A start-up investor used his power ‘for sexual gain.’ Now the tech industry is challenging the power dynamic

The technology industry is built on a model where venture capitalists have lots of leverage. Start-up founders, after all, regularly beg them for the cash needed to turn nascent ideas into viable businesses.

But that’s a power dynamic with dangerous consequences, as a sexual harassment scandal now ricocheting around the tech world illustrates.

Allegations against San Francisco start-up investor Justin Caldbeck have exposed unsettling realities about the venture capital landscape, raising questions about whether enough safeguards exist to protect women entrepreneurs from inappropriate behavior.

Caldbeck resigned as an investor at Binary Capital last week after acknowledging that he used his power “for sexual gain” — an admission that followed harassment accusations from six women. This week, his former employer, Lightspeed Venture Partners, said it should have taken “stronger action” when it received a complaint about Caldbeck.

Instead, in 2013, according to an anonymous source speaking to news outlet Axios, Lightspeed moved to silence Caldbeck’s accuser.

Entrepreneurs and investors have launched into discussions this week aimed at better defining how women on the fundraising trail can be ensured the same protections they get inside their workplace, in the hope that they feel empowered to speak out against misconduct.

“It’s clear there have not been enough safeguards for female entrepreneurs,” said Dayna Grayson, a partner at venture capital firm New Enterprise Associates, which has managed about $19 billion over more than 40 years. “There’s some policies that can be changed. But it’s really cultural norms that need to change. We’ve gotten used to bro-talk for too long and that’s been masking a lot of this for a long time.”

Katrina Lake, founder and chief executive of the prominent apparel start-up Stitch Fix Inc., may have felt vulnerable when she reportedly complained to Lightspeed about Caldbeck, who served on her company’s board of directors. Lightspeed got Lake to sign a contract agreeing not to disparage the firm for 10 years, according to Axios. The publication, citing its source, said that Lake would have jeopardized her chances of drawing additional cash to support Stitch Fix had she not signed.

The power disparity applies beyond female founders. Just 7% of the managers at 100 top venture capital firms were women, according to a study last year by research firm CrunchBase. Lightspeed, for instance, didn’t have a female partner until last fall. The gap has spurred complaints about disparate treatment from female employees at investment firms, including the landmark lawsuit Ellen Pao lost against her former firm in 2015.

Though the case brought the issue of gender discrimination to the forefront in venture capital, it’s hardly been a cure-all. On Wednesday, Ann Lai, a former employee at Caldbeck’s Binary Capital, sued the firm for fostering a “sexist and sexual” environment over the last two years, according to a labor practices lawsuit in San Mateo County Superior Court.

Lai said the firm took no action when she warned about alleged inappropriate behavior relating to female workers, such as comments about attractiveness and a female-specific dress code. She said Caldbeck pressured her to keep quiet about her time there after she resigned.

To legal experts and advocates for women in the tech industry, men circling the wagons to protect their own is a common roadblock.

“When you’re trying to raise money and an investor asks you to sign this type of agreement, many do because they feel they have no other choice if they want the funding,” said Allyson Kapin, founder of Women Who Tech, a nonprofit aiming to help women in the industry. “It’s not a good position to be in.”

Stephen Byars, associate professor of clinical business communication at USC, described such actions as “ethical blackmail.” Even if it isn’t forced upon someone, it could feel that way, he said.

Attempting to keep the accusations from going public may have been intended to spare Lightspeed from scrutiny from the major institutions it relies on for money. Lightspeed’s investors have included the regents of the University of California, the Los Angeles County Employees Retirement Assn., the Alfred L. DuPont Trust, Michigan State University and the Illinois Municipal Retirement Fund.

Representatives for the university endowments, pension funds and foundations didn’t respond to requests for comment. Lightspeed, founded in 2000 and based in Menlo Park, Calif., manages more than $4 billion in committed capital on behalf of such institutions and other investors.

Lightspeed, Lake and Caldbeck didn’t respond to inquiries for this story. But Lake and Lightspeed provided statements Tuesday in which they didn’t name each other.

Lightspeed said it now regrets not doing more in response to a complaint about Caldbeck, while Lake said she’s “encouraged” by recent industry discussions about addressing harassment.

Caldbeck, who left Lightspeed in 2014 to start Binary Capital, resigned after women attached their names to allegations of groping, unwanted text messages in the middle of the night and requests to spend the night.

In his resignation statement, Caldbeck alluded to a “despicably unfair” and “frightening” power imbalance “between male venture capitalists and female entrepreneurs.”

“It is outrageous and unethical for any person to leverage a position of power in exchange for sexual gain, it is clear to me now that that is exactly what I’ve done,” he stated.

Eve Wagner, founding partner of the law firm Sauer & Wagner, which represents employers in sexual harassment and discrimination claims, said women entrepreneurs do have options — though not without challenges.

Chief executives technically can have their human resources departments open investigations into sexual harassment by contractors and investors. But that department may not yet exist at small companies.

And though non-disparagement clauses are common with employers and non-disclosure agreements with financiers, they don’t trump rights to be free of harassment, Wagner contended. Under both federal and state law, victims of harassment have an absolute right to complain internally to management and human resources departments without fear of reprisal, she said.

“Handing an employee a non-disparagement agreement to sign just after she has complained about sexual harassment is ill-advised, to put it mildly,” Wagner said. “It smacks of retaliation and, unlike a settlement agreement, cannot stop the employee from making the claim. Nor does it allow a company to avoid its legal obligations to conduct a prompt, thorough investigation.”

The revelations about Caldbeck in the last week have prompted several venture capitalists to back a pledge to sever relationships with people engaging in sexual harassment. Investors at some of the best-funded firms, including Sequoia, GGV Capital, First Round Capital and Technology Crossover Ventures, signed on. Entrepreneurs have gotten behind the vow too, with Assist, a business software start-up backed by Caldbeck, offering to buy back his stake to end their relationship.

Jonathan Teo, who was Caldbeck’s lone co-founder at Binary Capital, offered to resign Wednesday, according to a source not authorized to comment. Teo’s departure would allow Binary Capital investors, which include UCLA’s endowment and Legacy Venture, to bring in new management and try to preserve the significant value they see in the firm’s portfolio.

Robyn Ward, an entrepreneurship coach who formerly worked on start-up investments for talent agency UTA, said “women will now know who they can go to if they experience this kind of harassment.” On the other end, a proposed database would help people in the industry keep track of “bad actors.”

The Caldbeck-sparked discussions also should lead to increased vetting, she said, of venture capital firms by universities, pension funds and others that funnel money to the industry.

For instance, Vintage Investment Partners, which invests in venture capital firms across the world, has introduced new practices internally and externally to account for the greater diversity in the tech community.

Six months ago, it held a sexual harassment training for everyone at the firm, Chief Executive Alan Feld said. And Vintage established a policy with its Israeli partners designed to promote gender and ethnic diversity among the entrepreneurs they backed, Feld said.

“The best entrepreneurs are attracted to smart investors with not only judgment but also integrity,” he said. “Working with diverse people and respecting them as equals is part of how we define judgment and integrity. We look for managers with that value system.”

Skeptics say pledges aren’t enough as long as the power dynamics continue to favor investors. Caldbeck left his post because he lost power when women came forward by name to accuse him, said Ingrid Sanders, the founder of multiple tech companies.

“Most often people decide it’s just not worth it to fight … unless they hold enough power or are endorsed by those who do,” Sanders said. “I’ve heard influential people warn against ever going up against an investor for wrongdoing because ‘in the history of Silicon Valley an entrepreneur has never won against an investor, justified or not.’ ”

paresh.dave@latimes.com / PGP

Twitter: @peard33

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UPDATES:

11:10 a.m.: This article was updated to include context about the number of female venture capitalists and news of a lawsuit filed against Binary Capital by Ann Lai, a former employee.

This article was originally published at 3 a.m.