The aggressive culture of Uber has come to typify a certain kind of Silicon Valley firm in recent years. Various theories exist to explain these cultures, but one of the more interesting comes via research from Portland State University, which argues that it may have emerged in the culture of private equity firms.
The research highlights the important role venture capitalists play in forging the culture of a startup as it moves through the developmental milestones. This creates an inevitable tension between short-term financial results and long-term socially responsible strategies.
The study finds that VC investors often demand that startups pursue financial goals rather than socially responsible ones, and because of the large equity many of the investors have in the firms they back, this gives them significant clout to push through their wishes. This pursuit of financial goals then opens the floodgates for other nefarious behaviors, such as the instances of sexual harassment seen at companies like Uber.
Culture unchecked
“We find that venture capitalist-backed companies have poorer socially responsible practice records, which do improve over time, but at a comparatively slower rate than non-venture capitalist-backed companies,” the researchers say.
What’s more, this overwhelming desire for financial returns from the VCs might actually end up causing more harm than good, especially if the toxic cultures it encourages ends up getting the company into legal issues, as was the case with Uber when it was ordered to pay several million dollars to settle federal charges pertaining to sexual harassment.
The researchers very much believe that such aggressive pursuit of financial returns harms the performance of the company in the long-term, and more socially responsible practices ultimately lead to a more sustainable business.
“Compared to non-venture capitalist-backed companies, venture capitalist-backed companies presented significantly lower assets, sales, tangible assets, inventories, returns on assets, profit margins and debt levels, as well as higher intangibles and current ratios,” the researchers explain.
What’s more, such sustainable approaches to business not only produce good financial returns, but also do more to satisfy a wider range of stakeholders, including employees, suppliers and customers.
Of course, the kind of downward spirals identified in the research typically only emerge when the investors themselves are purely motivated by short-term financial gain. If the investors have a more responsible investment strategy and take account of a broad range of stakeholders, then the social responsibility practices of the startup are usually much better.
“Early-stage imprinting can happen from many sources, but when businesses take funding from certain investors, certain cultures, operating modes and ways of conducting business may start to take shape for the long term to affect a broader group of stakeholders,” the researchers conclude. “The effects of early-stage imprinting from venture capital funding can be hard to ‘undo,’ and there are social consequences.”
