In the heady days of the first dot-com boom, a sketch on a napkin and a sparkle in a coder’s eye could net a nice seed round from angel investors. Subsequent rounds, it seemed, would flow like chocolate at a fondue party.

Then the bubble burst and napkin sketches turned into business plans and three-year forecasts. Investors became a little more sophisticated and entrepreneurs had to learn to pitch. Then along came the lean startup canvas, bootstrapping and SaaS business models. Incubators and coaches and pitch competitions sprang up like dandelions on a spring lawn.

Then 2018 happened.

Startups like Facebook, Twitter, Snap, Google had grown up. Scaled. Become Tech Giants. And the impacts of their technologies on society and geopolitically were suddenly realized in data breaches, hacks and privacy violations. Legislators and regulators in Western democracies had turned a baleful eye on the tech industry.

In the coming few years, it is likely that investors doing due diligence at every stage will ask new governance questions of technology startups, from those developing productivity tools to artificial intelligence, robotics and blockchain. These are on top of the ones they already ask.

I’ve already seen this happen with a few startups I’ve worked with in late 2018 and early 2019. They’re looking something like this:

• Litigation Risks: Usually these questions focus on possible patent infringement. Now these risks may be people being fired as a result of poor algorithms or the use of predictive analytics impacting a person’s job or insurance premiums. Technologies at the highest risk in these areas are Artificial Intelligence and predictive analytics tools in FinTech, HRTech and InsurTech.
• Regulatory Risks: As investors see scalability, they are asking questions about the risks of government regulators imposing various rules on an industry sector or certain technologies. Most at risk in this area is again AI, but also blockchain, workplace automation tools, FinTech, InsurTech and social media apps.
• Reduced Acquisition Viability: One key exit strategy for tech startups is to be acquired by a tech giant or industry giant in the sector they are attempting to disrupt. But as regulators and legislators look to companies like Facebook with an eye towards breaking them up, some investors are questioning if a startup may become less viable for acquisition as regulators may block such an action. This doesn’t mean the startup isn’t worth investing in; it just makes the options different.
• Cost of a Data Breach: No longer a matter of “if” but a matter of “when” a data breach is a reality and most every tech company today collects, stores and analyses data. The cost of a data breach can quickly exceed $6 million in the U.S. and Canada. As major investors tend to take a board seat, this puts them at risk of litigation and fines. They’re asking tougher questions on a startups data security processes and governance. For Canadian and European startups, new duty to report laws add impetus to this situation.
• Privacy Implications: With the European Union’s introduction of the GDPR in 2018, a new standard was set. Canada and the U.S. are looking to update privacy laws. Investors are aware that privacy is a growing concern of consumers and thus of legislators who get voted in by those consumers. Laws will only get tougher.

These are just some of the questions I’ve seen being asked, not just by sophisticated venture capitalists in Canada, the U.S. and EU, but increasingly by angel investors. It is a new landscape in 2019 and going forward. Startups that ask these questions and build their products with these questions in mind, will likely fare better in the due diligence process. It adds complications we’ve not seen before for technology startups, but these are the new governance questions. 

Giles Crouch is a serial technology entrepreneur and works with startups and established companies bringing new technologies to global markets. He also advises as a CIO-on-Demand. Crouch is a polymath bringing together digital anthropology, marketing and behavioural economics.