Here’s what that means for VCs and entrepreneurs.
Many of today’s entrepreneurs live by Facebook founder Mark Zuckerberg’s now-famous motto: “Move fast and break things.” Zuckerberg intended for this to inform internal design and management processes, but it aptly captures how entrepreneurs regard disruption: more is always better. We raced to put our products into consumers’ hands as fast as possible, without regard for the merit of—and rationale for—offline systems of governance. This is increasingly untenable.
Larry Fink’s 2018 letter to CEOs articulated the need for a new paradigm of stakeholder accountability for businesses across the spectrum. In the technology sector, venture capitalists must play a role in driving this change. The technologies of tomorrow—genomics, blockchain, drones, AR/VR, 3D printing—will impact lives to an extent that will dwarf that of the technologies of the past ten years. At the same time, the public will continue to grow weary of perceived abuses by tech companies, and will favor businesses that address economic, social, and environmental problems.
In short, the “move fast and break things” era is over. “Minimum viable products” must be replaced by “minimum virtuous products”—new offerings that test for the effect on stakeholders and build in guards against potential harms.
For VCs, questions are the tool of our trade. If innovation is to survive into the 21st century, we need to change how companies are built by changing the questions we ask of them. To better assess the social impact of startups’ technology, I propose eight questions every company must be able to answer—and every venture capitalist should be asking.
- What systemic, societal change do you aspire to create with your product?
If a founder aspires to create a truly transformative tech company, they should appreciate the first, second, and third order possibilities of what that transformation means. When I ask entrepreneurs this question, I look for a sophisticated awareness of how other technologies, trends, and stakeholders map onto their vision for the future. More than anything, I look for empathy.
Let’s take a relatively simple example. Suppose we spoke to an entrepreneur working on human longevity. We would need to see a vision—and a minimum virtuous product—that addressed disruption in labor markets through automation (what does the world look like when people live longer and have less access to work?) and disparity in access (will society allow a world in which the wealthy live 2X as long as the middle class? 3X as long as the poor? Should it?). The best leaders of tomorrow will see these links and plan for them from day one.
- How will you sustain the virtue of your product?
I grew up in India before moving to the U.S. in my teens. Facebook allows me to maintain ongoing connections with childhood friends, bringing me real joy. The vast majority of Facebook users have similarly virtuous use cases. But Facebook, and many innovations of its vintage, are statistically virtuous without being comprehensively virtuous. That is, a small number of nefarious users can—and have—caused major harm, making Facebook a prominent example of how a firm failed to anticipate and prevent its worst-case scenarios.
Future startups must do better. As DJ Patil, the former U.S. Chief Data Scientist and my friend, argues, the goal should not be perfect clairvoyance, but rather reasonable foresight. As an example, consider genomics. Already, CRISPR technology allows us to edit genes. That prospect is exciting—but also has the potential for serious social harm. If wealthy people can make themselves—or their children—better looking, more athletic, and smarter, it creates a biological divide that will dwarf current disparities in wealth, opportunity, and access.
To prevent unfettered gene editing, either society will enact regulation (that may kill innovation outright), or companies and regulators will partner to tackle inequity in access. The latter outcome is clearly preferable.
Genomics is perhaps the most dramatic example, but every entrepreneur should have a plan to address such risks. Consumer and regulator tolerance for statistical (or even selective) virtue will wane with each passing year.
- How do you drive the greatest impact on an individual level?
As I discuss in my book Unscaled, AI, coupled with powerful platforms, now allows innovators to achieve impact at breathtaking speed. That means impact will increasingly come from companies that service narrower slices of customers more precisely and effectively. I look for founders that appreciate this.
When I began working with Glen Tullman, the founder of the diabetes care management company Livongo, we knew we wanted to optimize for impact. Mass-market approaches to diabetes lumped patients into one of two categories: type 1 or type 2. As we all know intuitively, everyone suffers differently and needs different care. Standardized treatments allowed care providers to touch the most people, but we believed we could make a bigger impact on people’s lives by providing personalized, preemptive healthcare solutions regardless of which type they have.
Today, Livongo competes with healthcare giants like Johnson & Johnson and UnitedHealth by providing coaching and data insights to help patients reduce the severity of their diabetes. I do not believe that would have been possible had we accepted their market premise.
- What do you think is an optimal growth rate? How will you keep yourself accountable as you scale?
Growth is at the heart of most venture capital conversations. For any firm, the optimal growth rate depends on a variety of factors: the required pace of hiring, the complexity of services delivered, the capital intensity of expansion, and the size, maturity, and competition in the market, among others.
More often than not, venture capitalists promote a “winner-take-all” mindset, pushing expansion at the cost of impact on initial customer targets. This is increasingly untenable: the speed with which more narrowly-cast solutions can supplant incumbents means that subpar services will be replaced. The market will punish premature growth, to say nothing of the ethical issues inherent in hooking customers into half-baked solutions in healthcare, financial services, or other critical industries. We should not ignore the moral implications of the old “land and expand” business aphorism. Today when I talk with entrepreneurs about how quickly they can grow, I want to see them recognize that creating a “virtuous” product may require them to grow more slowly than they might otherwise.
- What’s your framework for leveraging data and AI responsibly?
Over the long-term, founders cannot create black-box AI if they want to maintain adoption, regulator cooperation, and consumer trust. Innovators should be able to explain, in relatively simple terms, why their complex algorithms tend to reach the conclusions that they do. Would you trust an AI medical diagnosis without a basic understanding of its methodology? Would you trust AI that couldn’t explain itself to render a criminal sentencing opinion on you or a loved one?
If a founder can articulate their complex AI footprint in simple, understandable, and honest terms, their products will be more sustainably successful. Needless to say, this is predicated on a founder understanding their AI’s results themselves.
Similarly, we are all familiar with growing consumer backlash regarding unforeseen or poorly understood personal data collection and usage. Regardless of whether the government acts, it is inevitable that AI will be forced to collect, log, and use data in a wholly transparent manner. Entrepreneurs who figure that out today will have a leg up on the competition.
- Does your business foster an ecosystem in which innovation thrives?
Bill Gates has said that a platform exists when “the economic value of everyone that uses it exceeds the value of the company that creates it,” and this vision of a true platform will guide future regulation for a simple reason: creating shared value insulates innovation. The old rules of what constitutes a monopoly are destined to change. Ostensibly free “platforms”—Amazon, Google, and Facebook—have become, in effect, the monopolies of the 21st century. How can a small retailer on Amazon hope to compete with Amazon’s massive data advantage (which the small retailer itself is helping augment and supply?). While these sorts of grasps on data enhance the offerings of the monopolists, they stifle innovation and will ultimately hurt competition—and thus, customers. These data monopolies have a responsibility to not only promote fair pricing, but to help support a vibrant innovation economy. The only alternative to such an approach is the near inevitability of restrictive regulation.
- How do you define and promote diversity in the context of your business?
The numbers are striking: Only 8% of venture partners at major funds are female, less than 3% employ black or Latino investors, and less than 3% of venture capital went to all-female teams last year (compared to 79% to all-male founding teams). A meager 13% of venture capital flowed to minorities during that same period, despite the fact that we live in a country where, as of the last census, 35% of businesses are owned by women and 28% are owned by minorities. Given First Round’s finding that their portfolio companies with a female founder performed 63% better than those with all-male founding teams, we have to acknowledge a core truth in our industry: there is a sustained market failure as it relates to the types of founders that receive venture funding.
As we commit to improving our own operations, investors have a financial interest in pushing their portfolios to aggressively embrace D&I. McKinsey research shows that diverse teams outperform in performance, talent acquisition, customer orientation, and employee satisfaction. Intuitively, diverse, empathetic perspectives make for better offerings. We encourage founders to use the established methods to reduce bias in hiring, such as the approaches Rebecca Knight lays out: standardizing interviews, requiring a work sample, doing blind resume reviews (without names), and challenging “gut feeling” assessments.
- How does your company dynamically evolve in response to regulation and account for the various stakeholders your product impacts?
For decades, entrepreneurs have treated regulation as something to worry about tomorrow. But regulation is not, inherently, bad. Bad regulation is bad. And, as our technologies grow more ubiquitous, more powerful, and more difficult to understand, the threat of bad regulation grows. If we do not engage early and constructively in the policy debate, regulator attention will naturally turn towards overcorrection, destroying economic value and crippling American competitiveness.
It is intellectually inconsistent to preach about a disruptive, billion-dollar vision and imagine it as being free from regulatory considerations. It fascinates me how often entrepreneurs lack a basic grounding in the regulatory hurdles they may face. At a minimum, founders must know who the key decision makers in their market are and think through how and when it makes sense to engage with them. Transactional relationships, born of crises, are neither effective nor worthwhile. Continual, consistent dialogue leads to better-informed regulators and better regulatory regimes.
Ultimately, venture capitalists take views on high-caliber people, innovative ideas, business models, and the changing nature of markets, using the best data available but operating with incomplete information. Asking the questions above can help to reduce uncertainty over whether entrepreneurs can deal with unexpected challenges that arise from the effects of their innovations. Investing in responsible innovation not only benefits society, it protects the viability of technological progress in a democratic system. For venture capitalists, this is the wise approach.
Hemant Taneja is managing director of General Catalyst and co-author of Unscaled: How AI and a New Generation of Upstarts Are Creating the Economy of the Future.