We have entered a world where, for many, investiing has become about much more than being able to deliver returns. Expect relationships in the venture industry for those who do not understand this to become more complicated.
The ethics of investing was thrust centre stage in the venture community at the end of last month, when the Archbishop of Canterbury, the Church of England’s most senior clergyman, Justin Welby, found himself in a tricky situation, which has several morals that are important for any who invest in third-party managers. It also strikes me as highly relevant to a debate which is gathering pace in corporate venturing on how corporates should back venture firms.
Welby admitted he was “embarrassed” when it emerged the church owned a stake in Wonga, a UK-based payday lending company which lends at high rates to people with weak credit, shortly after Welby revealed he had told the head of Wonga that the church intended to “compete it out of existence” by supporting co-operative lenders to its members. The church owned its stake in Wonga via its backing of venture firm Accel Partners as a limited partner (investor).
A spokesman for the archbishop’s office told Financial Times it was commissioning a review to look into the investment, which it labelled “a serious inconsistency”.
While the affair is mildly amusing – it proved a gift to newspaper headline writers and Wonga reacted in the UK press by advertising its own 10 commandments, including “we always help customers in financial difficulty” and “we always welcome competition” – no doubt this news is also being noted by other limited partners with concern.
The major worry is that a head of an organisation can end up in hot water because of investments made by third-party fund managers over which the investor has no control. The issue of morality clearly complicates the debate around investment, which is easier to judge in pure finan- cial terms.
One of the most interesting elements of this affair is that Accel is one of the most highly regarded financial investors in venture capital, having backed social network Facebook at an early stage. Wonga has also been a lucrative deal – with reports emerging of it considering listing in the US with a greater than $1.5bn valuation. Yet many now expect the church to divest its £5m ($7.5m) investment in Accel.
The standard debate in corporate venturing tends to revolve around the importance of the activity in terms of strategic and financial returns. There is a generalised disappointment in corporate venturing that many in venture capital do not meet the strategic needs of corporations.
Yet arguably the Welby/Wonga affair reveals another danger for corporations – lack of control of the corporate social responsibility (CSR) practices of your venture partners.
This is especially of concern as corporate venturing is often conducted by those corporations that try to retain a higher purpose. Andrew Gaule, founder of consultancy Corven Networks, said: “Many leading corporates that do corporate venturing also have CSR high on the agenda and it covers a triple bottom line – profit, people, plant. A number are looking at different fund approaches that suit Africa and base-of-the-pyramid start-ups.”
These corporations are likely to have a check-list of appropriate CSR behaviour. They do not want to be “embarrassed” by the investments of swashbuckling financial general partners (fund managers) in Silicon Valley or London whose primary concern is producing a financial return. This is likely to be a bigger issue than working with start-ups, as while entrepreneurs can make mis-steps, and a corporate can have problems with the association, the initial choice to go ahead with the investment is made by the corporation, so it is easier to pick entrepreneurs with shared values.
The Welby affair and other past “embarrassments” are likely to lead to a greater push from institutional and corpo- rate venturing investors for investment managers to meet their individual needs. This is leading to increased calls for strategic partnership, transparency and adoption of ethical codes such as the United Nations Principles for Responsible Investment.
We have entered a world where, for many, investing has become about much more than being able to deliver returns. Expect relationships in the venture industry for those who do not understand this to become more complicated.