Taking Investors and Business to Task for the ‘Systemized Grift’ of Externalities

Folks in the financial industry don’t typically seek to make waves with their words. But a recent article by Julianne Zimmerman at Reinventure Capital caught my eye due to her straight talk on the need to change the traditional hush-hush view of externalities and instead incorporate them into investment and business decisions.

As she wrote: “No point in burying the lede: ‘externalities’ are systematized grift.”

For those who aren’t familiar with the concept, Zimmerman shares a definition of externalities from the Organisation for Economic Co-operation and Development:

Externalities refers to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

Zimmerman points to the current (but far from new) trend among some employers to minimize labor costs as one means to maximize profits, thereby externalizing the effects onto government agencies and nonprofits that people turn to when they can’t earn a living wage for their work. These impacts fall hardest on underserved communities, she says, worsening race, gender, and class disparities. Closer to home for Reinventure Capital, Zimmerman calls on investors to reconsider where their capital is going: “The point is that externalities aren’t an accident. They happen because they are a construct of the system, constantly reinforced and affirmed.”

Founded by impact investing pioneer Edward Duggar in 2014, Reinventure Capital is among the financial firms leading by example and driving funding toward overlooked and underfunded entrepreneurs, especially People of Color and women. Zimmerman, Managing Director at Reinventure Capital, says the firm invests with a goal of creating opportunities for and advancing the innovations of women and People of Color — and a broader view of shifting the VC system toward greater equity and inclusion.

“What that comes down to is who has authority, who has a say, who has control, who has ownership,” she says. “When you look at the distribution of capital, consistently more than 90% of venture capital goes to an extremely narrow demographic — in broad strokes, straight, white, U.S.-born men from a dozen universities.”

That concentration of capital lands primarily in a half-dozen metropolitan areas, she says, further exacerbating inequities. “It also means that we have this perilously unbalanced means of propagating ideas and value propositions and technologies and services,” Zimmerman says. “They’re only coming from and validated by and, for the most part, serving that same demographic. That has all manner of ramifications: social, environmental, health, but also economic.”

Those ramifications are, of course, connected to the issue of externalities — a topic that Zimmerman decided to tackle in her writing, which she sees as another way to encourage others in the investing industry and beyond to rethink how they do business.

“It wasn't so much that something in particular prompted me to write about this topic [externalities], it just sort of bubbled to the surface as one of many themes that are sort of swirling around in my own internal echo chamber over the past many years,” she told me during a recent interview. “I hope that the concept of externalities is also starting to become maybe a little bit tarnished in the minds of a wider audience. I don't think it's yet fully considered disreputable; I think it's still widely accepted as a kind of given.”

The good news, Zimmerman says, is that she’s starting to hear more people discussing that this may not be the best approach for investing and economic growth. “It’s entirely within the power of investors — whether they are LPs, direct investors, individual or corporate or institutional or venture — and founders to make different choices,” she says. “I try to bring a colorful and irreverent and mostly positive voice to both challenge but also encourage people to take up those questions in their own endeavors.”

As an example of the ripple effects of its venture capital work, Zimmerman shares how Reinventure Capital intentionally confronts labor and supply chain issues in its investing practices. “In the U.S., we are sidelining and pushing aside the majority of talent. That has severe social repercussions, health and environment repercussions, security repercussions, particularly when we're talking about AI and Web3, when we’re talking about the way that technologies are being developed,” she says. “We also know that we're missing out on a lot of other innovation, a lot of other opportunities. For us [at Reinventure], focusing on those overlooked and discounted founder teams and their businesses is one way to counter that.”

When considering companies for its VC work, Reinventure Capital examines how they hire, promote, and compensate — from top to bottom, she says. “It’s not OK, for example, if a company has most of its female and Black and Brown employees as hourly workers, and most of its white, male employees as white collar salaried employees. It’s also not OK with us if a company's business model is based on driving labor costs to zero,” Zimmerman says, adding that it goes back to the issue of externalities: “If you’re driving labor costs to zero, you’re basically just displacing the cost of operating your enterprise onto somebody else.”