How can LPs conduct diligence on accusations of sexual harassment?: Start by asking the question.

by Jaclyn Hester

Over the past year, there have been a number of sexual harassment scandals in tech, especially involving venture capitalists. The power dynamic in our industry has enabled bad actors to harass founders seeking capital and junior employees trying to work their way up in a very competitive and historically male-dominated industry.

Some in the industry feel that Limited Partners (“LPs”) — the institutions, wealthy families, and wealthy individuals that fund VCs — are in a strong position to create change because they are the first source of capital in the investment chain. If bad-actor VCs are unable to raise capital, it diminishes their ability to leverage the power of that capital to harass others. As a result, LPs could be part of the solution by choosing not to fund VCs who commit sexual harassment.

A challenge is identifying bad actors before they have the power to prey on others. Victims of sexual harassment rarely report it for fear of retaliation or reputational damage. In addition, sexual harassment lawsuits are often settled out of court and involve non-disclosure and non-disparagement agreements. Likewise, many employers have non-disclosure provisions in employment agreements that prevent victims of sexual harassment from speaking out. Thus, allegations of sexual harassment are unlikely to show up in common due diligence methods such as background checks and reference calls.

So how can LPs find out if a fund manager has been accused of sexual harassment?

They can start by at least asking the question. A recent survey conducted by the Investment Management Due Diligence Association (IMDDA) revealed that 89% of the 78 participating institutional investors do not inquire about sexual harassment in the workplace (not to mention sexual harassment outside the workplace, such as that which is committed by VCs against founders seeking capital). It’s time for LPs to step up and start asking this question during diligence on a fund manager.

As an investor in smaller funds, we don’t apply a one-size-fits-all approach to fund managers. We do, however, conduct significant due diligence on every Partner Fund we invest with, even the ones we have known for years.

In addition to asking specifically about historical or current instances or allegations of sexual harassment, we’ve recently added a disclosure provision regarding sexual harassment to our standard side letter. We don’t view this as a legal mechanism, but as a tool to prompt a difficult conversation that needs to happen.

These are two specific ways LPs can inquire about sexual harassment issues with VCs they are considering funding. The IMDDA survey mentioned above provides additional recommendations for institutions looking to conduct diligence about sexual harassment. In addition, the Institutional Limited Partner Association (ILPA) is working on developing guidelines for addressing sexual harassment during and after the due diligence process.

As both an LP and a GP in the entrepreneurial ecosystem, we want to find ways to combat sexual harassment and the cultures that allow it to persist. Asking uncomfortable and direct questions is a start and we hope more LPs will feel empowered to join us in having the difficult conversations.