Embed Size (px)
Citation preview
PA P E R
J U N E 2 0 1 9
T E C H N O L O G Y A N D P U B L I C P U R P O S E P R O J E C T
Reimagining Investing in Frontier Technology
Technology and Public Purpose Project
Belfer Center for Science and International Affairs
Harvard Kennedy School
79 JFK Street
Cambridge, MA 02138
www.belfercenter.org/TAPP
Statements and views expressed in this report are solely those of the authors and do not imply
endorsement by Harvard University, Harvard Kennedy School, Harvard Business School, the
Belfer Center for Science and International Affairs, or the Rock Center for Entrepreneurship.
Design and layout by Andrew Facini
Cover photo: Adobe Stock
Copyright 2019, President and Fellows of Harvard College
Printed in the United States of America
PA P E R
J U N E 2 0 1 9
T E C H N O L O G Y A N D P U B L I C P U R P O S E P R O J E C T
Reimagining Investing in Frontier Technology
iBelfer Center for Science and International Affairs | Harvard Kennedy School
ii Reimagining Investing in Frontier Technology
Co-Sponsoring Organizations
Harvard Kennedy School’s Belfer Center for Science and International Affairs has launched a new endeavor, the Technology and Public Purpose (TAPP) Project. Led by Belfer Center Director, MIT Innovation Fellow, and former Secretary of Defense Ash Carter, the TAPP Project leverages experts from Harvard, MIT, and Stanford, along with leaders in technology, government, and business, to ensure that emerging technologies are developed and managed in ways that serve the overall public good.
Harvard Business School’s Arthur Rock Center for Entrepreneurship champions entrepreneurship at HBS by leveraging the school’s robust research and teaching agenda, vibrant ecosystem, and diverse global network to help entrepreneurs, startup joiners, and investors focus on what it takes to launch, lead, and invest in successful companies. The Rock Center is led by faculty co-chairs Tom Eisenmann and Shikhar Ghosh, along with director Jodi Gernon. It is one of eight HBS Initiatives—research-fueled communities of engagement focused on multidimensional topics at the intersection of business and society
iiiBelfer Center for Science and International Affairs | Harvard Kennedy School
AcknowledgementsFaculty Leads
Ash Carter, Director, Belfer Center for Science and International Affairs, Harvard Kennedy School
Tom Eisenmann, Faculty Co-Director, Arthur Rock Center for Entrepreneurship, Harvard Business School
Faculty Advisors
Shikhar Ghosh, Faculty Co-Director, Arthur Rock Center for Entrepreneurship, Harvard Business School
Nien-he Hsieh, Associate Professor, Harvard Business School
Kathy Pham, Adjunct Lecturer, Harvard Kennedy School
Mitchell Weiss, Professor of Management Practice, Harvard Business School
David Wood, Adjunct Lecturer, Director, Initiative on Responsible Investment, Harvard Kennedy School
Lead Author
Susan Winterberg, Fellow, Technology and Public Purpose Project, Harvard Kennedy School
Contributors
Aaron Bartnick, MPA ’20 Candidate, Harvard Kennedy School
Jodi Gernon, Director, Arthur Rock Center for Entrepreneurship, Harvard Business School
Christine Keung, MBA ‘20 Candidate, Harvard Business School
Tarun Khanna, Professor, Harvard Business School
Laura Manley, Director, Technology and Public Purpose Project, Harvard Kennedy School
Marissa Meir, MBA ’19 Candidate, Harvard Business School
Pradeepan Parthiban, Research Assistant, Technology & Human Rights, Harvard Kennedy School
John Ruggie, Professor, Faculty Chair, Corporate Responsibility Initiative, Harvard Kennedy School
Bruce Schneier, Adjunct Lecturer, Harvard Kennedy School
George Serafeim, Professor, Harvard Business School
Angela Winegar, MPP/MBA ’21 Candidate, Harvard Kennedy School and Harvard Business School
vBelfer Center for Science and International Affairs | Harvard Kennedy School
Table of Contents
Summary Report ................................................................................1
Event Summary ........................................................................................................................... 1
Opening Remarks ................................................................................................................. 1
Investing in Frontier Tech: Opportunities and Responsibilities ........................................3
Frontier Tech and Society: What Should Investors Consider? ......................................................................................4
Supporting Frontier Tech Ventures .....................................................................................5
Key Insights .................................................................................................................................5
Continuing the Conversation ....................................................................................................8
Event Briefings................................................................................... 9
Frontier Technologies ............................................................................................ 11
Responsible Investing ............................................................................................................... 13
Digital Technologies ................................................................................................................. 17
Biotechnologies ........................................................................................................................25
Supporting Frontier Technology Ventures .............................................................................. 31
vi Reimagining Investing in Frontier Technology
HBS Professor Tom Eisenmann asks what makes venture capital as an asset class unique when considering societal impacts.
1Belfer Center for Science and International Affairs | Harvard Kennedy School
Summary Report
Event Summary
Harvard Kennedy School’s Belfer Center for Science and International Affairs’ Technology and Public Purpose Project (TAPP) and Harvard Business School’s Arthur Rock Center for Entrepreneurship co-hosted Reimagining Investing in Frontier Technology on May 15, 2019. This work-shop convened over 70 investors (Limited Partners and General Partners), entrepreneurs, technologists, and others investing in and building frontier technologies in areas including artificial intelligence, genome engineering, advanced computing technologies, and more. The workshop explored the challenges investors and entrepreneurs face in bringing products to market in ways that maximize their benefits to society while minimizing harms.
Opening Remarks
Tom Eisenmann, Faculty co-Director of the Arthur Rock Center for Entrepre-neurship, opened the event with an interactive exercise in which participants were asked to reflect on nine facts about venture capital and frontier technologies (See Figure 1). Several aspects of venture capital investing make it challenging to incorporate considerations for ethics and public purpose. The failure rate among start-ups is very high, and fund returns are earned from a small percentage of companies. This leads to immense pressure on entrepreneurs to build, scale, and attain returns quickly. Investments are raised over several rounds with differ-ent VCs, and senior leadership teams in start-ups can turn over quickly. This turnover in capital and leadership leads to challenges in mission continuity and in accountability. At the same time, venture capital-backed startups also have opportunities to better integrate ethics and public purpose considerations. Part-ners sit on company boards and provide active management and advice, which is an opportunity to provide direction and support. Among frontier technology ventures, initial funding often comes from governments and technologies are often licensed via university technology transfer offices, both of which provide opportunities for additional checkpoints to consider societal impacts.
2 Reimagining Investing in Frontier Technology
FIGURE 1.
9 FACTS ABOUT VENTURE CAPITAL AND FRONTIER TECH
ENTREPRENEURSHIP: WHY DOES IT MATTER FOR ETHICS AND
SOCIETAL IMPACTS?
• Most startups fail: 75% do not earn a positive return.
• Venture capital firms earn most of their profits from just 5-10%
of investments.
• Venture capital is raised in rounds. Each round is led by a new
VC who typically takes a board seat.
• Around 60% of Founder CEOs have been replaced by the time
a start-up raises Series D.
• A Partner sits on about 10 boards and makes 1-2 investments
per year.
• Many frontier technologies are developed in university labs.
• Many frontier technologies receive their initial funding from
government agencies such as NIH, DARPA, DoE, etc.
• CEOs of frontier tech ventures tend to be PhD scientists
without business experience.
• Frontier tech entrepreneurship is often ‘solution-led’ by
asking which potential applications for an invention should
be commercialized first. This contrasts to ‘problem-led’
entrepreneurship which searches for a solution to an unmet
customer need.
3Belfer Center for Science and International Affairs | Harvard Kennedy School
Former U.S. Secretary of Defense and Belfer Center Director Ash Carter gave an address on the challenges of the next wave of technological development. He noted that the stakes will be much higher for society as AI moves from applications in ads and enterprise software to making decisions in health care, military, policing, and justice administration. The seriousness of these implications means that technologists, entrepreneurs, and investors must be more cautious going forward in ensuring that AI systems ‘get it right’ and are explainable and accountable to those impacted. At the same time, the coming wave of biotechnological innovation will also bring new societal challenges. The biotechnology field historically has been a relatively slow-paced field, led by scientists with PhDs, high regulatory oversight, and long product development timelines. The next wave will be characterized by fast-paced investment as the field intersects more with AI and digital technology developers. Community biolabs are also opening access to a new type of bio-tech entrepreneur without advanced scientific training.
Investing in Frontier Tech: Opportunities and Responsibilities
The first session, led by TAPP Inaugural Fellow Susan Winterberg, focused on the roles of investors in shaping development of start-ups and on the current state of responsible investment practices. Rudina Seseri, a Founder and Partner at Glasswing Ventures, spoke about evaluating bias in machine learning algorithms and how to encourage greater diversity on boards and product development teams in portfolio companies. Peter Barrett, a Part-ner at Atlas Venture, spoke about investing in biotechnologies, the value of having a regulatory body like FDA to help evaluate risk and quality of new products, and the need to keep the patient at the center of decisions. David Wood, Faculty Director at Harvard Kennedy School’s Initiative for Respon-sible Investment, spoke about why venture capital doesn’t fit into existing paradigms of responsible investment happening in the public equities markets. Public equities markets have a strong focus on transparency and measuring materiality of ESG issues to company performance. Both public and late stage private equity investors lack the tools necessary to evaluate new technologies. One participant explained, “The [financial services] industry is still struggling to get the right data points and the right data
4 Reimagining Investing in Frontier Technology
specificity. With AI, I think we have nothing to work with.” In the venture capital space, there is a subset of ‘impact investors’ looking at specific prod-ucts that could benefit groups of people or the planet, but there is a lack of attention to issues in other areas around risk, misuse, and unintended consequences. David Korngold, Director of Financial Services at Busi-ness for Social Responsibility (BSR), reflected on the experience of private equity funds in setting up ESG evaluation processes. He also noted there are many lessons that those interested in technology human rights and AI ethics can learn from other movements where businesses and investors have already mobilized, such as climate change. Key success factors include having a clear definition of what a successful outcome is, metrics, and a set of voluntary commitments that companies can sign onto.
Frontier Tech and Society: What Should Investors Consider?
In the second session, participants engaged in a case study discussion led by HBS Professor Mitch Weiss. The case featured Boston startup Voatz which had recently raised $2.2 million in seed funding to develop a mobile voting app using blockchain and facial recognition biometrics. The case featured a dilemma during a pilot with overseas absentee overseas voters in the West Virginia primary elections in 2018. A series of tweets and articles accused Voatz of Russian influence and criticisms of its data security prac-tices calling the app ‘a horrifically bad idea’ and the ‘Theranos of voting.’1
Weiss asked participants to take the point of view of a potential investor in Voatz and weigh the good intentions of the founders and potential benefits of the technology (increased access to voting and reduction of voter sup-pression) against potential risks of harms (election hacking, exposure of individual voting records, and subsequent risk of violence or loss of trust in democracy). The participants then generated a list of actions venture capital investors could take that would ‘increase the good and reduce the chance of harm’ such as developing term sheet requirements to hire a risk
Kosoff, Maya. “A Horrifically Bad Idea: Smartphone Voting is Coming, Just in Time for the Mid-terms,” Vanity Fair, August 7, 2018 https://www.vanityfair.com/news/2018/08/smartphone-vot-ing-is-coming-just-in-time-for-midterms-voatz?verso=true
5Belfer Center for Science and International Affairs | Harvard Kennedy School
officer, requiring key employees to obtain security clearances, and creating governance, oversight, and accountability mechanisms on the board.
Supporting Frontier Tech Ventures
In the final session of the day, HBS Professor Shikhar Ghosh moderated a conversation among participants with Ann DeWitt, Partner at The Engine, a venture capital fund and incubator for ‘tough tech’ start-ups, and Matt Wansley, General Counsel at NuTonomy, a self-driving car company. Wansley spoke about the role of law vs. ethics in decision-making in start-ups and the importance of creating a culture where every employee feels comfortable speaking up on issues of risk and safety. DeWitt spoke about the importance of mission and motivation, and ensuring that founders are working to develop the full leadership capability set of a CEO. She also stressed that founders must be dedicated to ensuring applications of their technology will be ‘net positive’ for the world.
Key Insights
The discussion surfaced several key insights.
1. The coming wave of technological innovation will look very different
from those of the past thirty years.
The coming wave of frontier technologies will likely be fundamentally very different from other recent technological developments. The pace is faster of technological adoption. Automobiles took 62 years to achieve the first 50 million users. Televisions took 22 years, personal computers 14 years, the internet 7 years, Facebook 2 years. Pokemon Go took 19 days.2 This means that there could be less time to fix problems with new technologies before they have massive societal impacts.
“How Long Does it Take to Hit 50 Million Users?” Visual Capitalist Accessed May 22, 2019 at: https://www.visualcapitalist.com/how-long-does-it-take-to-hit-50-million-users/
6 Reimagining Investing in Frontier Technology
The stakes could be higher this time. The past decade of digital techno-logical innovation focused primarily on applications for advertisements, consumer on-demand services, and enterprise solutions. This time the innovations in artificial intelligence and sensors could impact a far broader range of applications from health care, education systems, policing, crimi-nal justice, elections, military, and national security infrastructure. Frontier biotechnologies such as CRISPR and neurotechnologies could also open new possibilities of human enhancement, which could dramatically change the structures of societies around the world.
The players will be different this time, particularly in biotechnology, where digital technology’s culture of rapid prototyping and rapid scaling is inter-facing with the slower and more fastidious culture of laboratory science and clinical care. This could lead to revolutionary breakthroughs as well as disastrous missteps.
2. Investors and entrepreneurs should deeply understand the problems
they are trying to solve.
Frontier technology ventures tend to be ‘solutions-led’ rather than ‘prob-lem-led.’ Frontier technologists often begin the process by asking ‘which application of this technology should be commercialized first?’ rather than ‘what solution would best solve this customer’s problem?’
Investors and entrepreneurs should take a step back and ask what the actual customer problem is that needs to be solved and honestly assess whether the technology is the best solution. Similarly, investors should press entrepreneurs to consider the hidden risks and unintended con-sequences of the technology and how they will safeguard against them. Interviewing outside stakeholders as part of the due diligence pro-cess—such as a labor union leader, cybersecurity specialist, or a person knowledgeable on the community or issue in question—is one way to uncover these.
Additionally, technological development must be inclusive of the commu-nities whom it seeks to serve and those that will be impacted by it. This requires diversity in backgrounds and viewpoints be represented at all levels
7Belfer Center for Science and International Affairs | Harvard Kennedy School
of the organization from the board, to senior management teams, to product development teams. Additionally, product development teams must deeply understand the users of the technology and the dynamics of the local com-munities and cultural contexts where it will be applied across the world. This can be achieved through using principles of human-centered design and including diverse populations in AI algorithm training data sets.
3. Investors have many levers to influence the shape of technological
development.
Far from being passive providers of capital, venture capitalists have many levers they can use to shape the overall direction of technological devel-opment. This begins with creating fund theses that seek overall positive impact in an industry or issue area, and defining which applications of the technology the fund will not support. VCs can also investigate deeper questions of risk and unintended consequences during the due diligence process, and write specific provisions in the term sheets to ensure adequate safeguards have been put into place. VCs also have many levers as board members engaging in active management by ensuring diversity of view-points and experiences are represented on the board, leadership teams and product development teams. They can also support founders in articulating mission, values, and building a strong culture that fosters respect for stake-holder groups and empowers employees to raise concerns and take action on issues of safety and risk.
4. Tech entrepreneurs need additional supports to help them consider
societal impacts earlier on in their product design and business
model development.
Many VC firms offer services ranging from traditional mentorship and incubator services to in-house subject matter experts and talent acquisi-tion teams. Firms have well-experienced general partners ready to assist their portfolio companies with product development and business strat-egy. Some, as Andreessen Horowitz does with their Short-Term Advisory Relationships and First Round Expert Network, employ dedicated teams of operational and recruiting experts who advise on issues like product, design, engineering, marketing, finance, and human resources. Typically, these programs focus on operational capacity building (i.e supporting
8 Reimagining Investing in Frontier Technology
strategy or cost centers). VC firms could offer training that provides a more in-depth understanding the first- and second -order effects of the technol-ogy’s impacts and guides entrepreneurs in factoring these considerations into business models.
Continuing the Conversation
At the conclusion of the day, participants took part in a lively discussion over a reception and dinner to discuss next steps and ideas to take this work forward. In the post-event survey, participants highlighted needs for several additional research products, tools, and trainings including:
Evidence Base
• Business Case - Data on the business impact of frontier tech ven-tures factoring in societal considerations
• Case Studies - Short cases that demonstrate venture capitalists and founders working together towards successful management of technological advancement and risk; cases that demonstrate ‘turn-around’ techniques of a venture that has had a crisis of public trust
Investor Tools
• Investor Needs Assessment - Survey/focus group to identify current practices, concerns, and needs of venture capitalists to assess and manage frontier tech investments
• Term Sheets - Options and draft language to include on term sheets by technology category, application, issue area and stage of investment
• Technology Evaluation Tools - Rigorous due diligence tools to evaluate and manage risks of new technologies, especially data use/privacy, cybersecurity, and AI algorithms
9Belfer Center for Science and International Affairs | Harvard Kennedy School
Trainings and Awareness
• Tech Entrepreneur Training - Provide frontier tech entrepreneurs support on evaluating and mitigating risks, and working with regulatory bodies
• GP/LP Engagement - Engage general and limited partners to broaden scope of awareness of societal impacts of technology issues and to broaden definitions of ‘impact investing’ beyond social justice and climate change
10
Belfer Center Director, Ash Carter stating “...there does not need to be an inherent duality between doing good and doing well - we can achieve both.”
Event Briefings
12
Julie Richardson of SVB Capital shares a perspective on the role of Limited Partners.
13
EVENT BRIEFING
Frontier Technologies
Frontier technologies is the term for a “broad collection of the newest disruptive technologies sharing the common character-istic of being very early in their market-adoption cycle.”1 The technologies that constitute ‘frontier technologies’ change over time. In 2018, this list included autonomous vehicles, drones, artificial intelligence (AI), internet of things (IOT), Virtual Reality/Augmented Reality (VR/AR), 3d printing, genome editing, brain-computer interfaces, and space technologies, among others.2
Trends in Investing
Investments in frontier technology ventures have been growing rap-idly. Since 2016, nearly 1,800 new start-ups focused on applications of AI technologies have raised their first equity funding—with $19 billion in equity funding going to AI start-ups in 2018 alone.3
In 2019 there were 11 ‘unicorns’—companies with a valuation of more than $1B - building products and services focused on applications of AI. The two largest companies in overall equity funding, SenseTime and Face++, are both based in China and are building facial recognition technologies.4 U.S.-based companies that raised significant funding include Zymergen, a company building machine learning applications for materials science, as well as Automation Anywhere and UiPath, companies developing robotic process automation for industry.
Other categories of frontier technology have also seen significant funding. In 2018, there were 364 deals in drones and robotics, totaling $4.9 Billion in venture capital funding. The company that received the most funding was UBtech Robotics, a Chinese company building consumer humanoid intelligent robots.5
The Challenges of Frontier Technology Investing
Frontier technology is among the highest risk categories of venture capital investing. In the last decade most profits in venture capital funds were not earned in frontier technology categories such as energy transformation and cleantech. Instead, the highest profits came from consumer on-demand platforms, enterprise solutions
software, cloud storage, and online lending. 6 While today’s categories of frontier technology offer a more diversified range of opportunities and risks across technology classes and industries, they still present challenges for investors.
Technological Risks
Frontier technology is attractive to investors because it often has defensible intellectual property—which is harder for competitors to replicate, increasing the potential of market domination in a category.7 However, investors in frontier technologies also carry the high technological risk that these technologies may not become fully operational, or that they will be unable to outperform existing technical solutions already on the market. Sometimes this is not fully apparent until after several rounds of funding.
To manage these risks, some venture capital firms have set up dedicated funds inside of larger portfolios focused on specific categories of frontier technologies. To overcome the risk of a
Largest Total Equity Funding to AI Ventures, 2019
Company Total Equity Funding ($M)
Country Industry: Application
SenseTime 1,630 China Security: Facial Recognition
Face++ 608 China Security: Facial Recognition
Zymergen 574 United States Advanced Materials/Energy: Machine Learning
Automation Anywhere
550 United States Enterprise: Robotic Process Automation
UiPath 448 United States Enterprise: Robotic Process Automation
Yitu Technology
355 China Security: Facial Recognition
Butterfly Networks
350 United States Health Care: Diagnostics and Imaging
Source: CBInsights, 2019. “AI 100: The Artificial Intelligence Startups Redefining Industries.”
14
frontier technology being unable to transition from a laboratory to viable business model—what is commonly referred to as the ‘valley of death’ challenge—more innovative solutions may be required. In 2016, MIT founded The Engine, a fund providing long-term capital for ‘tough tech’ entrepreneurs in sectors such as space, en-ergy, materials science, and biotech that need additional support to transition ideas from a laboratory to commercialization. The fund takes lower stakes in equity than is typical and provides lab space, equipment access, and mentoring support to help ready companies for further rounds of venture capital.8
Market Risks
For certain categories of frontier technology, pre-revenue exits by acquisition to corporate R&D funds have become common. Several notable exits include DeepMind for $500M to Google in 2014 and Otto’s self-driving truck technology to Uber for $680M in 2016.9 Much of this acquisition activity has been fueled by an ‘IP arms race’ by major technology companies seeking to lock-down rights to foundational technologies for future product development and growth.10 At the same time, frontier technology companies still have high market risk as they often create new product catego-ries or entirely new industries where prior market comparisons do not exist. When technologies are in their first rounds of funding, it might not yet be clear who the end customer is or what they are willing to pay. Similarly, the broader supply chain for components, distribution channels, and sales platforms for the product may not yet exist. This can create complex challenges for investors around market timing for investments, valuations, and exits.
Political and Social Risks
Frontier technology investing also carries high political and social risks, as new technologies very often progress more rapidly than governments and society. Entrepreneurs often launch products into situations of regulatory uncertainty. In 2013 the consumer ge-netics start-up 23andme received a curtailment letter from the U.S. Food and Drug Administration (FDA) ordering to cease sales after the agency determined its services should be subject to agency review—a process that took nearly four years to resolve.11 In 2018 the space tech start-up Swarm Technologies became the first com-pany to launch objects into outer space without first receiving reg-ulatory approvals when they put four micro-satellites ‘SpaceBEEs’ into orbit - an action for which they were later fined $900,000 by the U.S. Federal Communications Commission (FCC).12
Frontier technology companies can also face challenges from managing stakeholders like consumers, employees, and the general public who do not understand the technology or are not yet ready to embrace changes they entail. The self-driving car company Waymo has had over two dozen incidents of resident vandalism including slashing tires and throwing rocks at their vehicles in the Arizona community where it is conducting road tests. “They didn’t ask us if we wanted to be part of their beta test,” one resident explained.13 These challenges require unique solutions whereby entrepreneurs must “become leaders outside the bounds of their own companies by building trust among stakeholders and helping to establish the institutions necessary for their success.”14
Endnotes
1. “The Era of Frontier Tech,” 2018, http://blog.ttcp.com/the-era-of-frontier-technology/
2. Frontier tech progression is tracked annually by the Gartner Hype Cycle report: https://www.gartner.com/smarterwithgartner/5-trends-emerge-in-gartner-hype-cy-cle-for-emerging-technologies-2018/
3. “What’s Next in AI? Emerging Trends in 2019,” 2019. CBInsights https://www.cbinsights.com/research/briefing/ai-trends-2019/
4. “AI 100: The Artificial Intelligence Startups Redefining Industries.” 2019, CBInsights https://www.cbinsights.com/research/artificial-intelligence-top-startups/
5. “Automation Takes Flight: A Look at VCs Soaring Interest in Robotics and Drones,” 2019. Pitchbook https://pitchbook.com/news/articles/automation-takes-flight-a-look-at-vcs-soaring-interest-in-robotics-drones
6. “Investing in Frontier Tech is (and isn’t) Cleantech all over again,” 2018, TechCrunch https://techcrunch.com/2018/04/28/investing-in-frontier-technology-is-and-isnt-cleantech-all-over-again/
7. “Why the Time is Now to Build Frontier Technology Start-ups,” 2018, Founders Institute. https://fi.co/insight/why-the-time-is-now-to-build-frontier-technology-startups
8. “MIT Launches New Venture for World-Changing Entrepreneurs,” MIT Press Release, 2016, http://news.mit.edu/mit-announces-the-engine-for-entrepreneurs-1026
9. “Why the Time is Now to Build Frontier Technology Start-ups,” 2018, Founders Institute. https://fi.co/insight/why-the-time-is-now-to-build-frontier-technology-startups
10. Ibid.
11. “How 23andme won back the right to foretell your diseases,” 2017, Wired https://www.wired.com/2017/04/23andme-won-back-right-foretell-diseases/
12. “FCC slams spaceflight company with $900,000 fine over illegal satellite launch,” 2018. The Verge https://www.theverge.com/2018/12/20/18150684/swarm-technologies-illegal-satellite-launch-fcc-settlement-fine
13. “Wielding Rocks and Knives, Arizonans Attack Self-Driving Cars,” 2018, New York Times https://www.nytimes.com/2018/12/31/us/waymo-self-driving-cars-arizona-at-tacks.html
14. Khanna, Tarun. 2018. “When Technology Gets Ahead of Society,” Harvard Business Review https://hbr.org/2018/07/when-technology-gets-ahead-of-society
FRONTIER TECHNOLOGIES
15
EVENT BRIEFING
Responsible InvestingResponsible Investing (also called ‘sustainable investing’) is the prac-tice of incorporating Environmental, Social, and Governance (ESG) considerations into the selection and management of investments. A wide universe of issues fall under ESG:
• Environment includes management of carbon emissions, water and energy conservation, waste, pollution and biodiversity.
• Social includes management of employees, customers, sup-pliers, and community and government stakeholders.
• Governance includes management of ethics and integrity of firm leadership including boards, shareholder rights, executive compensation, bribery/anti-corruption and codes of conducts.
Types of Responsible Investing
Responsible investing encompasses several types of activities.
• ESG Integration is the process of evaluating companies based on measures of their performance on the most ‘material’ ESG issues for the industry such as data privacy, water resource management, human rights in global supply chains, etc.
• Restriction Screening (also called ‘values investing’ and ‘faith-based investing’) is the practice of excluding entire product categories such as tobacco, alcohol, weapons, fossil fuels—or methods such as animal testing, GMOs.
• Impact Investing is the practice of making a portion of a portfolio dedicated to investments in companies which have a social impact thesis as part of their mission (i.e., affordable housing, social enterprises, green energy, etc.)
The focus of this brief is on the practice of ESG integration.
Trends in Responsible Investing
According to research by Morgan Stanley,1 as of July 2018, $22.8 trillion ($1 of every $4 under professional asset management
globally) is invested according to responsible investing principles. Additionally, 70% of institutional investors (pensions, endow-ments, etc.) now incorporate ESG as part of their investment pro-cess. The trend is being fueled largely by demand from Millennial investors—90% of whom are seeking responsible investing options as part of their 401(k) plans and other investments.2
The Business Case
There has been much debate as to whether investors have to accept lower returns in exchange for better ESG performance.3 Research completed in the last few years has shown that companies that per-form high on ESG metrics that are most material to their industry outperform their peers in financial returns.4 Among companies that have high ESG performance, they tend to have better ESG management systems and procedures in place as well as executives and board members charged with oversight of ESG issues.5
Materiality
Central to achieving better financial performance are materiality guides which prioritize which ESG issues to monitor and report by industry.6 The Sustainability Accounting Standards Board (SASB), which was established in 2011, provides overall guidance for each industry on which issues are most material—an extensive process which requires reviewing evidence on what impacts financial performance, as well as harmonizing standards set by industry associations, regulatory bodies, and international governance frameworks.7 SASB standards are frequently referenced by Limited Partners (LPs) and General Partners (GPs) in private equity when deciding which ESG issues to monitor and report.
There has also been much debate about the causality of ESG’s contribution to improved financial performance: does good man-agement of ESG metrics lead to better financial performance or do companies that have better financial performance choose to invest more into ESG performance? While there is no easy way to settle this debate, a closer look at how ESG metrics can complement other business metrics sheds some light.
16
Growing Revenues
Having good performance on corporate responsibility issues has been shown to be linked to brand reputation and consumer trust. A recent survey showed that 75 percent of Millennials say they factor in a company’s values when making purchasing decisions.8 The ability to access new markets in the B2B and B2G sector is also tied to sustainability performance. Most large companies have ethical sourcing standards or supplier code of conducts which typically have requirements on wages, working conditions, and environ-mental management. In 2018, Unilever expanded its ethical sourcing policy to include not advertising its products on social media platforms that promote fake news or hate speech.9
Attracting talent is necessary to achieve innovative products, efficient operations and outstanding customer service. Nearly 75 percent of Millennials consider company values when deciding where to work—and moreover, the same percentage say they will take a pay cut to move to a company with better corporate responsibility practices.10
Reducing Expenses
ESG management can also help companies lower operating costs. This is achieved through better water and energy conservation, and better management of workplace practices and procedures leading to reduced absenteeism, accidents, turnover, and quality control issues. ESG management can also support better risk management. This is achieved by having more resilient supply chains and better management of relationships with governments and local commu-nities across global operations, thereby preventing costly disrup-tions to operations, lawsuits, and fines.
Investors and Businesses: Actors in Social Change
In the last decade, investors and business leaders have increasingly been playing a role in movements to advance environmental and social challenges.
At the highest level, Frameworks and Guiding Principles provide guidance for what to consider on a specific issue area or in a given
RESPONSIBLE INVESTING
SASB Universe of Sustainability Issues
Source: SASB. “Why is Financial Materiality Important?” Accessed May 4, 2019 at: https://www.sasb.org/standards-overview/materiality-map/
17
industry. These frameworks often have a ‘secretariat’ which is typically either an industry association or international body such as the United Nations. Companies and investors can also become a signatory to voluntary guidelines and/or may sign onto specific commitments.
There are governance frameworks where investors and business commit to address specific issues. Among the most influential frameworks is the UN Guiding Principles on Business & Human Rights11 which lays out a comprehensive framework for addressing business roles in protecting and promoting human rights. The We Mean Business Coalition12 has collected action commitments in support of the Paris Climate Agreement from almost 900 companies representing $17 Trillion in market capitalization. The UN Business Call to Action13 platform for the Sustainable Development Goals (SDGs) has collected commitments from over 200 companies to make products accessible to the poor in developing countries. In the last few years, guiding principles have also been created around several technology issues including access to medicines, privacy, freedom of expression, and artificial intelligence algorithms—al-though they are still early in the implementation process.
Indexes and Rankings are built by third-party entities which evalu-ate and rate companies, typically on an annual basis. These ratings are typically restricted to publicly-listed companies. Many ratings are proprietary and developed by agencies such as Bloomberg, MSCI, and Thomson One. The largest publicly available index for rating companies on ESG performance is the JUST Capital Index, which includes assessments on some technology issues such as customer privacy.14
Shareholder Activism campaigns typically led by coalitions of NGOs and asset owners organize to advance company performance on specific issues. The Task Force on Climate Related Disclosures (TCFD)15 is working to mandate and standardize disclosures on climate-related activities. The Workforce Disclosure Initiative is or-ganizing investors to mandate disclosure on CEO-worker pay ratios, wages and working conditions in portfolio companies.16
Technology-related issues have received limited investor interest - yet after two years of tech crises in the headlines, activist investors are starting to take notice. In 2019 the U.S. Security and Exchange Commission (SEC) ruled that a shareholder resolution could be put on the ballot at Amazon to stop sales of Rekognition, its facial recognition software program, on the grounds that it discriminates against minorities.17
Implementing Responsible Investment Practices
Responsible Investment Frameworks are international norms that investors commit to as part of ESG due diligence and manage-ment. The main framework is the Principles for Responsible Investment (PRI), which was created by the United Nations in 2006. In 2018, PRI had nearly 2,000 signatories covering $81 Trillion in Assets under Management (AUM).18 Among the signa-tories are BlackRock, Fidelity, Vanguard, State Street, and PIMCO. In the same year, there were 703 signatories to the PRI with private equity assets, accounting for $2.15T in AUM; and approximately 70% of private equity funds integrated ESG as part of their screen-ing and active management process. 19 However, implementation remained a challenge as only 13% of private equity funds had staff dedicated to ESG.20
Responsible Investment Policies are statements, typically publicly available on the firm’s website, which lay out specific commitments to conduct due diligence or otherwise factor in ESG considerations during the investment due diligence and active management process. The policy is typically developed by a member of the senior leadership team and is then ‘socialized’ through internal departments including legal, public affairs, investor relations, and executed by investment teams.21
Due Diligence Questionnaires (DDQs) provide detailed questions investors should ask when evaluating an individual company for investment. Many private equity firms have created proprietary DDQs. There are also DDQs for private equity that are publicly available including the IFC Toolkit,22 the CDC Fund Manager Toolkit23 and the Invest Europe ESG DDQ24. These toolkits are primarily focused on corporate governance, environment, labor, and community relations—and do not offer in depth guidance on technology-related issues. Similarly, existing toolkits are focused on the issues of mature companies and not earlier stage ventures.
Suggested Readings:
• Tavares, Rodrigo. “10 Reasons Startups should be Socially Responsible from Birth,” Green Biz, March 20, 2018. (Link)
• BSR, “ESG in Private Equity: How to Write a Responsible Investment Policy,” (Link)
• UNPRI, “Incorporating Responsible Investment Requirements into Private Equity Fund Terms,” (Link)
• UNPRI, “Integrating ESG in Private Equity: A Guide for General Partners,” (Link)
• UNPRI, “Limited Partners’ Responsible Investment Due Diligence Questionnaire,” (Link)
RESPONSIBLE INVESTING
18
Endnotes
1. Morgan Stanley. 2017. “Asset Owners Embrace Sustainable Investing.” https://www.morganstanley.com/ideas/asset-owners-embrace-sustainable-investing
2. Morgan Stanley. 2017. “ Millennials Drive Growth in Sustainable Investing,” https://www.morganstanley.com/ideas/sustainable-socially-responsible-investing-millennials-drive-growth
3. For a review see: Serafeim, George and Jody Grewal. “ESG Metrics: Reshaping Capitalism?” Harvard Business School Technical Note 116-037, March 2016.
4. Khan, Mozaffar and Serafeim, George and Yoon, Aaron. 2016. “Corporate Sustainability: First Evidence on Materiality.” The Accounting Review, Vol. 91, No. 6, pp. 1697-1724. Available at SSRN: https://ssrn.com/abstract=2575912
5. Eccles, Robert G. and Ioannou, Ioannis and Serafeim, George. 2014. “The Impact of Corporate Sustainability on Organizational Processes and Performance“Management Science, Volume 60, Issue 11, pp. 2835-2857, February 2014. Available at http://dx.doi.org/10.2139/ssrn.1964011
6. “Materiality” is defined as information that has “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable inves-tor as having significantly altered the “total mix” of information made available.” (TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)) and Matrixx Initiatives, Inc. v. Sircusano, 563 U.S. __ (2011).
7. The SASB standards can be viewed in the online interactive SASB Materiality Map https://materiality.sasb.org/?hsCtaTracking=28ae6e2d-2004-4a52-887f-819b72e9f70a%7C160e7227-a2ed-4f28-af33-dff50a769cf4
8. Nielson. 2018. “Was 2018 the Year of the Influential Sustainable Consumer?” https://www.nielsen.com/us/en/insights/news/2018/was-2018-the-year-of-the-in-fluential-sustainable-consumer.html
9. “Unilever will not Invest in Online Platforms that Create Division,” 2018. https://www.unilever.com/news/press-releases/2018/unilever-will-not-invest-in-online-platforms-that-create-division.html
10. Sustainable Brands. 2017. “3 in 4 Millennials Would Take a Pay Cut to Work for a Socially Responsible Company.”
11. UN Guiding Principles on Business and Human Rights. Accessed April 9, 2019 at: https://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf
12. We Mean Business Coalition. Accessed April 21, 2019 at: https://www.wemean-businesscoalition.org/
13. UN Business Call to Action. Accessed April 21, 2019 at: https://www.businesscall-toaction.org/
14. JUST Capital. Accessed April 21, 2019 at: https://justcapital.com/rankings/
15. Task Force on Climate Related Disclosures. Accessed on April 8, 2019 at https://www.fsb-tcfd.org/
16. Workforce Disclosure Initiative. Accessed on April 8, 2019 at: https://shareaction.org/wdi/
17. https://www.openmic.org/news/2019/4/4/a-win-for-shareholders-amazon
18. UNPRI. Accessed April 8, 2019, https://www.unpri.org/pri
19. UNPRI. “2018 Private Equity Snapshot.” https://www.unpri.org/private-equi-ty/2018-private-equity-snapshot-summary/3999.article
20. “More Private Markets Managers Incorporating ESG into Due Diligence: Survey,” 2018.https://www.pionline.com/article/20181101/ONLINE/181109996/more-pri-vate-markets-managers-incorporating-esg-into-due-diligence-x2014-survey
21. “How to Write a Responsible Investment Policy,” 2019. BSR https://www.bsr.org/reports/ESG_in_Private_Equity-_How_to_Write_a_Responsible_Investment_Policy.pdf
22. “Beyond the Balance Sheet: IFC Toolkit for Transparency and Disclosure.” International Finance Corporation Accessed April 21, 2019 at: https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+cg/resources/toolkits+and+manuals/beyond+the+balance+sheet+-+ifc+toolkit+for+disclosure+and+transparency
23. “CDC Toolkit for Fund Managers,” CDC Group Accessed April 21, 2019 at: https://toolkit.cdcgroup.com/
24. “ESG DDQ for Private Equity Investors and their Portfolio Companies,” Invest Europe Accessed April 9, 2019 at https://www.investeurope.eu/about-us/responsible-investment/esg-ddq/
RESPONSIBLE INVESTING
19
EVENT BRIEFING
Digital Technologies Frontier technologies offer many exciting commercial opportu-nities to investors as they promise to fundamentally transform manufacturing and logistics, as well as open new markets around the world. Applications of frontier technologies, in particular artificial intelligence and biotechnologies, also offer unprecedented opportunities to advance health care and development in commu-nities and nations of the emerging world.
To realize the upsides and promises of new technologies, investors must also have a strong understanding to the potential risks these technologies pose. Current assessments of opportunities and risks in ventures primarily focus on three elements:
• Product looks at the technical viability and user-friendliness of the product itself.
• Market looks at the overall market size, market growth rates, and an assessment of the competition.
• Team looks at the professional background and personality profiles of the founders and assesses the degree to which they will be able to execute on their plan.
Although often overlooked, a fourth dimension, Societal Impacts—and in particular, how key stakeholders such as customers, com-munities, and governments will respond to a disruptive business model or new technology - is also critical to achieving commercial success, and should be just as central to investment process.
Mature Digital Technologies: What to Consider
Digital technologies cover a broad spectrum from IT services, telecoms, software systems, and digital platform services. The Sustainability Accounting Standards Board (SASB), an entity which sets standards for ESG disclosure and evaluation by investors, has identified material issues which should be closely evaluated:1
• Environmental Footprint of Hardware Infrastructure
• Data Privacy & Freedom of Expression
• Data Security
• Recruiting & Managing a Global, Diverse Skilled Workforce
• Managing Systemic Risks from Technology Disruptions
• Intellectual Property Protection & Competitive Behavior
The standards encompass a broad range of issues including advancing skills upgrading and diversity in the technology workforce, managing the regulatory environment for immigration, protecting intellectual property and fair competition, and man-aging the environmental footprint of hardware and operations. Two areas which have received a high level of recent scrutiny for telecoms and software companies are Data Privacy and Security and Freedom of Expression.
Data Privacy and Security
Data privacy involves the full life cycle of collection, storage, sharing, and destruction of user data. Companies typically conduct a Privacy Impact Assessment that explains what information is collected, the intended use of the information, the ability of users to decline to collection or specific uses of data, and how the secu-rity of data is maintained. A rapidly changing landscape of public awareness2 and regulatory actions on protecting privacy3 could greatly impact the types of business models that will be feasible in the coming years.
Elements of Data Privacy
• Notification refers to whether users must be informed that their data is being collected and which types of data.
• Consent refers to whether a user must give permission for data to be collected and if the user has an opportunity to opt-out.
• Correction and Deletion refers to whether users have an opportunity to correct or to request deletion of their data.
20
• Security refers to the encryption and security processes used to store and share data. Certain types of data require addi-tional protections.
Types of Data
• Personal data refers to data that is unique to identifying an individual such as name and email address. It may also refer to certain profiles of data that may lead to a unique identifi-cation such as geolocation tracking over time.
• Sensitive data is data that legally requires additional consid-eration for its treatment and use which can include data on an individual’s education, health, and financial records.
Freedom of Expression
Freedom of expression involves the use of digital technologies for the communication and distribution of speech, graphics, and other forms of communication. With the rise of digital platforms such as Facebook, Twitter, Instagram, and other platforms over the last decade, a number of issues have surfaced. Most issues come down to specific platform design and management choices.
• Anonymity is a policy choice about if an individual may use a platform without disclosing (and verifying) their identity to either the platform operator or to other users on the plat-form. Higher allowances on anonymity can lead to increases in fraud and misinformation. During major news events, it is estimated that 40-60% of Twitter traffic is activity by Bots.4
• Community standards involve the terms and conditions under which one may use a platform and the types of con-tent that may be shared.
• Content blocking is the degree to which a company is actively monitoring a platform and removing content. This can be done for legal purposes such as copyright infringement or preventing child pornography dissemination. It may also be done to maintain community standards around hate speech, cyberbullying, indecency, and personal attacks, or to sup-press speech not in line with values, beliefs, or commercial interests of the platform owner. Governments also engage in content blocking, typically by blocking URLs to websites that are determined to infringe on or undermine national cultural values or other societal concerns.
• Content curation is the practice of verifying accuracy and quality of information on a digital media platform.
‘Disinformation’ is a related concern that refers to how com-panies manage platform users who are operating targeted campaigns to spread false or misleading information for ideological, commercial, or political purposes.
• Network disruptions involve state-mandated temporary shut-downs of internet service providers, cellular networks, or blocking of social media sites. In 2018 there were 188 inci-dents of internet shutdowns worldwide, most having to do with political protests and campaigns.5 The costs to compa-nies engaged in network disruptions can be immense –both from broken trust with customers and in subsequent legal actions.6
Governance of Digital Technologies
The current governance approach to managing digital rights, privacy, and freedom of expression matters centers on establishing voluntary principles and improving transparency of company practices. The Global Network Initiative (GNI), founded in 2008, established the GNI Principles7, a set of commitments by com-panies to reduce government interference in free expression and violations of individual privacy. Current signatories to the GNI Principles include Microsoft, Google, Telenor, Vodafone, and Orange, among others. GNI conducts confidential company assessments and presents results in anonymized reports.
Transparency and Rankings
There are several new initiatives to advance transparency into the privacy and security practices of the largest tech companies.
• JUST Capital8 provides ranking of more than 800 companies’ performance on ESG issues including customer privacy.
• Ranking Digital Rights (RDR) Index9 ranks the largest tele-coms and digital platform companies on their performance on issues of corporate governance, cybersecurity, privacy, and freedom of expression.
• Transparency Reporting Index10 by Access Now provides links to companies’ voluntary self-reporting on government requests to share user data and censor content.
DIGITAL TECHNOLOGIES
21
Frontier Digital Technologies: What to Consider
Frontier digital technologies have many of the same concerns as today’s digital technologies, but they also have a range of additional concerns that investors should be tracking.
Artificial Intelligence
Artificial intelligence is a field of computer science that seeks to create software products that are capable of mimicking human cognition and decision-making processes. The field encompasses a broad range of techniques and applications.
Types of AI
• Machine Learning leverages large data sets to infer patterns and trends to render a prediction or decision on outcomes. Machine learning applications can be found in nearly every industry—ranging from targeted advertisements based on past browsing history, to medical diagnostics based on medi-cal records and genetics, to sentencing and parole guidelines based on past recidivism rates.
• Computer Vision processes images and videos to identify patterns and trends. Applications include facial recognition software for social media apps and law enforcement, as well as detecting cancer in radiological scans.
• Natural Language Processing develops methods for computers to understand human speech. Applications include transla-tors and Digital Assistants like Amazon Alexa and Siri.
Governance of AI
There has been widespread interest in understanding the ethics of AI. Over the last several years, more than two dozen organizations have publicly issued AI ethics principles. Among the most notable AI principles are the Asilomar Principles11 and the IEEE Ethics in Action standards.12 Some large tech companies13 including Microsoft, Google, and IBM have also issued public statements on their own AI ethics principles. While each set of principles varies, they contain common themes.
• Fairness refers to whether algorithms represent commonly accepted norms of fairness in the context where the algo-rithms are applied, such as employment promotion decisions
within a particular company or broader national societal norms .
• Anti-discrimination (also called ‘bias’) refers to whether the algorithm will prevent reinforcing pre-existing structural biases in decisions. This is particularly important where algorithms affect outcomes to historically marginalized groups such as the poor, women, minorities, and persons with disabilities.
• Transparency refers to whether the inputs and weighting of variables in the algorithm are shared with those impacted.
• Accountability refers to whether an individual or organiza-tion takes responsibility for the decisions informed by the algorithm. It can also refer to whether there is a process to appeal a decision rendered by an algorithm.
• Privacy refers to the protection of user data included in an algorithm.
• Scientific integrity refers to the data science standards used in collection and analysis of data for the algorithm.
• Diversity refers to the range of stakeholders who are involved in the design, testing, and oversight of the algorithm.
• Safety refers to anticipation and mitigation of harm that could result based on an algorithm. This is especially import-ant in contexts where life and death decisions are made such as military, autonomous vehicles, and medical treatments.
• Applications refers to specific customers or activities that a company will or will not serve with AI products. For example, Google’s AI Principles exclude specific applica-tions: “Technologies that cause or are likely to cause overall harm…Weapons or other technologies whose principal purpose or implementation is to cause or directly facilitate injury to people. Technologies that gather or use information for surveillance violating internationally accepted norms...”14
Internet of Things
There are currently around 25 billion Internet of Things (IoT) de-vices worldwide—a number expected to rise to 75 billion by 2025. 15 Bain estimates that total spending on IoT in 2022 could reach $545 Billion.16 IoT devices encompass a broad range of products including integrated sensors in manufacturing and supply chains; ‘smart home’ devices such as locks, thermostats, and controls for lighting and appliances; ‘smart city’ controls on traffic lights and self-driving cars; medical devices and consumer health wearable
DIGITAL TECHNOLOGIES
22
devices such as smart watches; and sensor controlled devices like insulin pumps.
Cybersecurity
IoT is opening a new realm of vulnerability for companies, as cybersecurity attacks move from accessing data to manipulating physical objects such as door locks, traffic lights, and power grids. A survey by Bain found that cybersecurity concerns are the top barrier preventing adoption of IoT solutions among companies, followed by data interoperability and vendor risk.17
Medical devices with linked sensors have faced similar security challenges. These devices have been targeted for cyberattacks, and their manufacturers have faced increasing scrutiny for not having adequate protections against vulnerabilities.18 Frontier neurotech-nology devices currently in development, such as EEG headsets for drone and AV control and Brain-Computer Interfaces for ‘hands-free keyboards’, will create even more cybersecurity vulnerabilities. Lab tests conducted on EEG headsets have shown that subliminal messaging can be used in ‘phishing attacks’ to extract sensitive information such as banking PIN codes.19
5G Networks
IoT will be enabled by 5G mobile networks. The method in which 5G is deployed, as well as its oversight and governance, have the potential to help navigate the challenges of cybersecurity and interoperability.20 Some observers have raised concerns that 5G connectivity will largely be concentrated in urban areas and higher income communities—further widening the existing broadband digital divide in U.S. communities and between advanced and emerging nations.21
Advanced Surveillance Technologies
Surveillance technologies aid in the monitoring of behaviors and communications of individuals and can be either overt (e.g. visible security cameras or disclosures of audio recording) or covert. Surveillance has several ethical issues that should be carefully con-sidered including the personal nature of what is collected, whether the goals of the surveillance serve a larger pubic purpose (such as protecting public safety), and whether there are alternative means that are less intrusive to individual privacy which could accomplish the same outcome. 22
Several frontier technologies will expand capabilities of govern-ments as well as companies, NGOs, and individual citizens, to engage in surveillance activities. Gigapixel Surveillance Cameras incorporate high resolution cameras which can be attached to drones for high resolution photography from a distance. Japanese start-up Axelspace is building microsatellites are developing high resolution daily satellite imagery. Axelspace plans to sell access to an API which would allow any developer access to their imagery.23
Facial recognition software uses computer vision to identify the identity of individuals. Products utilizing facial recognition are being built for a broad range of private sector applications—from diagnosing children with autism, to assessing consumer interest in stores for targeted advertising, to expediting check-ins at airports, clinics, voting booths, and hotels.24 Law enforcement agencies are a significant customer of facial recognition technologies as well. They leverage this technology to aid with the identification of suspects and arrests.
One subset of facial recognition, emotion AI, evaluates individual emotional states through facial expressions, gestures, voice tones, and other indicators to arrive at evaluations of emotional states including pleasure, anger, fear, or fatigue. The most common application of emotion AI is in advertising research to measure reactions to ads and social media content. Other applications of emotion AI are being developed for security screening, enterprise solutions software to monitor employees for ‘emotional infrac-tions’ such as anger or not smiling at customers, 25 and to monitor customer service experiences in venues such as airports.26
Facial recognition has been one of the more publicly contentious of frontier technologies. Research from MIT has shown that facial recognition software misidentifies minorities at a rate higher than whites, for example.27
Governance of Surveillance Technologies
Existing governance of surveillance technologies is primarily carried out through a combination of export controls imposed by governments and monitoring by human rights NGOs. Electronic Frontier Foundation has proposed ‘Know Your Customer’ volun-tary standards to help companies building technologies that may be utilized for surveillance understand and anticipate the inten-tions of potential customers.28 Privacy International builds and maintains the Surveillance Industry Index (SII) which monitors the activities of surveillance equipment suppliers globally.29
DIGITAL TECHNOLOGIES
23
There is an ongoing debate on the acceptable uses of facial recogni-tion which has resulted in a number of legislative proposals in the U.S. These include a bipartisan bill in U.S. Congress, state bills in Washington and Massachusetts, and a proposed local ordinance to ban use of facial recognition technology by the city government in San Francisco.
Frontier Technology: Export Controls and National Security
The broad range of potential applications of frontier technologies has raised national security concerns for governments globally. In November 2018, the U.S. Department of Commerce proposed a review of a list of technologies for potential export controls. Among the technologies under review are AI, neurotech, quantum computing, genome editing, and a range of robotics and advanced materials.30 Export controls could contain provisions on sales to foreign nationals and inclusion of certain nationalities in product development teams.31
The Committee on Foreign Investment in the U.S. (CFIUS), is an interagency authority with the power to review and block commercial transactions with a foreign entity or individual on concerns of national security.32 Most CFIUS actions have focused on large telecoms and military equipment. In the last few years, the focus has expanded to a broader range of companies, including digital platforms like Uber and start-ups that hold consumer data that could potentially be used for manipulation and blackmail of U.S. citizens, such as dating apps with data on sexual preferences. CFIUS recently ordered PatientsLikeMe, a Boston start-up that facilitates patients sharing their medical information, to divest a $100 Million investment from Chinese genomics company iCarbonx. There are over $20 Billion in pending CFIUS divestment cases.33
Suggested Readings:
• Ranking Digital Rights: Investor Research Note: Poor Digital Rights Performance: Who Pays the Price? (Link)
DIGITAL TECHNOLOGIES
24
Appendix SASB Software & IT Services: Sustainability Accounting Standard, SICS: TC0102
Full Definitions available at:
https://www.sasb.org/wp-content/uploads/2014/04/SASB_Standard_SoftwareIT_Provisional.pdf
DIGITAL TECHNOLOGIES
25
DIGITAL TECHNOLOGIES
26
Endnotes
1. SASB. 2014. “Software & IT Services: Sustainability Accounting Standard, SICS: TC0102” https://www.sasb.org/wp-content/uploads/2014/04/SASB_Standard_SoftwareIT_Provisional.pdf
2. For most recent public opinion surveys on privacy see: “Online Privacy and Safety,” Pew Research https://www.pewresearch.org/topics/privacy-and-safety/
3. For a review of U.S. state and federal regulatory proposals on privacy see: “Congress Begins Consideration of Comprehensive Federal Privacy Legislation,” February 19, 2019, Wilmer Hale https://www.wilmerhale.com/en/insights/client-alerts/20190219-congress-begins-consideration-of-comprehensive-feder-al-privacy-legislation
4. “Twitter’s Bot Problem Still Seems as Bad as Ever,” 2018. Vanity Fair https://www.vanityfair.com/news/2018/11/twitters-bot-problem-still-seems-as-bad-as-ever?verso=true
5. “#Keepiton: What is an Internet Shutdown?” Accessed April 16, 2019 at: https://www.accessnow.org/keepiton/
6. “Investor Briefing: Stay Connected: Telecoms and the protection of human rights,” Fair Pensions, 2016. https://shareaction.org/wp-content/uploads/2016/01/StayConnected2011.pdf
7. “The Global Network Initiative Principles.” Accessed April 16, 2019 at: https://globalnetworkinitiative.org/gni-principles/
8. JUST Capital, Issues: Protects Customer Privacy,” Accessed April 16, 2019 at: https://justcapital.com/issues/customers
9. “Ranking Digital Rights Index” Accessed April 16, 2019 at: https://rankingdigi-talrights.org/index2018/
10. “The Transparency Reporting Index,” Accessed April 16, 2019 at: https://www.accessnow.org/transparency-reporting-index/
11. “Asilomar Principles,” Future of Life Institute, https://futureoflife.org/ai-principles/
12. “Ethics in Action,” IEEE, Accessed April 16, 2019 at: https://ethicsinaction.ieee.org/
13. AI Principles of major technology companies include: Microsoft: https://www.microsoft.com/en-us/ai/our-approach-to-ai Google: https://ai.google/principles/ IBM: https://www.ibm.com/blogs/policy/trust-principles/
14. “Google AI Principles,” Google Accessed April 16, 2019 at: https://ai.google/principles/
15. “IOT Number of Connected Devices Worldwide,” Statista Accessed April 28, 2019 at: https://www.statista.com/statistics/471264/iot-number-of-connected-devices-worldwide/
16. “2018 Roundup of IoT Forecasts and Market Estimates,” 2018. Forbes https://www.forbes.com/sites/louiscolumbus/2018/12/13/2018-roundup-of-inter-net-of-things-forecasts-and-market-estimates/#394030227d83
17. Ibid.
18. Newman, Lily. 2017. “Medical Devices are the Next Security Nightmare.” The Atlantic https://www.wired.com/2017/03/medical-devices-next-security-nightmare/
19. Ienca, Marcello, Pim Haselager & Ezekiel J Emanuel. “Brain leaks and consumer neurotechnology,” Nature Biotechnology 36, s805–810 (2018) https://www.nature.com/articles/nbt.4240
20. “The Terrifying Potential of the 5G Network,” 2019. New Yorker https://www.newyorker.com/news/annals-of-communications/the-terrifying-potential-of-the-5g-network
21. “Experts Worry 5G Could Widen Digital Divide,” 2019. The Hill https://thehill.com/policy/technology/409047-experts-worry-5g-could-widen-digital-divide
22. “The Ethics (or not) of Mass Government Surveillance,” Stanford Dept. of Computer Science, https://cs.stanford.edu/people/eroberts/cs181/projects/eth-ics-of-surveillance/ethics.html
23. “Axelspace,” Disrupt100 Accessed on April 28, 2019 at: http://www.disrupt100.com/?company=axelspace
24. “Like It or Not Facial Recognition is Already Here: These Are The Industries It Will Transform First,” 2019. CBInsights https://www.cbinsights.com/research/facial-recognition-disrupting-industries/
25. For a review on U.S. workplace privacy practices: “Toolkit: Workplace Privacy,” Society for Human Resource Management (SHRM) https://www.shrm.org/re-sourcesandtools/tools-and-samples/toolkits/pages/workplaceprivacy.aspx
26. Shell, Ellen. 2018. “The Employer Surveillance State.” The Atlantic https://www.theatlantic.com/business/archive/2018/10/employee-surveillance/568159/
27. https://www.nytimes.com/2019/04/03/technology/amazon-facial-recogni-tion-technology.html
28. “Know Your Customer,” Electronic Frontier Foundation, Accessed April 16, 2019 at Ahttps://www.eff.org/deeplinks/2011/10/it%E2%80%99s-time-know-your-custom-er-standards-sales-surveillance-equipment
29. “Global Surveillance Industry,” Privacy International, Accessed April 16, 2019 at https://privacyinternational.org/explainer/1632/global-surveillance-industry
30. “Department of Commerce Reviews Export Controls for Emerging Technologies,” 2018. Accessed April 28, 2019 at: https://www.whitecase.com/sites/whitecase/files/files/download/publications/department-commerce-review-export-con-trol-emerging-technologies-final.pdf
31. “Pro Rata: Top of the Morning,” 2019. Axios https://www.axios.com/newsletters/ax-ios-pro-rata-a39b3c29-e3d7-4c04-ba78-8c9ff282ea8e.html?utm_source=news-letter&utm_medium=email&utm_campaign=newsletter_axiosprorata&stream=top
32. “CFIUS.” U.S. Department of Treasury Accessed on April 28, 2019 at: https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius
33. “The Trump administration is forcing this health start-up that took Chinese money into a fire sale,” 2019. CNBC https://www.cnbc.com/2019/04/04/cfius-forces-pa-tientslikeme-into-fire-sale-booting-chinese-investor.html
DIGITAL TECHNOLOGIES
27
EVENT BRIEFING
BiotechnologiesMature Biotechnologies & Society: What to Consider
Biotechnologies cover a broad spectrum of techniques and prod-ucts involved in the manipulation of living organisms.
The Sustainability Accounting Standards Board has identified several issues as material for investors to evaluate in biotechnology companies:1
• Access to Medicines
• Drug Safety and Side Effects
• Safety of Clinical Trial Participants
• Affordability and Fair Pricing
• Ethical Marketing
• Employee Recruitment, Development and Retention
• Employee Health and Safety
• Counterfeit Drugs
• Energy, Water, and Waste Efficiency
• Corruption and Bribery
• Manufacturing and Supply Chain Quality Management
During the pre-commercial development phase of biotechnologies, there are a range of standards, rules, and institutions oversee-ing ethics in research and clinical trials set forth by government funders, university institutional review boards, and scientific journals.2 Included in these standards are guidelines on informed consent, safety, and privacy of clinical trial participants, as well as, integrity in data analysis and publication rules.
The biotechnology industry is highly regulated compared to many other frontier technology categories. Products which are being marketed and sold for disease diagnosis or treatment must pass a review process by a drug regulatory body (i.e. U.S. Food and Drug Administration). These processes seek to ensure safety and efficacy of products before they are brought to market as well as bolster
trust and integrity in their on-going manufacturing, distribution, marketing, and management.
Voluntary Governance
Current voluntary industry governance frameworks for compa-nies and investors in biotechnology applications to human health focus on access to health care. The Guiding Principles on Access to Health Care3 and the Access to Medicines Index4 track company commitments and performance on the affordability of medical treatments as well as R&D spending on rare diseases and condi-tions prevalent in emerging economies.
Frontier Biotechnologies & Society: What to Consider
There are several categories of frontier biotechnologies, including consumer genetics, biobanks, biosensor data services, CRISPR-enabled genome engineering, synthetic biology, and neuro-technol-ogies. Frontier biotechnologies share the same materiality issues as current biotechnologies. Yet these technologies also bring some new issues—many of which reflect the issues of digital technologies with which they interface including AI algorithms and IoT sensors.
Genomics and Data Platforms
In recent years, there has been an exponential rise in the use of direct-to-consumer genetic testing kits. In 2018, 1 in 25 adult Americans had access to their genetic profiles through companies like 23andme and AncestryDNA.5 Additionally, several major U.S. and international hospital networks have created BioBanks that combine patient medical records with genetic information to inform research and treatment of disease. These activities have led to concerns about genetic information privacy—involving the col-lection, storage, management and sharing of genetic information.6
A related area of concern relates to AI algorithms which collect non-health data that can subsequently be analyzed to infer health status. Some companies including start-up MindStrong Health and ShareCare, are currently building products that use digital
28
phenotyping—a practice that uses AI algorithms to analyze meta-da-ta collected from smartphones (typing speed, GPS, accelerometers, etc.) to predict onset and worsening of neurological and behavioral disorders.7
Some advertising algorithms can also be used to reveal medi-cal conditions through analysis of web browsing and purchase history—such as the infamous case where Target’s AI algorithms analyzed browsing patterns of a teenage girl and informed her parents that she was pregnant before she knew it herself. 8
Investors in genetic and health data platforms may have to evaluate business models that propose using customer genetic or health data matched with other data, such as social media usage or web browsing, for a wide range of applications. These applications could involve the sale of data for use in algorithms used in the context of pricing and access to health insurance, life insurance, education, criminal justice, financial credit screening, and employment screening. These practic-es could lead to concerns of anti-discrimination. While there are some U.S. federal regulations that protect against use of genetic or health data, such as prohibitions on asking family medical history questions in employment screenings, there are significant loopholes that leave considerable discretion on when it is permissible to apply genetic and other health data to decision making.9 Miscalculating how consum-ers will perceive the fairness of using health data to inform decisions can have serious implications—as several health insurance companies have recently experienced in consumer backlash over use of sensor data from Fitbits and other wearables in premium pricing.10
Genome Editing, Synthetic Biology, and Neurotechnology
Genome editing is “a group of technologies that give scientists the ability to change an organism’s DNA” which is achieved through adding, altering or removing genetic material at target places inside an organism’s genome.11 While genome editing is not new, applications of CRISPR and synthetic biology technologies could vastly expand capabilities in the future.
The immediate concerns surrounding CRISPR technologies focus on non-human applications. Issues related to ecological impacts of Genetically Modified Organisms (GMOs) have been around for decades, CRISPR-enabled gene drive technologies will allow the process to become scaled in new ways.12 In 2019, the Target Malaria project funded by the Bill and Melinda Gates Foundation created gene drives to alter mosquito DNA with the goal of reduc-ing malaria infections in humans. 13
Scientists have expressed ecological concerns that this technology could have unintended consequences across entire ecosystems impacting biodiversity, food security, and climate, among other issues. The Odin, a crowd-funded start-up company, sells mail order ‘CRISPR kits’ direct-to-consumer online.14 Some scientists have expressed biosecurity concerns that widely available access to CRISPR technologies could facilitate either accidental pandemics or creation of bioweapons. Although, experts have assessed that CRISPR’s overall contribution to biosecurity risk levels is still ‘modest’ at this time.15
Most applications of frontier biotechnologies in humans are subjected to existing requirements for clinical trials and regulatory oversights. Yet there are some product categories which have a lack of regulatory oversight due to not making claims to diagnose or treat a medical condition. Neurotechnologies such as EEG headsets for monitoring cognitive function and wearable brain stimulation devices are sold direct to consumers without regulatory approvals. Sometimes these products do not provide safety or efficacy training to users and have limited data privacy protection.16
Frontier biotechnologies raise complex questions of autonomy—the situations under which an individual has the power to make treatment decisions. In the short term, these issues have arisen around patient monitoring platforms—in which behavior algo-rithms or ingestible sensors inside drugs are used to track treat-ment compliance.17 In the longer term, as CRISPR technologies become more advanced, health insurance payers may incentivize or require patients to receive gene editing as prevention. Identity issues may also arise due to differing concepts of what constitutes disease and disability (i.e. autism, ADHD, dwarfism, etc.).
In the long term, if genome editing becomes mature and pervasive, societal level consequences could arise. Many countries today including Canada, Germany, France, South Korea and U.S. have laws banning the use of genome editing technologies in human reproduction services.18
However as the technology becomes more established and mature, there could be clinics offering elective treatments for individuals or reproductive services for parents seeking to create a specific genetic profile for ‘designer babies.’ Depending on affordability and access there could be widespread inequalities in education, intelligence, athletic ability, or wealth based on genetic profiles. In the case of authoritarian states, it is plausible that CRISPR technol-ogies may also one day be used for shifting population diversity and eugenics to change the distribution of traits or ethnic composition of a population.19
BIOTECHNOLOGIES
29
Endnotes
1. Full metrics and definitions are available: SASB. 2013. “Biotechnology: Sustainability Accounting Standard, SICS: HC0101.” https://www.sasb.org/wp-con-tent/uploads/2013/07/SASB_Standard_Biotechnology.pdf
2. For a review of research ethics principles see: Masic, Izet et al. 2014. “Ethics in medical research and publication.” International journal of preventive medi-cine 5,9: 1073-82. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4192767/
3. “Guiding Principles on Access to Health Care,” Accessed April 9, 2019 at: http://gpah.bsr.org/
4. “Access to Medicines Index,” Accessed April 9, 2019 at: https://accesstomedi-cinefoundation.org/access-to-medicine-index
5. “2017 was the year consumer DNA testing blew up,” 2018. MIT Technology Review https://www.technologyreview.com/s/610233/2017-was-the-year-consumer-dna-testing-blew-up/
6. For review of current U.S. regulatory status see: “Genetic Information Privacy,” Electronic Frontier Foundation, Accessed April 15, 2019 at: https://www.eff.org/issues/genetic-information-privacy
7. Martinez-Martin, Nicole; Insel, Thomas R. Dagum, Paul Greely, Henry T. Cho, Mildred K. 2018. “Data mining for health: staking out the ethical territory of digital phenotyping,” Nature https://doi.org/10.1038/s41746-018-0075-8. “Digital phenotyping: A revolution or a privacy breach?” Med City News January 2018, https://medcitynews.com/2019/01/digital-phenotyping-a-revolution-or-a-privacy-breach/
8. “How Companies Learn Your Secrets,” 2012. New York Times https://www.nytimes.com/2012/02/19/magazine/shopping-habits.html
9. “Privacy in the Age of Medical Big Data.” Harvard Law School https://petrieflom.law.harvard.edu/resources/article/privacy-in-the-age-of-medical-big-data
10. “Insurers Want to Know how Many Steps You Took Today,” 2019. New York Times https://www.nytimes.com/2019/04/10/opinion/insurance-ai.html
11. National Institute of Health. “What are genome editing and CRISPR-Cas 9?” Accessed on April 28, 2019 at: https://ghr.nlm.nih.gov/primer/genomicresearch/genomeediting
12. For review on GMOs : Zhang, Chen, Robert Wohlhueter, Han Zhang, 2016. “Genetically modified foods: A critical review of their promise and problems,” Food Science and Human Wellness, 5,3, 116-123. https://www.sciencedirect.com/science/article/pii/S2213453016300295
13. https://www.npr.org/sections/goatsandsoda/2019/02/20/693735499/scientists-release-controversial-genetically-modified-mosquitoes-in-high-securit
14. Sneed, Annie. 2017. “Mail Order CRISPR Kits allow absolutely anyone to hack DNA.” Scientific American https://www.scientificamerican.com/article/mail-order-crispr-kits-allow-absolutely-anyone-to-hack-dna/
15. Revill, James. “Could CRISPR be used as a biological weapon?” The Conversation, August 2017, https://phys.org/news/2017-08-crispr-biologi-cal-weapon.html
16. Yuste, Rafael, et al. 2017. “Four ethical priorities for neurotechnologies and AI.” Nature, 551(7679): 159-163.
17. “Many Drugs Could Come Equipped with Ingestible Sensors,” Pharmacy Times May 2018 https://www.pharma-cytimes.com/contributor/timothy-aungst-pharmd/2018/05/many-drugs-could-come-equipped-with-ingestible-sensors/
18. Vogel, Kathleen. 2018. “CRISPR goes global: A snapshot of rules, policies, and attitudes”, https://thebulletin.org/2018/06/crispr-goes-global-a-snapshot-of-rules-policies-and-attitudes/
19. Pollack, Robert. 2015. “Eugenics lurk in the shadow of CRISPR,” Science, 348, pp. 871. DOI: 10.1126/science.348.6237.871
BIOTECHNOLOGIES
30
Appendix. SASB Standards: Biotechnology
“Biotechnology: Sustainability Accounting Standard, SICS: HC0101.”
Full Definitions Available at: https://www.sasb.org/wp-content/uploads/2013/07/SASB_Standard_Biotechnology.pdf
BIOTECHNOLOGIES
31
BIOTECHNOLOGIES
32
33
EVENT BRIEFING
Supporting Frontier Technology VenturesSupports for entrepreneurs - including mentorship, business strat-egy, operations support, and technical advice - play a crucial role in the shaping the overall direction of a new company. These early inputs help frame the company’s business model and set the tone for their growth for years to come. Numerous studies have shown that incubators and accelerators have positive impacts on growth, external financing, and firm survival.1 Their role in identifying bad ideas and closing down failing companies faster has been equally valuable.2 Supports can be particularly meaningful for frontier technology start-ups, where the quality of ideas and underlying technology play a more important role than factors like company structure and connections to valuable networks.3 Autonomous ve-hicle startup Cruise Automation, for example, was able to leverage its successful completion of the Y Combinator accelerator into an immediate acquisition by General Motors for $581 million. Two years later, it was valued at $11.5 billion.4
Current Channels for Support
There are four major types of support resources for entrepreneurs: incubators and accelerators, universities, VC active management, and Boards.
Incubators and Accelerators
Incubators and accelerators are often the first line of support for early stage entrepreneurs. In exchange for either monthly leasing fees or equity, incubators and accelerators provide entrepreneurs with office space, mentorship, specific skills training in areas like business operations and growth strategy, and often facilitate con-nections to potential investors. Many of the well-known incubators and accelerators tend to focus on digital consumer products and services. However, there is a growing cadre of incubators and ac-celerators, often affiliated with universities, which cater specifically to the needs and challenges of frontier technology start-ups.
The Engine, launched by MIT in 2016, works to support break-through innovations whose underlying technology—typically in robotics, manufacturing and materials, health, biotechnology, and energy—exceeds the typical three to five year commer-cialization timeline of digital technology startups. In addition to providing specialized equipment and lab space, mentorship for technical founders and access to MIT’s network, The Engine
also invests directly in its portfolio companies out of a $200 million initial investment fund. The Engine currently supports 17 start-ups.5
Greentown Labs is the largest clean technology in-cubator in the United States. It offers 70 largely hard-ware-oriented startups nearly 100,000 ft2 of lab, office, and event space, as well as legal support and access to the organization’s investor network. To date, Greentown Labs has helped more than 120 startups raise over $240 million. More than 80% of Greentown Labs startups are still operating today.6
Universities
Many frontier technology start-ups are born out of research con-ducted in university laboratories. Major research universities have launched labs and mentorship programs addressing the particular needs of frontier technology founders: access to advanced tools and equipment, commercialization support, and helping prepare technical founders to lead business ventures.
Pagliuca Harvard Life Lab is Harvard’s 15,000 ft2 incubator for biotech and life sciences start-ups founded by Harvard affiliates. For a monthly fee ranging from $200 (individual) to $20,000 (team), start-ups get access to specialized work stations including bio-safety level 1 and 2 facilities, while the Life Lab handles pain points like purchasing and waste removal. The Life Lab anticipates start-ups will incubate for 6-24 months.7
Creative Destruction Lab partners with business schools at seven leading universities in Canada, the United States, and the United Kingdom. The program focuses on supporting start-ups in seven areas—AI, blockchain, cities, energy, health, quantum, and space—primarily with business development. They connect start-ups with founder and investor mentors, scientific advisors, MBA students to help build financial models and market analyses, and potential investors.8
VC Active Management
Levels of day-to-day involvement with companies vary widely across the VC industry. Capital is the lifeblood of early stage start-ups, and financing plays a crucial role in supporting good ideas and good teams. For much of the industry’s history there was little expectation that investors should provide much beyond financing and a voice on the Board of Directors. Today, however, funds are increasingly
34
offering a platform of services in order to both better support their portfolio companies and stand out in a crowded market. These services range from traditional mentorship and incubator services to in-house subject matter experts and talent acquisition teams.
Andreessen Horowitz uses a VC platform model by building a large core team of operational and recruiting experts to sup-port its portfolio companies at a time when most firms relied on a small, partner-heavy team. Today, Andreessen Horowitz employs a talent team of nearly two dozen and an operations team of more than 40. The fund expanded into biotech in 2015, building out its operational capacity in the industry and raising $650 million in dedicated investment capital.9 10
First Round Capital launched two initiatives to provide outside advisory support to portfolio companies. The first, Short-Term Advisory Relationships, paired founders and advisors for 90-day sprints with predetermined deliverables and standardized compensation. The second, the First Round Expert Network, connects founders with outside operational experts who advise on issues like product, design, engineering, market-ing, finance, business development, and human resources. Like Andreessen Horowitz, First Round also offers recruiting services for its portfolio companies.11 12
Boards
One of the first sources of support for early-stage start-ups are their Boards. At the earliest stages, the Board may consist solely of the founders and investors.13 In contrast to later-stage companies, venture boards typically lack specialized board members and committees that provide a broader range of oversight and outsider relationships and support. There is also less attention paid to issues of board diversity in terms of gender, race, geography, professional backgrounds, or other important dimensions.14
Support for Societal Impacts
The need for greater support for high-growth ventures to consider societal impacts has received much attention in the last few years. Facebook, for example, suffered the largest one-day loss in the his-tory of the U.S. stock market—$120 billion—in July 2018 after 18 months of blistering public, regulatory, and Congressional scruti-ny.15 These types of cases have had investors, governments and the general public taking a much closer look at how the foundational values and practices related to management of societal impacts were considered in the earliest stages of tech companies.
Risk management, ESG evaluation, and legal and public relations strategies are all avenues that companies pursue to help mitigate societal harms. Unfortunately, many of these functions are not fully operational in early stage tech-driven ventures.
Risk Management
There are a variety of approaches currently used to help companies navigate and in some cases, foresee societal impacts. Risk manage-ment frameworks such as the EthicalOS Toolkit16 launched by the Omidyar Network and Institute for the Future are designed to help ventures build capacity in risk evaluation. The toolkit was designed specifically for computer scientists and product developers to help ‘future proof ’ technologies against likely challenges in later stages of growth and market adoption. The toolkit provides a first point of considering potential risks in digital technology products such as how bad actors might use the product. However, it does not cover challenges of other frontier technologies or create a full risk management evaluation and implementation process.
ESG Management
ESG (Environmental, Social, Governance) management, also called Corporate Social Responsibility (CSR) teams inside companies handle issues of labor, human rights, ethical sourcing, environment and community relations. Ventures typically have very small teams of mostly technical and sales personnel which lack expertise in these topics.
Legal and Public Relations
In frontier tech ventures, managing the regulatory environment is particularly important to market access and long term growth, as many technologies have unclear regulatory status when they are first launched. The typical approach is to hire a head of legal to support on challenges encountered with regulators and public relations consul-tants to manage challenges with public perception of products and services. Some governments have tried to bridge the regulatory gap by creating ‘regulatory sandboxes’ which allow entrepreneurs to apply for a permit to test their products with a limited number of customers for a set period of time, similar to clinical trials for medicines. In exchange, entrepreneurs share their learnings to inform future regula-tory frameworks. One notable example is the UK Financial Conduct Authority’s sandbox program on blockchain and fintech.17
SUPPORTING FRONTIER TECHNOLOGY VENTURES
35
Endnotes
1. Madaleno, Margarida, et al. “Incubators, Accelerators and Regional Economic Development.” IZA Institute of Labor Economics, September 2016, http://ftp.iza.org/dp11856.pdf.
2. Yu, Sandy. “How Do Accelerators Impact High-Technology Ventures?” Management Science, August 1, 2016, https://pdfs.semanticscholar.org/c8a4/eb2556e26c76f0a0f893750d53ba14517ba5.pdf.
3. Scott, Erin, et al. “Are “Better” Ideas More Likely to Succeed? An Empirical Analysis of Startup Evaluation.“ Harvard Business School, October 2016, https://www.hbs.edu/faculty/Publication%20Files/16-013_41f3750a-9d54-49be-a8f4-51a6489d514e.pdf.
4. Burns, Matt. “GM’s Cruise Gets $2.25B from SoftBank’s Vision Fund, $1.1B from GM.” TechCrunch, 31 May 2018, techcrunch.com/2018/05/31/gms-cruise-gets-2-25b-from-softbanks-vision-fund-1-1b-from-gm/.
5. The Engine, www.engine.xyz/.
6. Greentown Labs, https://www.greentownlabs.com.
7. “Pagliuca Harvard Life Lab.” Harvard Innovation Labs, innovationlabs.harvard.edu/our-labs/pagliuca-life-lab/.
8. Creative Destruction Lab, https://www.creativedestructionlab.com.
9. Andreessen Horowitz, https://a16z.com.
10. Konrad, Alex. “Andreessen Horowitz Is Blowing Up The Venture Capital Model (Again).” Forbes, Forbes Magazine, 3 Apr. 2019, www.forbes.com/sites/alexkonrad/2019/04/02/andreessen-horowitz-is-blow-ing-up-the-venture-capital-model-again/#29e0b06a7d9f.
11. First Round Capital, https://firstround.com.
12. First Round Capital. “Startup Advising Is Broken - Here’s What We’re Doing to Fix It.” Medium, 10 June 2015, medium.com/@firstround/start-up-advising-is-broken-here-s-what-we-re-doing-to-fix-it-5454c952540.
13. Garg, S. and Furr, N. 2017. “Venture Boards: Past Insights, Future Directions, and Transition to Public Firm Boards.” Strategic Entrepreneurship Journal 11: 326-343. doi:10.1002/sej.1258
14. Ibid.
15. https://techcrunch.com/2018/07/25/fallbook/
16. Ethical OS, https://ethicalos.org/.
17. “Comparing the Industry and Regulatory Sandbox,” Industry Sandbox Accessed May 5, 2019 at: https://industrysandbox.org/regulatory-sandboxes/
SUPPORTING FRONTIER TECHNOLOGY VENTURES
Rudina Seseri, Partner at Glasswing Ventures, Peter Barrett, Partner at Atlas Venture, and TAPP Fellow Susan Winterberg discuss how venture capitalists can factor in considerations for societal impacts in artificial intelligence and biotechnology ventures.
Technology and Public Purpose Project
Belfer Center for Science and International Affairs
Harvard Kennedy School
79 John F. Kennedy Street
Cambridge, MA 02138
www.belfercenter.org/TAPP
Copyright 2019, President and Fellows of Harvard College
Printed in the United States of America
