Bad Blood

Bad Blood is a fantastic book and an amazing journalistic feat. The drama is still playing out as I write this with the main characters facing criminal charges and likely to stand trial this year. Like Enron: the Smartest Guys in the Room it’s a brilliant set of lessons about how a company can be rotten but the system of investors and regulators forget to trust their sense of smell. And like the Enron book (in that case Bethany McLean who wrote an article in Fortune magazine posing a simple question — how, exactly, does Enron make its money?), John Carreyrou helped uncover the scandal — he’s part of the story, which makes it an even better tale.

It’s particularly interesting to me because in one version of the story Theranos could have been an amazing tech for good impact investment. It made me wonder how we would have reacted at BGV — would we have spotted the fake?

Theranos was founded in 2003 by 19-year-old college dropout Elizabeth Holmes. Her dream was to revolutionise medical diagnostics by creating a simple, cost effective way for people to get their blood tested from a tiny sample. If she had achieved that, it would indeed have had a huge positive impact on the world. The trouble is that it’s a very hard thing to do.

Holmes was joined at the helm of the company by Sunny Balwani, who made some money in the first dot-com boom and was also her boyfriend. Bad Blood is littered with examples of them making terrible mistakes and hiding information from people (including that they were a couple). Their paranoia was extraordinary — to the extent of fitting bullet proof glass in Holmes’ office and having people trailed when they left the company. What they were covering up for was that the technology they promised didn’t work.

In the business it’s known as ‘fake it til you make it’ and all tech startups do it to a degree. You often have to convince investors that what you’re going to do will be revolutionary before you’ve actually built it (after all you need their money to build the thing). One famous example is the video that the Dropbox founders created to judge whether or not it was worth building the software in the first place. But raising peoples’ hopes of better document synching is one thing — raising the hope of quick, painless diagnosis of diseases is another. Richard Waters is great on the subject in this FT piece.

All the signs were there with Theranos. But hindsight is a wonderful thing and there were many investors, customers and journalists who were duped. Holmes and Balwani got plenty of things wrong but it was the system that allowed them to gamble with peoples’ lives that was really rotten — and it still is.

It’s a strange story when Rupert Murdoch comes out of it pretty well. Despite losing the whole $120 million he’d invested he refused Holmes’ attempts to spike the story at the Wall Street Journal which he owned.

One aspect of the story makes me think we wouldn’t have fallen for it at BGV is that most of the investors seem to have made their decisions based on who else was involved. A classic case of groupthink. We’re always the first investor so don’t have the ‘luxury’ of seeing who else is investing. We also don’t invest very much to start off with so we get to work with teams (usually in very close proximity) before we decide to invest larger amounts. I’d like to think we would have worked out that the Emperor wore no clothes in this case. And finally we’re very sceptical of ventures that insist on secrecy — we think there’s an important link between true tech for good and openness and transparency.

What will be interesting in tech for good in 2019?

2018 was the year of tech for bad. An annus horribilis for the reputation of the big tech companies and mistrust of the technology industry. I fear there’s more of that to come this year with new revelations and scandals.

But on a more positive note, we’ll see tech for good continue to grow in 2019. At BGV we meet more and more founders wanting to solve the world’s most pressing social and environmental problems and that’s why I’m still optimistic. If there is a market correction (aka a crash), tech for good companies will be the ones that prevail. The motivation of the founders and teams is just so strong.

Here are a few areas that could be interesting this year.

More fintech for good

Now that the hype cycle of blockchain has started to pop, we’ll actually see some useful and beneficial applications of distributed ledgers. I have to admit we usually groaned when teams tried to shoehorn blockchain into their applications to BGV in the past, but I’m more interested now it’s less sexy.

Plastic alternatives

The plastic problem is much worse than people thought and pressure on companies to replace plastic in their packaging and products is intense. Our own Panda Packaging is part of that charge.

Agritech will grow

Agriculture is responsible for about a quarter of greenhouse gas emissions and lots of old techniques for increasing output seem to be coming to the end of the road. We’ll see more meatless foods being created (animal production is accounts for 70% of agricultural land use) and completely different ways of growing crops. BGV company LettusGrow is doing great work on this and Farmerama is a fantastic way to learn about new approaches to farming.

WorkerTech starts to work

WorkerTech really seems to be growing in profile now. As precarious work (sometimes caused by technological change) has grown so have the effects on income security, health and mental health. We’re seeing more and more good ideas for ventures to use tech to help tackle this. Organise, LabourXchange and WorkerBird are just three.

More chief ethics officers

While ‘what’ you do is important in tech for good, ‘how’ you do it is just as vital. Big tech companies are starting to do this by hiring new people to set policy and interrogate the way that products and services are created but it’s important for startups as well. New frameworks to help are beginning to emerge.

Funding options diversify

While the way we tackle social problems and start businesses has changed rapidly over the past decade, traditional forms have finance haven’t (think bank loans, grant making and even venture capital). I’ve got a feeling there will be greater diversity of funding models for tech for good in the future. Take a look at the Indie.vc model for one early sign of new approaches.

Predictions for impact investing in 2019

2018 was the year impact investing started to reach a much wider audience in the investment world. It went from the occasional mention in the media in previous years to a torrent of speeches, events, announcements and even billboard advertising campaigns, particularly from big financial services companies. It all kicked off when Larry Fink (CEO of Blackrock, the world’s biggest asset manager) used his annual letter in January to say that in the future they would take social purpose into account in the companies they invest in.

Less policy, more practice

This might be overly optimistic, but I think 2019 could be the year that the words and policies begin to translate into practice. I’d like to see some of the financial services giants start to make real investments and be able to say how much capital they’ve put to work to make the world a better place. It needs to be more than impact wash though and live up to the definition:

“Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”

Charities get their houses in order

I hope that more big charities and foundations get behind the idea of 100% impact investment portfolios for their endowments. It’s shocking to me that we often ignore the impact of what a charity does with the money in its endowment but looks at every detail of the money that it gives away. It just doesn’t make sense. It’s possible that many large charities are doing more damage with their money by investing it in oil, tobacco, arms, gambling and so on than they are doing good with the money they get back from those investments (which may well be negative this year as well!). I hope they change before we see more scandals. There are some great networks like the SIIG for charities and foundations who want to learn more and I hope we see those continue to thrive.

BCorps continue to grow

I also think the BCorps movement will continue to grow in 2019. It’s just common sense. The framework the B Impact Assessment gives is excellent and the community of business that have certified gets better and better. I think in 2019 we’ll continue to see BCorps getting investment and be acquired by larger companies, which will attract more good companies to the community.

Growing pains

Unfortunately, I think the impact investing sector is now getting to a scale where there will be a big scandal at some point. My guess is that it will come from the world of very rich people dabbling in impact investing through vehicles they’ve set up themselves. The attitude has been wrong there for a while. Will it be a Bad Blood style unwinding of the story of a large impact venture or fund? I’m not sure. I should stress that I have no inside information — this is just a hunch. It will be interesting to see how the sector responds to intense scrutiny.

Don’t forget who this is for

2019 will almost certainly be a year when the world needs impact investing more than ever. If Brexit happens it will disproportionately hurt people who are already hurting. Climate change seems to be even worse than we thought and will affect poorer people more severely. We absolutely need to ramp up impact investing to tackle inequality and try to halt the damage we’re doing to the environment as soon as we possibly can.