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May 22, 2022

Ep 9 - Hannah Leach and Johannes Lenhard - Being Good in VC

Ep 9 - Hannah Leach and Johannes Lenhard - Being Good in VC

Welcome to the latest episode of the ESG in VC podcast where I’m joined by Hannah Leach and Johannes Lenhard.

Hannah is a Partner at Houghton Street Ventures, a new venture firm backing companies founded by students and alumni of the London School of Economics. She is also a co-founder of a global industry-wide non-profit initiative, VentureESG, whose aim is to help the VC sector recognise the importance of ESG and to provide resources and guidance to make ESG a standard part of diligence, portfolio management and fund management.

Johannes is an ethnographer of venture capital and homelessness and currently teaching and researching at the University of Cambridge. Having worked towards a better understanding of survival practices of homeless people in London and Paris for his PhD, he has spent the last four years researching the ethics of venture capital investors interviewing 200+ VC General Partners.

Together with Johannes and Hannah, we discuss if VCs have time to be good, what factors are contributing to VC’s persistent lack of diversity, especially at the senior ranks and what levers are out there that can help us to scrutinize VCs and much more.

Guest: Hannah Leach and Johannes Lenhard

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Hello, and welcome to ESG in VC, a podcast where I continue to interview top players in the ESG space and where we dive into ESG-related topics, exploring how investors, regulators, and founders try to build a more sustainable and inclusive society. I'm your host Oksana Stowe, and today we will hear from two great guests, Hannah Leach and Johannes Lenhard.

Hannah is a partner at Houghton Street Ventures, a new venture firm backing companies founded by students and alumni of the London School of Economics. She's also a co-founder of a global industry-wide non-profit initiative, VentureESG, whose aim is to help the VC sector recognize the importance of ESG and to provide resources and guidance to make ESG a standard part of diligence, portfolio, and fund management. 

Johannes is an ethnographer of venture capital and homelessness and currently teaching and researching at the University of Cambridge. Having worked towards a better understanding of survival practices of homelessness in London and Paris for his Ph.D., he has spent the last four years researching the ethics of venture capital investors, interviewing 200+ VC Partners. 

Let's dive right in. 


Hi, Hannah and Johannes. It's really good to have you with us. It's actually the first time I have two guests, so quite excited to have both of you on. 

I always think it's good to start from some sort of beginning, and it would be great to understand your motivations to start VentureESG and what is your vision for VentureESG going forward. 


First and foremost, thanks so much for having us. 

It's really lovely to be on the podcast. I remember you talking about it a few months ago, so it's great to see it happen, and all of the guests that have been on before us, we're in great company. So yeah, the origins of VentureESG. So I think you probably know that I wear two hats.

So one of my hats is I'm a partner at a new London-based venture firm Houghton Street Ventures. We're in partnership with the London School of Economics, so backing companies that have been founded by students and alum of the university globally. Essentially when we were starting kind of putting the fund together and trying to think through what kinds of companies we wanted to invest in and how we wanted to invest, we noticed that a lot of the companies that were coming out of the LSC alumni base were those that were being built in quite a responsible fashion. They weren't impact businesses. They didn't have an explicit societal or environmental outcome that they were trying to achieve, but the way in which they were operating was very sustainable and inclusive and responsible.

We wanted to kind of codify this and actually embed this in the way that we invested in supported companies. But when we look to the market to kind of explore what other funds might be doing on this vein, the benchmark or frame of reference was really ESG. We realized back in 2019, that not many funds were really doing much on this topic at all.

Maybe a few venture funds had an exclusions list that was something that they their LPs wanted to put in place. Maybe some funds were thinking through things a bit more thoroughly, like Atomico, with their conscious scaling framework. But really there was no industry best practice or guidelines or toolkits that were able to help us think through how we did this for us.

So in 2020, we started trying to solve this problem for ourselves, taking the best of what was out there in terms of the frameworks that did exist on the ESG front that were being used in public markets and late stage private markets and adapting them for early stage venture. Essentially through that process we realized that there were a gaggle of funds who were interested in ESG and were committed to kind of coming together to explore the topic and help each other through the process.

Then just over the however many months, VentureESG was born. Obviously we're now a standalone non-profit entity with about 270-280 VC fund members across the globe, and then we also have a community of about 80 LPs.

You asked the question around what's the vision. In a nutshell, we exist to support venture funds with implementing more robust ESG practices. So we want to provide them with the knowledge, access to peers, toolkits, and best practice resources to be able to do this both in terms of their fund and how they operate, but also how they invest in and support portfolio companies. 

I think the big dream is that ESG disappears. We don't want eventually ESG to be around in however many years’ time. We want ESG to become part and parcel of how venture funds are set up from the get-go and how companies are set up from the get-go becomes part of the fabric of how we all operate. So that ultimately it does seem like the dream would be to destroy our own organization. 


That's a great intention. So essentially, as I was preparing for the podcast, I spotted a phrase that Johannes used that “VCs don't have time to be good”, and you set up VentureESG. Do you feel that this has changed and the motivation to actually be good has increased within the VC community? 


Yeah, absolutely. I started researching venture capital academically in 2017, and I interviewed about 250 partners in venture funds in the three years following that. Particularly in the last year or so, so 2019, 2020, and when I was in Silicon, I started thinking more about topics, which I would now call a part of ESG. 

One of them being diversity and inclusion, and it was just after Me Too was really making waves and Black Lives Matter had happened and lots of people were paying lip service to certain and mostly diversity-related initiatives. But there was very little understanding of what we would now call responsible investing for instance or investing that integrated ESG into their processes at the time. 

It was very particular, “Oh yeah. We all have to think about diversity now”. But that wasn't taken to a higher level of would we possibly need to think about how we just full-on innovate? Is blitz scaling, perhaps not the right way of going about doing startups? Is a dual-class share structure, perhaps questionable? All of these questions were very, very quickly pushed to the side when I asked that in interviews. 

At the time I just didn't have the language and vocabulary to talk about it differently. Some people were speaking, and this is a confusion that we had a really hard time trying to clear up about Tech for Good, they were talking about impact investing, they were probing about responsible investing, about ethical investing, all in the same way. And I was frustrated that they were not taking this seriously at all, which partly has historical reasons. 

There was a wave of impact investors in the venture community in the Valley in the 2000s that got terribly banned. They were focused on climate and that was slightly too early. So VCs I think this generation still thinks about “Impact is not for us. It's concessionary returns. We're going to lose money.” 

And ESG and impact as they're often put together where they need to be thought apart are lumped in this blob that at the time, I think I thought about as Tech for Good. That's where this idea of “A Good” came from in this particular moment of my thinking. 

Now I would be very, very careful removing any kind of morally loaded language. So good is a term that I wouldn't use anymore at all. I'm interested in what is actually quite a technical ESG integration as such, which touches on everything from hiring to how you manage your supply chain to diversity and inclusion to things around governance and team and working environment.

In a sense, all of your different practices are what you need to look at and possibly turn around and slightly shift when you're doing an ESG integration. And yes, the answer to your question is this has shifted in the last 18 to 24 months, basically since we started this first interaction between us and then with more and more funds.  

I think to burrow this down very easily, let's talk about three reasons. 

One government regulation, particularly in the EU. SFDR, Sustainable Finance Disclosure Regulation, came into place in March 2020 with the effect that within now and the next two to three years, every investor whose got operations in the European ecosystem will have to think about what quasi ESG. So that is also why we're seeing much more of an uptake of this in the EU ecosystem, including the UK and in the U S and we can talk about that more later. 

The second, I think there's a big impact of a generational shift across the investment chain from people who are employees and startups, to people who run startups to people who are employees and funds, to people who run funds to people who own family offices and LPs. So decision-makers are starting to rethink how they're supposed to operate in the world with more of a focus on being good or thinking about ESG in an operationalized sense. So I think these are the two most important things that might be worth mentioning right now. 


Yeah, and you've mentioned diversity and inclusion a couple of times, and that's perhaps where the beginning of your journey maybe started from. And within ESG, I think there is more and more focus on S which encompasses diversity and inclusion, but there are so many factors contributing to VC persistent lack of diversity, especially at the senior ranks. 

What would be your top three to five reasons why it's still the case? How can we change it? 

VC is such a dynamic, fast-moving industry in many ways, compared to more traditional industries. You would hope that it would be easier for them to change this yet, it's still very far from diverse. 


So I'm just going to quickly, I'm going to hand over to Johannes to answer your specific question, but before that, I think there's a lot of miseducation in the venture space, generally around what the S means. And I think people immediately assume that the S is synonymous with DEI. And you see that, particularly in the US. DEI is almost treated as if it's its own category, separate from E, S and G. 

But I think what we really need to change the conversation around this and position DEI within the broader context of the S as a whole. And if you look at early-stage, fast-growing companies, teams are growing at a rate of knots, working with new technologies, new business models, often kind of rapidly pivoting, as you know, having worked in an early stage fund, there are other things to account for. 

So in the context of a company, Johannes has mentioned broader things around team and working environment. So how are your team being motivated? How are they incentivized? How are they being treated? You've got option plans. So a lot of things that could be closely related to DEI, but actually are in the broader context, the whole working environment and culture that you're creating. 

You've then got things around, building a responsible product. What does that mean? That could be anything from diversity of a product team, but also the bias in the AI. So that falls under the S category. You could also argue that data ethics, data security, how you are handling consumer data, that's also an S issue in large part. It could also be governance. 

And then you've got supply chain issues and human rights. Human rights affect a whole multitude of factors. So I think we need to start having a conversation around S that isn't just dominated by DEI because I think that can actually distract away from a number of other really critical factors. 


To briefly think about this D&I piece, which I'm doing a book on with Erica, specifically because of the frustrations that at least for the last three to four years a lot of lip service has been paid and very little action has at least resulted in changing statistics. Perhaps again, two reasons and then one hopeful gleam into the future on this.

VCs have an image of themselves, which I think is also transported into a wider societal understanding of them, that they are very progressively thinking. Very fast-moving. Actually, the VC industry has changed very, very, very little in the last 60 to 70 years. We are still operating in exactly the same economic and structural and model of a GP-LP relationship where asset owners give money to the asset managers.

So it's actually quite an entrenched ecosystem. There are still players that have been dominant 30 years ago that are still dominant. There's a tendency in the VC ecosystem to replicate and reproduce oneself, and that unfortunately comes with the replication of the existing personality that happens to have started in VC and still tends to dominate in VC.

And that also has to do with the relationship-based nature of how venture makes decisions, both when it comes to hiring themselves, hiring the new generations of VCs, but also investing in startup founders, which you think could be divorced from each other. But funnily enough, we have almost the exact same number of white men in the VC ecosystem as we do in the startup founding ecosystem. 

So the money is handed out by white men and happens to be handed to other white men. And I think, and I just wrote a piece for Sifted on this, which has a telling title “VC is Still a Boys Club – Here’s How to End It” is again, because the ecosystem is very unprofessionalized.

There's very little particular professional conduct around how are you supposed to make decisions. Yes, people write investment memos, but very few LPs will check them. Yes, there are certain ideas around what kind of diligence you need to do, but really the decision is taken in the bar.

So this relationship-based nature hasn't really changed and hasn't really been innovated or professionalised as I would say. So that's one factor. 

The second is, what we suppose is the biggest change maker in this ecosystem because they actually own the money, which are the LPs, the asset owners. They haven't really pushed very hard, some of them, and this is particularly true for the American ecosystem, consider themselves lucky and would really, the earth would have to go down for them to get out of the situation if they're in Sequoia or Andreessen.

They're not going to ask very, very, very hard questions to these top players. So they have a general policy of not asking hard questions, particularly of the funds that are then generating FOMO in the ecosystem that everyone looks towards. So LPs have historically not pushed hard enough.

Both of this is changing as new people are running funds and as LPs have been increasingly under pressure. And then we are seeing communities, we are obviously specifically operating on the broader spectrum of ESG, but Diversity VC has made big waves both in the EU/UK ecosystem and in the US. All Raise has been in existence for even longer in the US. We have communities like 10 X 10 VC, which is a group of particularly black VCs in the UK ecosystem.

So I think there's organising happening. I can't say this is unionisation, but there's people getting together who are upset and they are trying to change. 


Yeah, agree. And my next question relates to your answer about this concept of how can you scrutinise VCs more and whose job is it to scrutinise them, to be accountable for the impact they make via their investments long-term on the society, and also the ways they operate? What are your thoughts there? 


So, yeah, we’re all around ESG and we frame ESG as very different to impact. So impact is all around the societal, environmental outcomes that our company is creating through its product or service. And ESG is all around the way that a company is operating, all of its internal practices and processes and procedures. So we say that the two, they're not mutually exclusive, but they require two very separate, but aligned methodologies and approaches. 

So we obviously are focused on the ESG piece. There are other organisations out there that focus on the impact piece. So you've got the IMP, you've got GIIN, you've got an entity that an impact LP might be launching soon, but there are groups and organisations who do that.

When it comes to the ESG component, I think as Johannes alluded to, there are LPs now who are implementing more rigorous ESG due diligence processes. A lot of those are obviously more institutional, lots of state funds. But the questions they're asking are slightly all over the shop and there's not a lot of coherence there. And as Johannes also said, if a top-tier fund says that they're not going to fill in the questionnaire or not respond, then that's not going to mean that the LP isn't going to invest. In some instances, one will move from one group or another group.


One of the things that we've been exploring is how we can kind of roll out some sort of peer accountability mechanism through VentureESG, as an organisation, as a community. How can we as funds in the group and as peers hold each other accountable as to some of these things. You know, you have the other ESG_VC, the group that's being run by Beringia, and they've approached it by the portfolio company side. So their member funds are having their portfolio companies report, which is slightly different, right? 

It's more on the portfolio company level and not necessarily holding funds to account, but at the moment there aren't a ton of ESG bodies out there that can provide this role. The PRI does do this, but their processes and frameworks are not really relevant to venture, and they have a very small percentage of their overall members are VC funds. But obviously this is something that we are trying to work with them to change.


And what role does regulation have to play in all of this? What are your views? 


I mean SFDR is already playing a massive role. I would think he would be hard, and which is the Sustainable Finance Disclosure Regulation in the EU that is going to be complimented even more in the future once this is properly launched by forever particularly green EU regulation. 

So you would be hard-pressed at the moment to find a fund in the EU that isn't thinking about this slash is already acting on this. There's various different things that flip into place, depending on certain decisions that you take, which comes with more or less onerous reporting standards.

And again, reporting is one bit of what ESG is ultimately supposed to produce. What it should really produce as a full rethinking of how companies are run and how VCs make decisions that go far beyond just how are we supposed to talk about what we do with our LPs or general stakeholders in our company and funds. But the reporting side of things we'll shoot through to the company level and produce, by simply asking questions, a certain rethinking by definition. 

Once you have to report on your carbon footprint, somebody will have to actually likely hire consultants there or software, and somebody will look at that carbon footprint and see that it's been going up for the last 10 years, and you might possibly want to do something about this otherwise, you're going to face pressure from the employees for instance. 

So the regulation, I think in the EU is over the set to have a massive influence on this that is unavoidable. Now we haven't really heard anything concretely. There were some explicit publications on the official SEC website, where in the form of blogs, that they're moving in a similar direction. But don't get me wrong, I'm German and I don't have too much faith in the American administration, even the current one and they are facing a devastating loss in the next midterms actually, to go after financial services anytime soon. 

So if we are lucky, we produce something in the EU that will look similar to GDPR with SFDR and the US would say, “This is kind of the standard” and everyone who has something to do with Europe will have to comply anyway, “We’ll adopt something that looks close enough”. But that I think would be the best-case scenario, and that's going to take another couple of years. 


Yeah, just one thing to add. SFDR also, hasn't been designed with venture fellows and small companies in mind. So a lot of the questions that they're asking are not relevant to small, fast-growing tech companies so that we have to bear that in mind as well.


So if you are an early-stage company, where do you start and who would be a good benchmark to refer to their journey? I get that asked quite a few times, so would love to hear your thoughts.


One thing we're really lacking at the moment is proper case studies and examples of best practice. So what does good ESG performance look like if you're a pre-seed, seed, Series A stage company? Maybe more on Series A. But hopefully these examples will be teased out and surface from the community at some point. 

And to provide an example of the direction of travel, I think what you can say is that as soon as you're raising money or bringing money or external funding on board, you're going to be hiring. Like, think about the way that you're hiring. Are you hiring in an inclusive, unbiased fashion? What language are you using in the job descriptions? What platforms are you using to post the role publicly? Are you tapping into networks that are outside of your immediate orbit? And actually how are you building inclusive practices into the company? What are your share option plans? et cetera, et cetera. 

There are many things that small companies can think about on that vein. You're also going to be releasing a product out into the wild. Have you considered what the adverse impacts of that product are? Have you considered how you're going to mitigate that over the short, medium and long-term? Carbon footprint, obviously not relevant for a lot of tech software-based companies, but there are things that you can start to think about to map your carbon footprint and track it knowing that as you grow, that's going to be something that your VC funds are probably going to demand of you at some stage. 

As we always say, it's more about having the conversations and being aware of how you integrate this into the way that you build your company because your funds invariably, are going to have this conversation with you at some point. So it’s understanding at what point these are going to come into place and be relevant for you. That's what we say. 


So, interestingly enough, the social anthropologist in me would say it's all about culture, which is something that's very hard to report on slash to measure. That's going to make the difference.

And it's very, very hard to change the culture of ego right now, not to say impossible. Or Deliveroo to that respect, which was one of the first cases, one of the first anti-cases where people started to talk about they had some issues with ESG and that actually has led them to losing out on certain financial targets.

Right, three asset managers here in the UK decided not to invest in Uber when it went public and the conversation for the first time surfaced. And why have these VCs not made sure that Deliveroo was prepared for this better? So I think starting early with building a culture that is what you could call responsible, what can be self-defined as inclusive, when it comes to diversity in particular, is much easier if you're two people than it is when you're 2000 or 200. 


Yeah, I agree. And I think a number of case studies in benchmarking is very helpful when you are starting out your journey. So hopefully we will see more and more of those.

My last question to both of you is what has surprised you this year? Could be ESG or non-ESG related.


Yeah, I think mine can be the boring one, which Europeans might be happy to hear in particular. So we've spent increasingly more time in the US because obviously everyone is talking and thinking about what Silicon Valley is doing in particular and what the east coast is doing in the venture capital industry. And partly because of the networks that everyone has and partly because of my own research, we've spoken to a lot of funds and LPs, but particularly conversations with some of the bigger name funds there, which were just frustrating.

There was still very, very little interest even, not only adoption, not even talking about adoption, but even interest in this conversation. And some of it can be attributed to the fact that ESG is possibly not the right word in this particular context, we might need to change our language. But again, this is supposed to be the people that think 10 years ahead, not behind, they are making our economic future, they have made our economic futures for the last six to seven decades.

And some of it is very helpful, but how close can your eyes possibly be that you're not seeing that the world is changing and you might want to change actually ahead of that, not in the same vein as it? I think that is one of the most frustrating and most surprising things, which is only very, very slowly changing. The US is very unengaged and uninterested in this topic generally. 


And you, Hannah?


I have a good counter to that. It's also ESG-related, so apologies. I think we're continually surprised at how much interest and engagement there is around ESG. We launched VentureESG as a standalone entity last July, and however many months later, less than a year later, we've grown to almost 300 fund members and huge amounts of inbound and people joining calls and self-organising.

And whilst the US is somewhat slow to catch on. I think the pace of interest on this side of the pond can only be a sign of optimism and hope around changing attitudes. 


Yeah, very encouraging. On this encouraging note, I think it's good to thank you for joining us and for taking the time to speak with me.


Thank you so much for having us.


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