Magdi Amin
Investment Partner

Race to the Top: A New Business Paradigm for Identity Data

March 26, 2019

Data is at the heart of a digital revolution that has created immense economic and social value. And it will continue to play a vital role in solving the biggest problems of our time. As such, data is critical to us as individuals, technologists, investors, and entrepreneurs interested in a healthy society of empowered people.

Many of the business models powering digital services are designed to offer personalization through the collection of personal data and the construction of digital profiles — de facto digital identities. And as we know, digital advertisers also desire those ever-so detailed profiles to precisely target potential buyers. To feed this machine, the applications we use collect vast amount of information on us and, according to a forthcoming study by Monitor-Deloitte, only a fraction of it is used. Two risks emerge from this dynamic. As time goes on and our data changes hands, the way it is used can stray from our original preferences, violating our privacy. Additionally, bad actors can see all of that valuable data sitting there and try to steal or manipulate it for personal, monetary, or political gain.

This begs the question — why are companies collecting all of this information if they don’t use it and if it creates more security and privacy risks for them and us?

Surveys tell us that people think the data economy is out of control, and that they are at risk. As people learn more about what information is collected about them, a substantial trust deficit has grown:

  • Most consumers (58 percent) think the threat to online privacy is a crisis (Axios). 
  • Nearly two-thirds of US consumers say it is “very important” to them that they be in control of who can get information about them, and 65 percent say it is “very important” for them to control what information is collected about them. 
  • An overwhelming majority (94 percent) of British consumers said trust was crucial in deciding whether to share personal data (ODI), and only one in 10 trust the major social media platforms.

If today’s data practices are causing people to feel disempowered and eroding their trust, then we have now entered a downward spiral — a race to the bottom — in which the competitive dynamics of the industry are increasingly at odds with the interests of individuals. More competition through ever-more intrusive models only raises the risks. This downward spiral cannot persist without eventually reaching a failure point at which customer engagement, trust, traction, and commercial viability becomes irreversibly damaged. These risks are compounded as regulation begins to link severe fines and penalties with harmful data practices.

It is inevitable that mass collection and exposure of personal data will continue to attract legal scrutiny and inspire additional regulation. Much of the focus is on Europe’s General Data Protection Regulation and the California Consumer Privacy Act. In fact, new data protection and privacy regulation has been proposed or enacted in eight American states, and in many countries ranging from Brazil to Thailand, China, and India. These compliance-based standards will eventually require all companies meet a minimum standard of privacy, security, transparency, and accountability, possibly with patchwork solutions at an uncertain pace.

But what about shifting the business paradigm all together? Venture capitalists (VCs) have an outsized influence in shaping these dynamics through their decisions on which startups to back, and through the guidance they provide to the CEOs of their investees. VCs can ease the apparent tension between what is good for business and what is right for people and societies by backing the right technologies, policies, and practices.

Omidyar Network is convening a group of committed investors who want to replace the “race to the bottom” with a Race to the Top, introducing a way to approach personal data. The growing group of investors calling for this shift includes Omidyar Network, Glasswing VenturesChaos TheoryStructure Capital, and PTB Ventures among others like Professor Alex 'Sandy’ Pentland who directs the MIT Connection Science and Human Dynamics labs. We all recognize having the trust of individual consumers is paramount, and the entrepreneurs we have been entrusted to be good stewards of personal data.

We aspire for all startups and companies to choose this path and steward the data beyond compliance. We need not wait for politics to establish penalties for doing the wrong thing before doing the right thing. Our investees Learning MachineDigi.me, and Terbium Labs are demonstrating that business models built on privacy, security, transparency, and accountability are viable and competitive.

To catalyze a Race to the Top, we believe the following conditions are needed:

  • A coalition ready to lead. We are convening a like-minded group of tech investors and thought-leaders to co-design the Race to the Top. The entry ticket is simple: demonstrate our shared values through investments, engage in the process, and build a community.
  • Articulation of our values, norms, and principles. Over the coming weeks we will collaboratively draft a set of principles and guidelines for investment, including such values as privacy, inclusion, individual choice, and security, systematically assessing the risk that the products we develop can be used for harm.
  • New tools for VCs. Stating values is the easy part. The hard part is transforming them into products and services. We will over time release tools for VCs to help in the due diligence process, to assess the data governance practices of potential investees, and to subject their portfolios to periodic review.
  • Education. Race to the Top is a change in culture, which can only start with increased awareness of the business case and examples of firms who are doing it right.

We know changing the industry’s direction of travel and finding new business models where customers choose privacy is ambitious. We also know that data can be used as a force for good, and the innovation economy is worth protecting.

Our view is that true innovation occurs within meaningful responsible constraints, to minimize the risks and downsides, and cannot be good innovation if it comes at a great individual and societal cost. With a shift to a Race to the Top, we think even more beneficial products and services will prevail because innovation is more aligned with the interest of people. Customers have been very clear about expectations, ignoring these reduces engagement and raises risk. Aligning with these creates loyalty and trust, which we know businesses can convert to value.

The “race to the bottom” is not inevitable, it is a business choice. The data economy we desire will emerge when we, as investors, technologists, and consumers, make a different choice. We are embarking on that journey because we believe it is possible and urgent. We’re inviting VCs to join us in shaping and leading this important shift. Find us at #KNOW2019 and contact us to learn more.

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