Is the Practice of Startups' Taking Money From Bad People A Big Problem?

There is a surfeit of investors and money chasing deals, so scarcity of funds is not an acceptable excuse.

The question, increasingly, is where the line gets drawn. Is the Saudi Government ok, but Jeffrey Epstein is not? The differentiator lies with the individual entrepreneur and their willingness to stand for the principles they espouse - or not. JL


Alyson Shontell reports in Business Insider:

With so much money sloshing around Silicon Valley these days, chasing the dream to success has never been easier. Capital from all over the world is available. For tech founders and investors, not all money is the same. If you take money from good people, your success becomes their success. If you take money from bad people, your success also becomes their success. In Silicon Valley, where the ideal of changing the world has been mythologized, the more founders and investors try to live up to their principles, the tougher it becomes to rationalize the things that fall short of them.
If you are a venture capitalist or an entrepreneur, your primary goal is to become wildly successful.
You might have a more noble second goal of trying to build something that improves the world. But if you aren't successful first, you won't have the chance to unleash that world-changing idea.
Success is typically measured in dollars. How much money you raise. How big your fund is. Getting a unicorn valuation. How big a return you make for investors. Or, if you're an investor, for your limited partners.
Ultimately, it's about how rich you get.
And with so much money sloshing around Silicon Valley these days, chasing the dream to success has never been easier. Capital from all over the world is available. For tech founders and investors, it doesn't matter which ATM you go to — they all spit out money.
But not all money is the same. If you take money from good people, your success becomes their success. Similarly, if you take money from bad people, your success also becomes their success.
This is something far too few entrepreneurs and venture capitalists want to think about. Silicon Valley's moral compass is broken.
Last week I had lunch with two established founders who are in the middle of fundraising. They are seeking giant checks, upward of $50 million a backer. I asked whether they were considering who they were pitching and where their money came from.
Yes, they replied, they had thought about it. They hadn't reached a conclusion on what they should do, though. Taking money from Saudi Arabia, one of them reasoned, was essentially the same as pumping gas in your car. Either way, you're supporting Saudi Crown Prince Mohammed bin Salman, the country's de facto ruler thought to be behind a journalist's assassination.
In a recent interview with WeWork CEO Adam Neumann, I asked him about raising money from SoftBank's first Vision Fund, which was largely backed by Saudi Arabia.
Neumann paused before answering the question and then essentially said he would consider his sources of capital better next time.
Jeffrey Epstein, the disgraced financier who killed himself in jail this month, was also a tech investor. He was supposedly a limited partner in venture-capital funds and an investor in startups.
At least one investor who took his money in 2013, Joi Ito, has come forward. He acknowledged accepting Epstein's money years after the 2008 allegations, including Epstein's guilty plea of soliciting prostitution with a minor, were made public.
"Regrettably, over the years, the Lab has received money through some of the foundations that he controlled. I knew about these gifts and these funds were received with my permission," Ito said in a public apology last week. "I also allowed him to invest in several of my funds which invest in tech startup companies outside of MIT."
Ito's decision helped him financially but hurts others long term. Venture capitalists don't need to disclose who their limited partners are, and it's likely that none of the founders who accepted Ito's funding knew some of it was coming from Epstein. Now their products are polluted with sex-offender money.
Founders are supposed to conduct due diligence on investors before they accept their money. That means calling up references to see whether they're decent humans. Likewise, investors are supposed to do due diligence both on the founders they want to back and on the limited partners who invest in their funds. Often, little to no due diligence is happening.
"Is it too much to ask that people do a simple Google search before going into business with someone?" the entrepreneur Om Malik wrote after the Epstein-Ito connection was exposed.
Fred Wilson, a venture capitalist who invested early in social networks such as Tumblr and Twitter, recently wrote that he was surprised how thoughtlessly some founders chose their investors.
"It is easy to get caught up in the game of startups and investing in them," Wilson wrote. "A fundraising process is at its heart a competition. And everyone wants to win. But you don't get a trophy for winning this game. You get into a relationship. Often a very long one."
It's not just investors and entrepreneurs who are getting into long relationships with bad people. It's all of us.
Pumping gas might enrich bad actors. So does every Saudi-funded ride you take from Uber or every WeWork office you work in. Your iPhone is made in China, where the government has forced millions of Uighur Muslims into reeducation camps. Our tech products have all become corrupted, in one sense or another.
If we can't enact our convictions in our personal lives, why should we expect businesses, with profits at stake and responsibilities to employees, to make these kinds of decisions?
It's a complicated question, with no easy answers. But in Silicon Valley, where the ideal of changing the world has been mythologized and milked for years, there's a greater responsibility to confront it. And the more founders and investors try to live up to their principles, the tougher it becomes to rationalize the things that fall short of them.
Richard Titus, a tech investor and entrepreneur, agrees that this is a "toxic" problem in tech but acknowledges that taking the high road — and choosing between funding your dream or doing the right thing — can be difficult for founders and investors.
Muslims into reeducation camps. Our tech products have all become corrupted, in one sense or another.

"We need to care more about source of funds," he said on Twitter. "But when you are out of money, and driven the way many founders are.. it's hard. very hard."