With fundraising by venture capital firms globally hitting a nine-year low at the end of 2022, news reports are circulating that top-tier Silicon Valley investors such as Andreessen Horowitz and Tiger Global are courting investors in cash-rich, freedom-poor countries such as Saudi Arabia and Qatar.
In some cases, that means they would be rowing back on commitments not to do business with the Saudis made in the wake of the murder of journalist Jamal Khashoggi in 2018.
This should be a wake-up call for founders. Founders should be asking investors hard questions about where their funding comes from. Otherwise, they’re putting themselves and their business at significant risk.
An uncomfortable truth
The uncomfortable truth is that today the flow of money into, and within, the venture capital world is both byzantine and opaque. Limited partners — those investing into VC funds — often wish to keep their identity confidential, and along with the existence of funds-of-funds — funds that invest into other funds as LPs — it can be incredibly difficult to keep track of the money. More often than not there are multiple layers between a founder and the ultimate source of funding.
And with the balance of power seriously stacked in favour of investors rather than entrepreneurs, the reality is that far too few entrepreneurs truly understand the origins of their investors’ capital. After all, when cash is running low and you’re in your 60th investor meeting, digging into the source of your prospect’s funds isn’t exactly top of mind. Getting a term sheet and securing the future of your business is.
A storm on the horizon
However, as the previous crop of “mercenary” founders is increasingly replaced by the new crop of “missionary” founders — founders who are tackling some of the world’s largest problems such as the climate crisis, social inequality and more — this topic of “dirty money” is going to come to a head quickly.
Would you sacrifice the pace at which you fulfil your mission, or let go of team members because you weren’t prepared to accept funding from certain sources?
This weekend I ran an — admittedly not representative — poll across several founder WhatsApp groups, and the results paint a very clear picture of the direction of travel from a founder’s perspective. A whopping 91% of those polled said they would “decline investment from an investor based on the source of their funding for moral, ethical or political reasons”.
Virtue signalling? Perhaps. However, there are surely many who really do intend to stick to their principles; I would certainly count myself among them. And if that’s the case, it looks like the firms courting Saudi and Qatari sovereign wealth funds may need to brace themselves for tough conversations as founders refuse their Faustian bargain.
But a plunge in VC funding and shorter runways will test founder ethics in coming quarters. Would you sacrifice the pace at which you fulfil your mission, or let go of team members because you weren’t prepared to accept funding from certain sources?