Last night, Governor Gavin Newsom of California signed Senate Bill 54 into law, marking a groundbreaking step in increasing diversity within the venture capital industry in the United States. The legislation, which will take effect on March 1, 2025, mandates that venture capital firms operating in the state, including those headquartered in California, those with operations or investments tied to the state, or those with investments from California residents, must annually report the diversity of the founders they support. This reporting encompasses factors such as the race of the individuals funded, their disability status, and sexual orientation. The bill also requires these firms to compile and disclose their diversity data to the public.
The gathered information will be aggregated and released to the public, akin to how the state handles wage-related data. Those failing to comply with the new law could face penalties determined by the courts.
Governor Newsom, upon signing the bill, expressed his dedication to advancing equity and empowering historically underrepresented communities. Senate Bill 54, now added to the existing Business and Professional Code as “Chapter 40: Fair Investment Practices by Investment Advisers,” will also make amendments to the Government Code concerning professions.
Tech policy advocates welcome this legislation, as it seeks to address the longstanding issue of limited funding for startups led by women, Black founders, or Latinx founders, which has historically not exceeded 5% in any given year. The hope is that SB 54 will shed light on the allocation of venture capital funds, especially since California is one of the largest markets for such investments.
Senator Nancy Skinner, the bill’s sponsor, highlighted the significance of Governor Newsom’s endorsement, emphasizing the importance of transparency in venture capital investment decisions to provide opportunities for women and minority-owned startups.
Allison Byers, a tech policy advocate involved in the bill’s creation, has ambitious goals for this law. She aims to encourage funds to allocate more venture capital to women and people of color. Furthermore, she hopes the law will increase awareness of funding disparities and expose which funds support diverse founders and which do not. This transparency will empower women and people of color to make informed investment decisions and avoid dedicating significant time to fund managers who express interest but do not ultimately provide funding to their demographic groups.
Before the bill passed in the Senate, it faced opposition from critics, including the National Venture Capital Association and TechNet. They expressed concerns that the legislation might have adverse effects on VC firms. The NVCA believed it could result in misleading and counterproductive data, causing unnecessary costs and risks for California venture capitalists. TechNet, on the other hand, worried about potential liabilities stemming from the release of sensitive information to the state’s civil rights department.
While both organizations supported the goal of enhancing diversity in venture capital, Governor Newsom acknowledged that some elements of the bill needed refinement, particularly concerning problematic provisions and unrealistic timelines. These adjustments will be addressed in the 2024-2025 Governor’s Budget to ensure the effective implementation of this critical policy to improve venture capital diversity.
Allison Byers also expressed her intentions to promote similar legislation in other states and countries, as discussions are already underway with leaders interested in enacting matching bills.
