I beat to The New York Times to the punch with my post Know your VC’s limited partners! Nonetheless I recommend founders read the Time’s article Start-Ups Ask, ‘Are We Making Money for Saudi Arabia?’ Times reporter Erin Griffith has done a great job of piercing the veil of secrecy surrounding many VCs’ limited parters. Social consciousness, never much in evidence in Silicon Valley, has ramped up recently, especially with regard knowing where venture capitalists’ money is coming from. Technology companies face a backlash against their addictive products, privacy violations and their role in the spread of misinformation.
Some start-up founders are asking their investors whether they have financial connections to a foreign government with a poor human rights record. Others say that from now on, they will demand to know the source of investment money.
But while asking is easy, getting answers is not. Firms rarely disclose where their funding comes from. Fred Willson of Union Square Ventures, who has been a leader in explaining how investments work via his blog, posted last week that his firm had just been asked by the CEO of a portfolio company where was his firm’s money was coming from. (Full disclosure, one of my startups had an investment from Fred’s previous firm, Flatiron Ventures.) For those of you not familiar with the world of venture capitalist, Erin Griffith provides a mini-tutorial in two paragraphs:
Venture capital investors raise money from a variety of sources, including pension funds, college endowments, sovereign wealth funds, wealthy individuals and family fortunes. They then use the money to invest in start-ups with the potential for fast growth.
Since the venture capital funds are privately held, they are under little obligation to disclose information about their activities. Some executives at the firms say they keep the information private for competitive reasons. Others do so at the request of the people and organizations, known as limited partners, that invest.
Firms are very hesitant to disclose the names of their limited partners. When reached for this article, many of the top firms in Silicon Valley, including Sequoia Capital, Kleiner Perkins, Accel, Lightspeed, Andreessen Horowitz, Greylock, Benchmark, and New Enterprise Associates, declined to publicly discuss their limited partners. (Full disclosure two of my companies had investments from Greylock).
David Gutelius, partner at The Data Guild, summarizes in one sentence why founders should know the source of funds of their VCs: because the profits you generate go directly back to supporting that regime and everything it stands for.