data, tackling one of the big problems in the data-fueled new digital economy. From the heart of Silicon Valley, the start-up quickly raises venture capital funding from one of the most well-known VC funds, led by Peter Gregory, and starts on what seems like the perfect trajectory to build and grow the small startup into a big tech company.
Enter Peter Gregory’s long-term enemy, Gavin Belson. Hendricks and Pied Piper find themselves, for the first of many times, caught between competing VC investor interests. To annoy his rival, Belson, Gregory forces Hendricks and his team to take part in a start-up competition to showcase a product that isn’t ready yet. When Hendricks wants to pull out, Monica Hall, a partner at Gregory’s firm, explains bluntly to the still inexperienced CEO:
MONICA. Let me just tell you what’s gonna happen. Peter will pull all of his support and pass on any further funding, which, as you know, is the most flaming signaling risk on earth. You’ll burn through the rest of your runway … then you’ll go bust. […]
RICHARD. Doesn’t Peter Gregory want what’s best for the company?
MONICA. I am going to be straight with you: Peter Gregory doesn’t care [… about] you. Any of you.
RICHARD. Why did he back us? Does he just wanted to piss off Gavin? […] now I’m in the middle of some pissing contest between two billionaires?
Biases, whether they are on the level of personal excitements such as for Sam and Matt, or individual rivalry, as between Gregory and Belson, shape tremendously how tech kings are crowned. Taking some recent sociological scholarship on markets generally, and assetization and VC specifically, hopefully helps us to direct our attention in the direction the money flows. When it comes to understanding—and ultimately influencing—tech, we have for the longest time focused on the kings (and few queens) who start and sometimes also scale and run the big tech companies we have become accustomed to. In order to tackle some of the systemic issues—for instance, the lack of diversity among these founders—court rulings, fines, and regulation are not good enough.
Following the money to the investors and their unprofessional and often biased decision-making, as well as one level up, to the investors’ investors—the asset owners—is where I argue the crux lies.
- As with all of the VC decision-makers I have spoken to since 2018, Sam was “warmly” introduced to me by another investor I had interviewed before. Warm introductions are one of the ways the industry keeps outsiders out, both when it comes to how people are hired and where funding goes. ↩
- Mariana Mazzucato, The Value of Everything: Making and Taking in the Global Economy (PublicAffairs, 2018) ↩