Aligning Incentives to Develop Prosocial Technology Funding Infrastructure
LX Cast / Sep 17, 2024
As we navigate today's complex world, it’s becoming more apparent that we need social technology that supports respectful interaction, belonging, and cooperation, and avoids harming people or communities. Most of the social platforms popular today were built to maximize engagement, surveil people, and monetize attention. This has led to outcomes that are not healthy for individuals or societies.
However, technologists working to offer alternative approaches are inhibited by the way the technology funding landscape operates. The options for companies trying to develop at the speed of trust may not include traditional venture capital, a model in which success for investors depends on fast growth, scale, and large exits within a limited time frame. Meanwhile, people who use social technology have come to expect free products, and often moves to charge fees are seen as anti-accessible or unattractive compared to the business models of big platforms that monetize through data collection and advertising.
We want and need alternatives to existing platforms. As we face a future where our democratic systems are in crisis, where there is little trust even within local communities, where people are increasingly learning that they must ‘advertise themselves’ as opposed to be who they are, where misinformation spreads quickly, and where we’re increasing our rate of energy use and pollution as climate crises proliferate, we can’t depend on the incentive structures of the past to deliver new technologies that support our collective good.
Searching for alternatives
As part of the Council on Technology and Social Cohesion, I have been conducting interviews and research on aligning incentives to support prosocial technology. On May 1, 2024, we held a day-long workshop at the Internet Archive in San Francisco with key funding stakeholders to better understand their interests and incentives for supporting prosocial technology.
To investigate how we might develop a capital infrastructure that works differently, we brought together a diverse group of people, ranging from VC, angel, and impact investors, to foundation funders, technologists, nonprofit tech leaders, representatives from incubators and accelerators, and people working on Web3 funding models to participate in a workshop with the intent of beginning to understand different stakeholder motivations and develop resources useful to different kinds of capital suppliers interested in the emergence of prosocial technology infrastructure.
We learned that some VC companies want to do good; and care about social impact. But their bottom line is profit; they need to show shareholders that their investments grow. We explored alternative funding models and investment approaches beyond traditional venture capital for projects/ventures aimed at creating positive social impact and public good, rather than solely maximizing financial returns. Some of the key themes discussed included:
Alternative Funding Sources
- Government programs, public-private partnerships, treated as public utilities
- Customer subscriptions, which can include freemium, pay-what-you-can, or sliding scale models
- Customer sales and pre-sales
- Equity crowdfunding
- Non-equity crowdfunding
- Quadratic funding
- Retroactive funding
- Software licensing
- Non-profit grants from foundations/NGOs
- Aligning endowment investments with impact goals
Evaluation Criteria
- Long-term impact over short-term gains
- Community engagement from affected populations
- Founder proximity and understanding of the problem
- Qualitative metrics beyond just financial/user growth
- Considering negative externalities and societal costs
Rethinking Incentives
- Deemphasizing traditional VC-driven, unicorn-chasing exits
- Incentive structures for fund managers beyond just high returns
- Antitrust measures to enable more experimentation
- Transparency around funder/investor involvement, such as mission-oriented endowments being Limited Partners in unaligned technology investments
- Policies that primarily impact large-scale platforms to prevent anti-competitive results from legislation
We explored reframing how we value and invest in "pro-social" technology that prioritizes community benefits over pure profit motives. There were discussions around developing new frameworks, redefining metrics, aligning incentives, and finding alternative investment models better suited to this mission.
What is possible?
There are reasons why VC has been a major driver of tech startups. The foundation of VC is to give their investors, called ‘Limited Partners’ or LPs (such as endowments, pension funds, and other large wells of capital) some small exposure to high-risk investments that might have more significant returns than a ‘safer’ investment.
Software has the potential to “scale,” where unit economics become near-zero as usage increases, leading to outsized returns for investors. Software startups typically burn through a lot of cash initially as they go through a process of iterating and experimenting to find an untapped market, especially because developer salaries have been hefty as demand outstripped supply.
And furthermore, using the techniques of “blitzscaling” and other high-risk hypergrowth strategies to create extractive platforms may be more palatable to entrepreneurs in tech, for reasons both in identity (often young, overwhelmingly male, and rarely Black, Latinx, or Indigenous) and temperament (attracted to high-risk, high status work).
If we imagine a landscape where technology might support our social fabric and be more tailored to context, culture, and human flourishing, we need alternatives to the VC model. Altruism can not be our only approach. What then, might we consider, as possibilities to explore?
In the workshop, a few ideas and proposals stood out as possible new or unexplored approaches:
Alternative Funding
- The concept of treating some socially-beneficial technologies as "public utilities" with government support or public-private hybrid models. This goes against the typical approach of treating tech companies as purely private, for-profit ventures.
- The idea of "retroactive funding" where projects/ventures get funded after-the-fact based on the value/impact they've already created. This flips the traditional investment model.
- Using models like "quadratic funding" which tries to align incentives toward representing the interests of the broader community rather than just wealthy investors.
Shifting Incentives
- Factoring in negative externalities and societal costs into evaluation metrics, rather than just looking at growth numbers. This reframes how "success" is measured.
- The emphasis on having founders/leaders who are proximately connected to the problems they are trying to solve, rather than just bringing in talented entrepreneurs/technologists.
- Exploring alternative incentive structures for fund managers beyond just maximizing financial returns, which could realign their goals.
- Suggestions around using antitrust measures to enable more experimentation and discourage monopolistic behavior that stifles innovation.
- Possibilities for early investment in open-source projects to open up new kinds of markets and create investable market dynamics.
Overall, we found that many of the ideas challenged conventional Silicon Valley norms and pushed for more pluralistic, decentralized, and community-driven investment/funding approaches for prosocially-oriented technologies. These radical departures from the status quo seemed quite thought-provoking and worthy of more investigation.
What's next
In the coming months, we hope to learn more and develop some resources to support suppliers of capital interested in exploring new approaches and understanding the contours of prosocial tech principles.
Finally, it’s worth noting that while in Silicon Valley, being “venture-backable” and raising large tranches of capital through equity sales has been seen as a primary marker of success, the overall landscape of technology and funding is facing massive change.
First, there’s a dawning recognition that, despite large returns on the most financially successful tech company exits, overall, VC returns are not particularly more exciting than other investments in LP portfolios. In addition, the development of AI alongside a huge and growing population of software developers and other tech workers outside the US and Europe changes the cost structures of early-stage tech significantly.
In the end, there is simply the reality of a planet with limited resources to waste on companies that consume a lot of power and capital and mostly fail. In considering a future capital infrastructure for prosocial tech, we may be moving towards experiments in collaborative and ecological economies in general. The way we fund and build technology may be as important as the technology itself.
Resources
Funding the Commons Conference
Authors
