Venture capital firms need to recognize their role as gatekeepers. As individuals with the power to control valuable outcomes and resources, gatekeepers possess immense moral responsibility.
Venture capital can have a profound impact on the success of a business and, in turn, on funded founders and multiple employees. Even if well-intentioned, if venture capital firms don’t actively work to tamp down their cognitive biases in investment decision-making, they may exclude certain people — or entire demographics — from investments. Beyond being morally wrong, the consequences of implicitly biased gatekeepers in VC can be far-reaching.
Unleashing the Impact of Bias
The effect of biases can ripple into the surrounding community. This is an ethical issue because entrepreneurs from many demographics are far underserved, discriminated against, or even harassed by the VC industry. There are many effects of implicitly biased gatekeepers, including:
One underserved entrepreneur can abandon a winning business and multiple employees — particularly if gatekeepers can’t perceive the vision for the sake of their own nonoverlapping experience.
One person in a gatekeeper role for a career can affect an entire portfolio allocation by skewing away from growth industries on account of idiosyncrasies they might not grasp or opportunities they may not see.
An entire population of implicitly biased gatekeepers can have an impact on a macroeconomic scale by collectively under-allocating resources to growth sectors because of inefficient information.
Navigating Bias in Venture Capital
The VC gatekeeper, empowered and entrusted to invest capital wisely, needs to guard against three particular implicit cognitive biases that may creep into their practices:
Stereotyping: The act of categorizing and applying characteristics across those categorized. This is natural in the VC world; venture capitalists tasked with deciding among thousands of potential investments have to turn to categorization as a simplification process. But, without careful feedback loops to examine their thinking, it is a certainty that bias in venture capital will creep in.
Prejudice: The act of emotionally coding a situation with admiration, envy, fear, and/or dismissal due to past experiences. VC gatekeepers will often unconsciously consider their own lived experiences with investments and might react negatively or positively to investments that conjure those experiences. Without safeguards, this emotional bias can directly impact decision-making.
Discrimination: The act of behaving differently toward individuals across demographics. Funders need to be careful about the assumptions that they make about founders. Absent intentionally objective processes, discrimination can creep in within companies, and venture capital firms are no exception.
Artificial Intelligence’s Potential to Exacerbate the Issue
Despite efforts to neutralize the effects of bias in the workplace over the past few decades, these impacts have persisted. This is precisely why VCs cannot entrust funding decisions to AI alone — the historical record serves as a biased dataset perpetuated by backwardly trained algorithms. AI in venture capital can’t solve this issue because it’s rooted in human data. Without addressing the inputs, AI bias in financial services may amplify the current problems.
Cultivating a Forward-Thinking VC Gatekeeper Community
VC leaders can make a difference at the industry, organizational, and macroeconomic levels. Here are three key recommendations:
1. Industry level
VC firms should adopt a code of ethics in the community and create a consistent set of rules and aspirational guidelines. They can take cues from established foundational principles like those of Chartered Financial Analysts or Certified Financial Planners.
2. Organization level
Venture capitalists can implement systems to track decision-making data. For example, they can incorporate a standardized evaluation process with objective criteria to minimize biased decision-making.
3. Individual level
Examine decision-making processes and implement bias-cracking strategies. Organizations need to track decision results, encourage transparency in decision-making, and share these results for accountability and organizational learning.
VC firms must acknowledge their role as gatekeepers and the moral responsibility that entails. Bias in investment decision-making can lead to exclusion, affecting not only individual businesses, but also entire communities and the economy. Breaking out of the traditional mold is a difficult thing for any organization to do; however, if VC leaders can be intentional about their outreach, they may find people and opportunities that surpass what they can currently imagine.
Image by Caleb Steele