California Gov. Gavin Newsom signed Oct. 8 a bill that requires venture capitalists to report, annually, the diversity of the founding members of businesses they are backing.
Such reporting would begin by March of 2025.
Senate Bill 54, introduced by Sen. Nancy Skinner (D-Berkeley), will make California the first state in the nation to require such firms to disclose race, gender, disability or veteran status, and other information of the founders of the companies they invest in to the state’s Civil Rights Department.
“With Governor Newsom’s signing of SB 54, California is extending its nation-leading efforts to expand equity by bringing transparency to venture capital investment decisions with the goal of helping more women and minority-owned startups access the [venture capital] lifeline upon which entrepreneurs depend,” Ms. Skinner said in a statement Oct. 9.
Venture capital firms affected by the new law are not only those based or operating in California but also include out-of-state firms that invest in businesses located in the state.
Additionally, such information will be now required to be publicly released by the state. Companies that fail to comply may be subject to penalties imposed by a court.
In 2022, California accounted for over 40 percent of the approximately $246 billion invested in venture capital funding in the United States, according to data from business research firm PitchBook.
The data—which was also cited by the bill’s author—show that companies with female-only founders made up 7 percent of all funded deals last year, but they received just 2 percent of the total capital from venture capitalists.
Additionally, according to PitchBook, startups founded by black and Latino individuals received only 2.6 percent and 0.6 percent, respectively, of such funding.
In his signing message, Mr. Newsom said the bill echoes his effort to “advance equity and provide for greater economic empowerment of historically underrepresented communities.”
However, he added that there are some issues in the law that need to be addressed.“This bill contains problematic provisions and unrealistic timelines that could present barriers to successful implementation and enforcement,” he wrote. “This bill would require [the Civil Rights Department] to undertake significant and ongoing investigations just to determine whether any given entity meets the criteria set forth in the bill—and the department is not situated to perform this work.”
Mr. Newsom added that the implementation of the bill would place a financial burden on the state.
Consequently, he said that his office will present a revised version of the new law as part of his proposed 2024–25 budget to make sure the law can be properly put into action.
Ms. Skinner’s office was not able to comment on the proposed revision.
Supporters of the bill, including the Los Angeles Area Chamber of Commerce and F5 Collective—a firm that exclusively invests in female founders—said the law will create equal opportunities.
Privacy Concerns
The bill received opposition from some in the business community, citing poor practicality and privacy violation.In a letter sent to lawmakers in August, the National Venture Capital Association—a Washington D.C.-based policy advocating nonprofit—argued that “diversity data collected will be misleading and counterproductive. … [because such] surveys solely dependent on voluntary, self-reported submissions tend to distort data, as individuals from diverse backgrounds are more inclined to partake, resulting in an overrepresentation within the dataset.”
Additionally, Bobby Franklin, president and CEO of the association, wrote in the letter that adding the extra step for venture capital companies to handle and pass on the data increases the chances of accidentally exposing individuals’ private information.
Lastly, Mr. Franklin said that the potential penalty “could be devastating enough to bankrupt certain emerging managers who have already undertaken substantial financial risks to open a new [venture capital] fund.”
“While well-intentioned in principle, in practice, SB 54 would produce misleading and counterproductive data that would hurt the cause of diversity, equity, and inclusion efforts while creating unnecessary costs and risks for California venture capitalists,” he wrote.
