Data Leaks and the Opportunity for Venture Capital

12th December 2018  

By Daniel Kratkovski, Analyst at U-Start

Just as the ink dries on the drafts of the 2nd annual transatlantic Privacy Shield Framework summit, it is important to recap what drove the forthcoming privacy laws, how do they serve the tech sector and what is the underlying opportunity for the venture capital community.

Up until recent events, one had difficulties arguing that Big Tech brought anything but good to the consumer: choice, democracy and competitive pricing. They were viewed as the good guardians of the knowledge economy. Then it all came crashing down: fines for excessive market control, ever-growing data breaches and mishandlings of private information. The companies that used to be interesting and benevolent are now disrupting democratic processes and jeopardizing consumer privacy. Shrinking public trust, mounting scandals and lawsuits have all added up to the contempt directed at Big Tech. For an industry that at its core relies on tacit consent of the users to use their data to improve services, it has shaken the foundation of their identities to the core.

The unfolding tech backlash and its negativity is largely the risk that every new technology brings when it comes to existence. «When you invent the ship» the French tech theorist Paul Virilio wrote, «you also invent the shipwreck; when you invent the plane, you invent the plane crash....Every technology carries its own negativity, which is invented at the same time as technical progress». This event has served as a wake-up call to the discipline of computer science and specifically to the ethical ramifications of its work. Just as the invention of dynamite and poison gas for chemistry, atomic bomb was for physics and eugenics for biology, the same moment of reckoning has arrived to the tech sector. However, it has to be noted that the backlash is not against technology per se, rather being against the malevolent behavior of incumbent actors. Big Tech has designed, developed and deployed digital technologies and they are fully responsible for the downside, just as they reap the fruits of its adoption.

Investors are increasingly finding data leaks to be just as damaging to tech corporations as oil spills are to supermajors. Data privacy will become crucial metric with which to assess tech firms, and increasing investor focus will further put an end to flippant attitude of data protection that some of the incumbents have. Notwithstanding, it is my belief that these companies are contributing more to the society in the form of free products and innovation than they are detrimental by monopolizing our data and crimping competition. However, one has to be aware of the pitfalls that uncontrolled growth presents and be vary of its consequences before, not after it hits the fan.  

The Venture Capital community has been silent bystanders at best, and active participants at worst. This is not to say that the community is uniform in its position on the ongoing tech backlash. However, it is also true that the community has manifested itself in keeping its head down rather than taking an active part in the dialogue. The silver-lining of the backlash comes not in a form of demonizing, but taking a step back and realizing what each actor can do to prevent it from happening in the future, but most importantly, to mitigate the loss of the public trust.

Little more than a decade ago, VCs were backing companies who championed universal free access to information and powering global connectivity. Same purpose-led investing could be applied to today’s generation of tech businesses, yet avoiding the pitfalls that the ongoing tech backlash has taught us. Just as VCs backed companies that leveraged on increasing connectivity, thereby decreasing costs of communications and increasing access to knowledge, same can be applied for the current batch of disruptive startups. Coming years will see evolving AI and connected device technology spur the development of new consumer applications. As such VCs can place their bets on the companies that for one, treat responsibly the aforementioned goodwill of the customers.

On another level, VCs have to more proactively back companies that promote diversity or increase social mobility. It would be an illusion to state that the benefits of the technology revolution of the past two decades were distributed equally. There still exist disenfranchised segments of the society that could use technology to sort out specific pain points. Be it AI-powered self-care apps mitigating increasing anxiety disorders, fertility-planning apps to decrease barriers to access healthcare or applications working on integrating minorities into the labor force. This is not to view these investments from an impact standpoint, on the contrary, it is paramount to view them as engines of economic value in the long haul. Just as search engines increased access to information for the weakest chains of our societies, so will the next generation of companies democratizing access to healthcare and stimulating sustainable consumption.

Venture capitalists around the world need to take a more proactive role in defining legal standards for bigger and small companies alike. By participating actively in the life of early-stage companies, venture capitalists have a unique perspective on the pain points that regulation can cause and the opportunity it can create. It is the VC community that had the chance to pinpoint to Google and Facebook earlier: “Hey, this is an important issue and I think we should take it seriously now to avoid altercations in the future”. Current wave of public outcry about use of personal data can help pave the way for the companies that will adequately serve the need of safeguarding data, opening multiple business opportunities in the privacy sector. Venture capital community has been uniform in shying away from participating in legislative processes that will shape the technology landscape of tomorrow, and to my mind, eerily so.

Keeping the utilitarian moto of the greatest amount of good for the greatest amount of people, VCs should take a mindful approach in investing in businesses that tangibly improve the lives and opportunities of its users. Because in the long term it is the trust, attention and goodwill of the users that will ensure the greatest returns for tomorrow. However, this has to be done while taking a proactive approach in shaping the regulation that will affect users and the upstarts of tomorrow alike.