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Will Limited Partners Help Fix Venture Capital’s Harassment Problem? It’s Complicated.

Jul 07, 2017

This article first appeared in Term Sheet, Fortune’s newsletter on deals and dealmakers. Sign up here.

The past week’s news reports on sexual harassment in the venture capital industry have created hope that much-needed cultural change is coming to Silicon Valley. But many of my conversations with investors have been tinged by cynicism that little will change. A few notes:

• As we’ve written before, limited partners -- the pension funds, endowments, and institutional funds that invest in venture capital funds -- are furious over the revelations. Many feel deceived that they were not informed of past bad behavior with the general partners they invested in.

• Meanwhile, there have been many calls for LPs to help fix this problem, by demanding transparency, holding GPs accountable, and doing more thorough reference checking. But GPs and LPs I talk to say that, aside from the moral and ethical concerns, it boils down to two factors for LPs: Headline risk by association (especially if they represent state pension funds), and returns (preserving value of existing funds, and fears that the scandal will prevent the firm from getting into the best companies).

• In the case of 500 Startups, which held an investor meeting yesterday, some unhappy investors moved to invoke a “key man clause,” over Dave McClure’s departure, which would prevent the firm’s partners from making new investments. But 500 Startups would be a very complicated firm to unwind: It has backed more than 1900 companies via dozens of funds.

The firm has raised four “global flagship” funds that support its accelerator program. I understand the first three are fully deployed. Fund four has been in the market for some time; an SEC filing shows it closed on $50 million in September 2016 after lowering its target from $200 million to $150 million. Further complicating things: Regional microfunds and vertical funds focused on Latin America, Korea, Southeast Asia, Turkey, Vietnam, Canada, Thailand, Vietnam, Japan, the Middle East, India, mobile, and fintech.

• One sticking point for situations like this is that most funds have one or two anchor LPs. Often those LPs are sovereign wealth funds. If they don’t want to force a firm to shut down, the vocal opposition of smaller LPs doesn’t count for a lot.

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