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Venture Capitalism, Extremism and Accountability

Venture Capitalism, Extremism and Accountability
24th March 2021 Isaac Kfir
In Insights

Attempts to limit the dissemination of extreme digital speech have taken many forms as seen with Germany’s Network Enforcement Act (NetzDG), the European Commission’s 2018 Directive on illegal content, the Christchurch Call, and content moderation and removal by tech and social media companies.

What has not been examined is the failure of entrepreneurs and their financial backers to recognise the possibility of misuse of their application in the design stage. Gatekeepers such as the former commissioner of the Commodity Futures Trading Commission Brian Quintenz have spoken of the challenge of designing and developing a regulatory framework for emerging technology, especially once a product is adopted. However, if entrepreneurs, VCIs, and regulators work together at the early stage of an industry, one could anticipate potential pitfalls and explore possible solutions. Put differently, if entrepreneurs were encouraged to employ business judgment and recognise they have a fiduciary duty as they design an application, platform, or system they could explore or even build in protocols that limit harm.

Venture capital investors (VCIs) have played a key role in the fourth industrial revolution. They have transformed ideas into realities, facilitating the emergence and growth of new sectors, businesses, and platforms that changed society. And one must wonder, whether corporations such as Apple, Intel, Amazon, Google, Sun Microsystems, and others would ever have emerged if it was not for VCIs. But over time, VC changed as did the tech sector, focusing less on not doing evil, and more on money.

Supposedly, 6 January was a wakeup call for many VCIs, with one describing it as “another 9/11”.

As the Capitol was breached, and lawmakers hid for their lives, VCIs (and the rest of the world) witnessed how polarised the US had become in part because of the role that tech and media platforms played in feeding the mob fake information.

For a moment, VCIs recognised the danger that their products pose to the maintenance of law and order. However, beyond expressing outrage and calling for some undefined action, substantive changes are unlikely as there is general opposition toward regulating the tech and financial sectors for fear it would harm the market or stifle innovation. The typical assertion whenever proposals for regulatory supervision are suggested.

Venture capital (VC) lies in the middle of the industry S-curve. It comes in at the early stages of an industry, bringing in the financial (cash and capital) and technical expertise. Unlike traditional, mainstream financial institutions, VC focus less on asset consideration and risk management, but instead on how a concept will revolutionise society. By taking risks on an idea, the VCI looks to gain financial rewards, which may explain why in 2019, US VC made an exit value of over $250 billion across 882 liquidity events though the search for unicorns continues.

The ability of VCIs to shape an industry begins with the role they play with start-ups, many of whom lack the knowledge and the understanding of the business world. These entities also lack the human resources to take their concept to the next level. Key to the success of a start-up is its ability to undertake a beta test of the product to see if there is interest, which often requires capital and cash flow. If there is interest, the start-up can expand by hiring more people and advertising their product, creating a market, and generating revenue and ideally profits.

Throughout this process, the start-up looks to attract the VCI as they need financial and business expertise as well as the stamp of approval that comes with having acquired such backing. For its part, the VCI looks to test the concept and later the product. No attention is given to whether the product could cause harm or whether the start-up has good governance, as the focus is on commercial viability. This is because the VCIs search for the next Zuckerberg or Facebook, encouraging investments in wild ideas as even if the concept may not seem to be commercially viable, there is always the hope of being proven wrong.

In the mid-2010s, Professors Jack Balkin raised the idea of ‘information fiduciaries’ as a way to impose certain obligations on tech and social media companies. Balkin writing with Professor Jonathan Zittrain argue that entities that hold great amounts of personnel data should be legally obligated to be trustworthy because fiduciaries have two principal duties, one of which is a duty of care and the second is one of loyalty. The duty of care refers to not harming the interest of the client, beneficiary, or principal. The duty of loyalty means keeping the interest of the client at the forefront of the fiduciary action. In other words, the fiduciary cannot undertake an action that would disadvantage the client.

Expanding the concept of information fiduciaries to VC would mean that VCIs must recognise that ultimately the client or beneficiary of any start-up is the community-at-large. Placing a fiduciary duty on them would return the sector to where it was in the 1970s and even 1980s when VC encouraged innovation and good governance, as currently, the focus is only on profit and less on innovation. A conscious VCI such as the late Tom Perkins balanced making money with helping companies develop in a responsible way.

In their search for the next unicorn, VCIs should encourage start-ups to consider how their concepts or platforms could be used by extremists. By making such a demand, while recognising that one is neither prescient nor omniscient, VCIs could ensure that future and emerging social and media companies have features within their platforms and systems that address the dissemination of extremist ideas. Imposing a fiduciary duty and calling on VCIs to think through what they are supporting beyond the financial aspect could help reign in misuse and abuse.

Stanford University Professor and innovation guru Steve Blank has argued that once VC sees “if you do things that are bad for society you’ll be called to account,” the whole sector would change, and with it the start-up culture that ignores the damage that some products cause. The idea however is never to reach this stage, which is why entrepreneurs, VCIs, and regulators need to work together to ensure that innovation prospers but in a responsible manner.