Venture capital's place in the struggle against labour exploitation
There’s a market for social change, so why not invest in it?
As directors of the Working Capital Innovation Fund, the only true venture capital fund making for-profit investments in the forced labour/worker rights space that we know of, the openDemocracy article ‘The blindness of using venture capital to fight human trafficking’ unsurprisingly caught our attention.
A close reading makes it clear that the authors are targeting the work of leading venture philanthropists, not impact-oriented venture capital investors. We would distinguish the two. Both stem from the idea that the practices and principles employed by venture capitalists can be used to achieve social outcomes, but the former uses the tools of traditional grantmaking while the latter invests capital to generate social impact in a way that also provides financial returns. Our fund is squarely within the second of these two models, and as the article is primarily an overarching critique of philanthropy we understand that it is not targeting us directly.
Nevertheless, we feel compelled to respond as the article touches upon a number of themes that are critical – and often contentious – aspects of our work to use early-stage venture capital to address forced labour in the extended supply chains of multinational companies. These critiques are, in our view, over simplified. They are also often polarising and potentially detrimental to the collective effort required to make progress on the deeply challenging issues of inequality that we all care deeply about.
The private sector faces increasing pressure to address risks in direct operations and extended supply chains, but the toolkit available is inadequate to this task.
Similar to the arguments of Anand Giridharadas in his controversial book ‘Winners Take All: The Elite Charade of Changing the World’, the authors suggest that superficial (particularly tech- and metric-oriented) interventions by a philanthrocapitalist elite are often harmful “vanity ‘solutions’” that serve only to perpetuate the status quo. And while less categorically critical, Anne Gallagher’s thoughtful and self-reflective article in the same series suggests that the role of philanthropy in addressing human trafficking has been, at best, mixed. There are worthy and timely criticisms of the role of philanthropy as it pertains to human trafficking and forced labour. But we would say to all these authors: they have little if anything to do with the introduction of the venture capital model to the fight.
How best to change the world?
How can venture capital help fight forced labour and other labour exploitation in global supply chains? Simply put, supply chains are rife with labour risk, including widespread forced and child labour, underpayment of wages, unsafe workplaces, and restrictions on worker organising. The private sector faces increasing pressure to understand and address these risks in direct operations and extended supply chains, largely driven by tightening legal requirements in the US and Europe. At the same time, the toolkit available to brands, retailers and their suppliers is inadequate to this task. Social audits and voluntary codes of conduct are the interventions most frequently used at a large scale, yet they suffer from serious credibility and efficacy questions.
The Working Capital Innovation Fund (WCIF) is uniquely suited to offer an alternative. It invests in companies that provide tools which enable brands and retailers to learn the identity and location of suppliers, generate a picture of working conditions at those suppliers, trace product from one supply chain node to another, communicate information to consumers, and enable workers to know and act on their rights, among other approaches that drive improvements in labour conditions. We believe that a socially-motivated, labour-rights-focused impact investment vehicle can demonstrate the viability of these high risk or early stage ventures and catalyse broader market adoption.
We have tested these approaches at WCIF for the last four years. And, as we have refined what we do, we have gained insight into how a mission-committed, venture-type strategy can help innovators make progress, at scale, against the systemic problems of labour exploitation in global supply chains. Our experience confirms that venture capital models, embedded within the right theory of change and with substantial attention to impact management, can make a significant contribution to changing the system in which exploitation occurs.
We seek to highlight three components of our work here that contrast with the authors’ critique. First, our work takes a long-term, organisation-building approach. Second, we embrace the potential of technology rather than deny it. Third, we support market-based interventions as essential to the sustainability of systemic transformation.
Contrary to the view of venture capital as short-term and extractive, and as trailblazing groups like the Omidyar Network and the Soros Economic Development Fund have demonstrated, investment capital is an effective tool for achieving durable and scalable social change. Grants are the best tool for some problems but they are not always the most effective form of support. We know this first-hand, as the Working Capital Innovation Fund was created by the private foundation Humanity United precisely because its grant-givers were running up against the limitations of traditional philanthropic approaches. They saw that some problems could be better addressed with investment-style tools that supported organisations to build sustained revenue and leverage the market for sustained impact.
For example, over the last decade the ubiquitous penetration of mobile phones into even the poorest worker populations has created new opportunities to crowd source worker information at scale and resulted in the emergence of ‘worker voice’ platforms. These survey and grievance mechanism-oriented platforms offer real-time, anonymous feedback from workers regarding labour conditions and provide an opportunity to better identify labour abuses and remediate quickly.
Seed-stage investment allowed Ulula to reinvest profit and access commercial financing in a way that philanthropic support could not.
In the early days, and as new market entrants emerged, a number of leading foundations spent millions of project-based philanthropic dollars in an effort to grow these platforms and expand their impact. When WCIF was launched in 2017 we took a closer look at this cluster of start-ups. We evaluated the technology and the different business models and approaches in the field, and ultimately chose to invest in the Canada-based start-up Ulula. Fast forward to today and virtually all of these competitors have fallen by the wayside. They've all either gone out of business or been acquired for close to nothing. Meanwhile, Ulula has grown at 50% year-over-year and reached over 1.5 million vulnerable workers. It has extended into electronics, extractives, palm oil, and apparel while demonstrating examples of meaningful social impact along the way.
For-profit investing forces us to focus on the critical variables – the unit economics, the market demand, the sales channels – and thus sharpened our idea of what was required for commercial success. A seed-stage investment has allowed Ulula to expand and scale its impact, as it has enabled the company to reinvest profit into sustainable growth and access commercial financing in a way that philanthropic support could not.
Vitally, venture capital aims to build successful businesses that are able to grow and scale organically, free from the perpetual cycle of grant funding. A venture capital-informed approach commits us to on-going support for our investments as they seek impact. We provide the resources that our portfolio companies need to find product-market fit, build managerial capability, adopt the right strategy, and understand and communicate impact. And our investment is not restricted to specific projects or achieving narrow outcomes. Rather, we support the investee to find its unique path to sustained success. Grants can theoretically do this as well, but philanthropic funding that comprehensively supports organisational development is rare. Venture capital approaches have the advantage of tapping into commercial markets. This is a force multiplier, and it serves as an engine of growth and sustainability.
Another misconception put forward by the authors pertains to technology. Like many in the field of labour rights they dismiss technology as ineffective, or worse as something that competes with or undermines worker organising. Unquestionably there are inherent limitations to what technology can achieve, and there are dangers in a surveillance economy where data privacy is not protected. We would never argue that technology can or should substitute for labour organising, movement building or policy advocacy.
But technological innovation is most certainly a reality of modern business, so rather than trying to steer clear of it our approach has been to proactively and aggressively channel it into applications that have demonstrable positive impact and help build new standards for data privacy. The double-edged sword of technology has challenged and enhanced every aspect of our lives, creating unimaginable efficiencies while also encroaching on our privacy and civil liberties. The risk/reward calculus for worker agency and protection is no different.
The question isn’t whether venture capital can address labour exploitation, but how best to use this tool in combination with others.
Reviewing over 400 tech-enabled pitches over the past four years has given us a keen sense of the opportunities that exist where technology and business’s need to understand their own labour risks intersect. Our investments help answer such important questions as:
- How can artificial intelligence and machine learning provide unprecedented visibility into the risk of labour rights violations within a company’s supply chain?
- How can product traceability be transformed through the reduced cost and improved accuracy of DNA ‘fingerprinting’?
- How can blockchain and the use of automated and verifiable claims about the production process lead to more trustworthy information about the origin and chain of custody of a product?
- How can worker health and safety be improved by breakthroughs in on-site training and new models of worker-management communication?
- How can knowledge of workplace-level labour risk be transformed by the growing ubiquity of sensors and other internet-of-things devices which enable scaled, real-time data collection?
- How can the high penetration rates of mobile technologies enable step changes in worker agency and empowerment?
The market as a change-maker
Finally, we embrace that our work is only one part of a strategy to combat the complex and challenging system of opaque and globally distributed production that enables the exploitation of vulnerable workers. Our interventions do not substitute for organising and collective bargaining in workplaces, nor can they replace the essential role that governments play in guaranteeing workers’ rights. Our investments do, however, enable the private sector as well as its regulatory and civil society stakeholders to collectively implement a more efficient, more sustainable, more scalable, and more impactful system of corporate accountability, one that measurably reduces the risk that workers face in extensive and hidden supply chains around the world.
There are tailwinds that are forcing the market to evolve, and corporations are increasingly held to account for labour conditions around the world – by regulators, investors, consumers and their own employees. In June 2021, for example, Germany adopted a supply chain act that places human rights-related due diligence obligations on corporations. Similar mandatory human rights due diligence legislation from the European Union is on the horizon. The UK and US Customs and Border Protection trade restrictions targeting Xinjiang/Uighur forced labour have also had significant impact. For example, the US Government has prevented the import of over 20 shipments since 2019 which were found to have been made with forced labour.
The rapid growth of the environmental, social, and corporate governance investing market and the growing influence of sustainability-oriented investors will likely continue to positively influence corporate behaviour. A new generation of consumers has begun to express their demand for ethical products. These accountability mechanisms create a market for tools and services that can help multinationals avoid severe exploitation. We believe this market can only sustainably be served at scale by for-profit innovators. Investors will give such innovators the capital they need to build tools that can scale to the size of global supply chains, that integrate leading technology, and that have the time needed to find a sustained market for their services.
The question then isn’t whether venture capital or other market-oriented approaches can address forced labour and other labour exploitation, but how best to use this tool in combination with others. Our fund will, with all the rigour that we can muster, test and take chances on new business models and technologies that positively contribute to nudging a massive, inequitable, and complicated system toward more equitable treatment of workers. We embrace the uncertainty embedded in our approach, commit to honestly assessing our impact, and share our successes and failures.
Since the passage of Palermo Protocol over 20 years ago, progress has been made to address the scourge of trafficking and forced labour. The size and sophistication of the NGO community working on this issue has grown markedly and investigative journalism has played an important role in raising public awareness of the problem. There are now frameworks of legislation and norms of performance that structure the private sector’s response and make it a strategic priority for corporates.
We agree with our colleagues in the philanthropic world that these changes aren’t sufficient to drive progress against the deep pervasive structural issues that make workers vulnerable. But we believe that ultimate success will require coordination and constructive engagement among a diversity of approaches. Embracing the potential of venture capital models to contribute to solutions – as opposed to categorically dismissing them – will ultimately enable the efforts of workers’ movements, governments and the private sector actors to achieve even more.
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