Fundraising Now? Remember Morality Impacts Valuation
Fundraising Now? Remember Morality Impacts Valuation
Startup founders are trying to figure out how to fundraise through a pandemic and economic crash. New talk of capital efficiency is gratifying, but there was another lesson from pre-COVID-19 valuation struggles. Morality matters.
Venture capitalists and early-stage investors have told all of us, founders are critical to a startup’s valuation.
These investors also tell you the founder’s role cuts both ways. As a unicorn approaches an exit, the balance sheet needs to make sense. But importantly, headlines around WeWork, Uber, and Juul that may be fading into memory too fast were a signal.
These companies were a signal for founders and their early investors to reexamine their understanding of morality and valuation.
“Morality” is it too strong a word?
Most of us almost never use the word morality when talking about entrepreneurialism. It is a strong word driving deep into what’s in the soul, and publicly at least we work to avoid judging others. Like many of us, I’d rather focus on my own actions, and associate with others who I can learn from, and who I admire.
That’s probably why we don’t hear morality used often at business events. It’s a high stakes word. But we do hear it quietly standing behind other words we use more frequently, like reputation, purpose, brand, optics and litigation risk.
WeWork’s founder was been accused of self-dealing, which in turn has thrown the company’s IPO into question. Investors saw the enterprise’s nearly $ 50 billion valuation eroded right as they were headed to the public markets.
The founder stepped aside. Juul and its $ 38 billion valuation came under the spotlight after deaths and illnesses connected with vaping. Juul’s founder resigned.
Uber is still living down reports of its founder’s past behavior, and California pushed to treat drivers like full-time employees and take on the associated costs.
When the pandemic finally evolves into something more predictable, we can only wait for cannabis startups to find their way back into the news.
Whether we believe a company is moral, or not, actually matters. As Marie Ekeland, founder of venture capital firm Daphni has suggested, it matters if a company represents what you want the future to look like. Alternatively, if a company is seen as faking it, tremendous value can evaporate. The conversation boils down further to whether the leaders of these companies can be trusted.
What people say behind your back
Amanda Hesser, the founder of Food52, has talked about this saying when we think about reputation, it’s kind of how people speak about you when you’re not in the room. Columbia University professor Sheena Iyengar has called out authenticity as being at the root of whether a customer, partner, or investor will do business with you.
Iyengar suggests if you know who you are, and why you want to do what you’re doing, then you’re better at explaining it, and also you’re better at being more concrete about what choices need to be made and what you’re looking to do when you make each choice.
These ideas are right. Will people vouch for your character based on what they have seen of your actions. Do they believe you are transparent about your motivations and consistent in honoring what’s at your core?
A cynic can point to the fact that despite headline-grabbing behavior at Uber, the company continues.
Juul got far before events caught up with it. WeWork still does not appear on the verge of folding. The leaders who have caught the spotlight, have not seen their wallets hurt in any substantial way that we can see.
That may be true.
But what’s the logical conclusion of that lesson? Maybe it doesn’t hurt that much to push the line on ethical questions after all. In fact, the founders involved could argue, as could investors, that by pushing the line when others weren’t willing, much was gained. And the founders are only martyrs for the investors they made money for. And they are compensated for their troubles after stepping down.
This may also be true… up to a point.
Investors step in
Investors balking at companies right now, that appear to be morally compromised are not wrong, and there is an alternative. Companies that prompt employees to speak up about ethical lapses tend to be more profitable. Companies ranked by Ethisphere as among the most ethical, outperform the large-cap sector over five years by more than 14 percent.
As Jerome Dodson of Parnassus Investments, Jane Gladstone of Evercore, Julie Gorte of Pax World Funds and others have suggested — there’s tons of research that show companies that care about gender, equality, who care about diversity.
These companies care about the environment and they actually perform better. Because the research is so compelling, the largest investors, BlackRock, Vanguard, State Street, who are all the stewards of index funds — now represent the top three holders of almost every company. These companies have now started voting in sync with that because that’s just what’s best for their shareholders.
Fintech steps up
There are fintech companies that are especially well equipped to help best practices and morality rise to the top. I’ve had the chance to work with many of them to see it firsthand.
Harmonate, based in San Jose has developed private fund data operations tailored to the complexities of tracking social impact investing. One of their investors, JTC Group has developed a specialty in this arena through a recent acquisition.
Trust also comes into play supporting bankers who are now moving vast amounts of stimulus funds out to communities. They are trying to avoid getting it into the wrong hands. Fraudsters, organized crime, and others are stepping up to the trough.
Banks need to weed them out but do so in a manner that does not hurt small businesses. Enterprise AI firm Symphony AyasdiAI has developed a capability to reduce trust-eroding false positives to ensure the money that can have a social impact doesn’t get siphoned away or the wrong person is pilloried.
Property technology company Grace Hill in South Carolina has refined digital training for multifamily housing teams to not just make it through the COVID-19 pandemic with health intact — but by building better relationships with renters.
The action includes training in the full range of customer service skills that bring in revenue. And that includes a better understanding of how to cut out discrimination, sexual harassment, and biases that can destroy the reputation and moral purpose.
Impact
We all have been talking about impact investing for some time. And maybe we’ve been talking about it for so long that we’ve stopped taking it too seriously. Founders building their venture from the ground up, and the venture capitalists that back them as angels and seed investors, should not pay lip service to reputation, brand, or morals.
Economics should not be the driver for morality… but if that’s what it takes. We live in an age where powerful people appear to get away with trying to obscure the truth. But that can be ripped out into the open more than you expect. Bank on it.
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