Recently I’ve had a recurring conversation with several people about the ways in which our acceptance and use of language propagates the very patterns and dynamics we are working to break.
[This isn’t a new idea: it isn’t new in the world, and maybe it isn’t new to you. The language we use not only gives us the means to communicate our thoughts, but it also shapes them as well.]
Specifically in our context, seemingly benign phrases like best practices serve as surprisingly effective barriers against improvement in the realms of finance.
Have you or your organization interpreted best practices as a threshold to be improved upon, a temporary standard only ever demanding to be raised? If you have, you are in rarefied company.
When is best not actually best?
In principle, the phrase best practices refers to the best available, or best so far. Not best and final or best possible. But it’s rarely used or understood that way.
The conceit of best practices as it is most commonly used and understood is that it represents some pinnacle, from which any departure is by definition less than best. That’s problematic by itself, for all the obvious reasons.
Further, stepping back to consider the premise of best practices invites several questions about what is meant by best: best for whom? for what? where? for how long? under what assumptions or with what caveats? Honest examination of those questions leads to disquieting answers, as noted by Morgan Stanley [see Beyond the VC Funding Gap, The Trillion Dollar Blind Spot], Citi [Closing the Racial Inequality Gaps: The Economic Cost of Black Inequality in the US] and others [see a sampling here, under Debunk persistent falsehoods].
The short, sharp takeaway is that best practices in finance and elsewhere are actively propagating societal harms including race and gender inequities, and costing investors of all capacities from individuals to the largest pension plans — as well as all their dependents and constituents, including those who are most severely afflicted by those negative impacts.
Take a brief mental tally of the avoidable risks, costs, and negative impacts lurking in plain sight in the best practices you are most familiar with.
Do you really believe those avoidable risks, costs, and negative impacts are justified? Can you still accept them as the best you can do?
You can do better (and you may be legally obligated to).
If you’re feeling personally indicted right now, it may help to recognize that it’s not just you.
Across the finance sectors, and in many other fields of human endeavor, the fiction of best practices serves as a low but sturdy barrier to defend against the incursion of better. For example, the dusty adage Nobody ever got fired for buying IBM still remains relevant decades after it was coined, at a point in time when it was widely acknowledged that IBM had long since been surpassed by smaller competitors offering superior solutions and better value. However, because of its venerable industry stature and wide commercial reach, IBM was nevertheless perceived by many decision makers as safer than its younger rivals. Therefore people knowingly chose the lesser option because it felt less threatening than breaking with conventional wisdom.
It’s tempting to disparage people who succumbed to the pressure to take the safer option over the demonstrably wiser choice, but to do so is disingenuous at best.
After all, the exact same dynamic is playing out today in the financial sectors, where LPs and consultants, advisors, trustees, and investment committees continue to authorize investments in the conventionally hyperconcentrated, extractive, underperforming venture funds that are perceived as safe because of their venerable industry status [fame, prior glories, vast fund sizes], in spite of the abundance of evidence that they actually deliver unnecessarily elevated risk and reduced returns — along with significant negative social, environmental, health, climate, economic, and other systemic impacts — relative to younger, smaller, more reality-based funds, and particularly those led by people of color and/or women.
Are you being held — or holding yourself — hostage to damaging best practices that are actually driving the very outcomes you strive to avoid? That’s neither safe nor wise.
If you are investing your own money, that’s self-injurious.
If you have responsibility for someone else’s money, that’s a breach of fiduciary duty.
Let that sink in for a moment.
Now that we’ve acknowledged the severity of the problem, let’s also acknowledge that just as in any other sphere of excellence, best can only hold legitimacy in the financial sectors as an ideal which we are constantly seeking.
Decades of market data across jurisdictions — as well as lived experience — show that it’s a time-varying, multivariable proposition. There is no best practice which holds across sectors, asset classes, geographies, clients, or other categories. Moreover, as more data come to light, newly (re)discovered evidence and previously disregarded voices inevitably oblige us to reexamine past high water marks and interrogate the best practices that produced them or coalesced around them.
The only way to legitimately pursue best as a practice is to let go of false objections, break habits that create harm, adopt better models, and climb higher.
True up.
With that in mind as you contemplate your investments, dear reader — whether your own or your clients’ — I implore you to discard discredited best practices in favor of optimizing for the available evidence.
As human beings, and especially as numerate professionals, we like to think of ourselves as rational, evidence-based decision makers. So gather up the evidence, including stakeholder perspectives, and take a clear-eyed inventory of your investment processes, criteria, and portfolio.
Examine the costs, risks, and negative impacts of investing with the status quo, and compare those with the costs, risks, and potential negative impacts of instead investing in funds, companies, and instruments that center inclusion, equity, health, environment, climate, and other real-world considerations. Do the same comparison for financial returns and positive nonfinancial or indirect financial impacts. Choose investments that optimize the totality of positive and negative returns and impacts with respect to the available evidence today.
Repeat tomorrow, next month, next quarter, next year. Hold Dr. Maya Angelou as your role model and do what you know how to do. When you know better, do better. Make that your discipline.
It’s not rocket science. If you are a finance professional, it should demand no more than basic skill.
It just takes a little bit of courage to escape the tyranny of best practices so you can make more rational, more responsible, more evidence-based decisions.
Please don’t wait. Start right now. Just as in any other crisis, take all necessary and prudent action calmly, expeditiously, and without delay. Quoting Dr. Tina Opie, “We need to address racism and sexism with the same urgency we brought to addressing COVID.”
Onward and upward
Here at Reinventure we are investing for racial / social / gender equity, nonconcessionary financial returns, and positive strategic impacts, contrary to conventional vcs.
We invest exclusively in companies led and controlled by BIPOC and/or female founders, and specifically in companies with their own cogently articulated strategic impact objectives. We invest in those companies when they are at or on the cusp of breakeven and we work with them to help them grow more profitably to create wealth, opportunity, and positive impacts.
By design, this strategy is well outside purported best practices: it is instead based in widely available evidence, including the success of Ed’s prior fund.*
Even better, we are surrounded by a vibrant and growing community of fund managers, founders, and LPs who are also pursuing a wide variety of other strategies to move beyond the limitations and drawbacks of conventional best practices and create far superior outcomes for their stakeholders.
Are you also investing or building a business that far surpasses best practices? How might we collaborate with you toward that objective? Please contact us to explore how we might support and amplify each other. And as always, please share how you are improving on the status quo, and let us join in celebrating your progress along the way!
***
Image credit: Jon Moore / Unsplash
*While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s prior track record delivering 32% IRR to investors provides direct evidence that it is indeed possible to consistently invest for both financial returns and system change. If you are an accredited investor and would like to learn more about investments that can advance social, racial, and gender equity by supporting high-value companies led by people of color and/or women, please contact us to start that conversation.
Legal Notice
The information contained in this blog does not constitute, and should not be used or construed as, an offer to sell, or a solicitation of any offer to buy, securities of any issuer, fund or other investment product in any jurisdiction. No such offer or solicitation may be made prior to the delivery of definitive offering documentation. The information in this blog is not intended and should not be construed as investment, tax, legal, financial or other advice.