From the global economic recession caused by the pandemic to George Floyd’s death empowering the Black Lives Matter movement to overall desperate calls to action for social justice and equality—the venture capital industry has much to learn from the age of social reckoning.

It’s not enough for venture capitalists to just continue with the status quo of funding startup companies and small businesses, producing high returns, and maximizing growth; VCs must expand networks and adapt to the changing social climate. These necessary shifts must consider who’s getting funding, the diversity within the teams being built, and ultimately, the values that VCs and firms uphold.

 

“Cancel Culture”

As VC firms and corporations attempt to navigate uncharted territory and address complicated systemic issues, we have to recognize that our companies reflect our broader society. In today’s world, we cannot (and should not) separate our values from our business, making it crucial to manage both personal and internal cultures with external projections to avoid indiscretions that could lead to damaging reputational risk.

With the powerful rise of social media, public anger and frustration have never been more candidly forceful or volatile. It is far too easy to virally vent and spread frustrations via the digital megaphone of social channels, so “cancel culture”—or culturally blocking or boycotting a leading public platform, status, or career—has become dangerously common.

A “canceled” organization runs an enormous risk to the bottom line and who wants to work with you.

So, what can be done to avoid this ostracization?

 

Managing Reputational Risk

VCs and institutions send messages to the market in very visible ways: through the diverse makeup of their leadership, in their reporting and communications, through the companies they invest in, and across the personal and professional conduct of the people within the firm. VCs need to plan and build a framework to examine their inner structures and notably focus on internal and external communications that could be made public. This likely includes reevaluating their investment strategy to ensure alignment with their values and the public messaging that goes with it.

And portfolio companies that VCs are working with must also apply the same logic. 78% of respondents in a Director Lens Survey agreed that board leaders should discuss and play a role in addressing social issues. Companies need to listen to their board, employees, and customers to establish a set of authentic values that can be articulated and, most importantly, adhered to.

 

Authentic Values

Circling back to the mention of authentic values, it’s non-negotiable for VCs to be candid and driven by their established principles in our politically divided world. You can’t run to take sides with whatever’s trending—you have to understand where you truly stand. While crises might push you to panic into setting new standards or forming new opinions to support one side or the other, you’ll be ill-prepared if you haven’t already laid the groundwork for how you behave every day and what you authentically value.

Unless you align with your set values—particularly from inside your organization—it won’t reflect the change you intend to portray. In other words: “Don’t go out there talking about how important diversity is if your own house isn’t in order.”

In a 2020 survey of venture capitalists by Morgan Stanley, 61% of VCs said that the Black Lives Matter movement affected their investment strategy, and 68% said that they were more likely to invest in multicultural-founded companies moving forward.

With 2020 being a pivotal year in launching discourse on many issues such as BLM, diversity, and inclusion, we’ve been forced to become more honest and introspective about our values, attitudes, biases, barriers, and actions to address inequality.

But talk isn’t enough to make change.

 

Actions and Accountability

Firms and organizations must actually take action and be held accountable for them. As said by Carla Harris, Morgan Stanley vice chairwoman and head of the bank’s multicultural client strategy group: “Transparency is going to be demanded by shareholders. While VCs are not public companies, they, too, will have to comply with the industry trends.”

So, it’s full circle from avoiding reputational risk to projecting authentic values. VCs need to keep up with the changing social and political environments to understand how their values relate to the issues and then shift their behaviors to be better in our ever-evolving world.

 

Adjusting What Value Means

We need diverse teams to make all of these value-based actions more impactful. We know that various perspectives and backgrounds are not only good for business and seeing higher returns, but it opens more eyes to see the value of investing in companies founded by diverse entrepreneurs.

Diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG) responsibilities aren’t just checkboxes to tick off. The pool of qualified, working individuals is much greater today than ever before, so we can’t use lack of talent as an excuse anymore. If a VC or firm fails to see multicultural, multigender, and multigenerational experiences as strengths, some serious change needs to happen internally.

Companies should be required to publicly report on their DEI and ESG metrics to analyze what standards exist in today’s funding world, and then they also need to be held accountable for them.

 

Venture capitalists, ask yourselves: Are the people you interact with today—the entrepreneurs you fund, the networks you’re part of—different from a year ago? From what we’ve learned about identifying your values and adapting them to events in this age of social reckoning, the answer should be “yes!”