The first official piece of policy around diversity efforts in venture capital may soon see the light of day, but not because of any action by the government.
In a complaint filed this week, the American Alliance for Equal Rights — founded by conservative activist Edward Blum, the man driving the effort to end affirmative action — sued a minority-focused venture capital fund for unlawful racial discrimination.
In the complaint, the organization accuses Fearless Fund (an early-stage venture capital firm based in Atlanta that focuses on funding solely to women founders of color) of racially discriminating against non-Black individuals by having a $20,000 grant program for only Black women who are small-business owners.
The program is the Fearless Strivers Grant Contest, and the fund hosts it four times a year in partnership with Mastercard. The American Alliance for Equal Rights alleges that Fearless Fund is violating Section 1981 of the 1866 Civil Rights Act, which states that private contracts must be made and enforced without regard to race.
It’s still too early to draw winners and losers in this battle, but if the American Alliance for Equal Rights wins this lawsuit, it could result in the first official piece of law around diversity, equity and inclusion in venture capital. The result could very well set a lasting precedent for how the entire startup ecosystem evolves. And given Blum’s recent record, a loss for Fearless Fund could be on the cards.
Gregory Shill, a professor of law at the University of Iowa who teaches a class on the Civil Rights Act as part of his Contracts class, told TechCrunch+ that a victory by Blum and the American Alliance for Equal Rights would stop many of the efforts designed to address the current disparities within venture capital.
The Civil Rights Act was the first piece of federal civil rights legislation passed in the U.S., enacted to guarantee that contracts would be honored regardless of race. At the time, it was widely held at the time that the market was open to everyone, but it wasn’t really.
“For years, Black founders have complained of discrimination, but they have been effectively blocked from doing anything about it, because, to prevail, they must show that the discrimination is intentional,” he said, adding that many avoid doing so because it can be harmful to their careers. “So rather than challenging this head-on, one alternative tack has been to set up funds that specifically recruit Black or women founders. That effort is what is being challenged here.”
Blum told TechCrunch+ that the American Alliance for Equal Rights was contacted by a woman-owned business that asked to help challenge Fearless Fund. “The program being challenged is racially exclusive, thus violating our nation’s civil rights laws. It is to be hoped that other programs like this one end these practices and offer the benefits to all small businesses regardless of the owner’s race,” he said.
Fearless Fund did not immediately respond to a request for comment.
Fearless Fund was founded in 2019 with the sole purpose of backing entrepreneurs who are women of color. Just a few weeks ago, TechCrunch reported that the fund raised an undisclosed amount, with the goal to deploy at least $50 million as part of its second fund. It is also currently in the process of hosting one of its grant contests.
Blum has a history of teaming up with individuals to sue race-based policies. For this latest suit, he told Reuters that the white and Asian American members of the American Alliance for Equal Rights were excluded from the grant because of race.
Recently, he sued Harvard to overturn affirmative action, saying it discriminated against Asian Americans, and assisted a young white woman in suing the University of Texas over affirmative action, though he lost that last case.
Thomas Dorwart, a managing partner at law firm Thomas C. Dorwart Law, said the American Alliance for Equal Rights could have a chance to win, but not based on the UNC and Harvard affirmative action cases. That’s because the court’s ruling there applied only to government funding.
The Supreme Court “has held that the statute cited by Blum applies to the employer-employee relationship. It could be argued that Fearless Fund is only an investor and is not an employer of the grantees. Thus, Blum’s and SCOTUS’ reasoning do not apply,” Dorwart told TechCrunch+. “Further, SCOTUS, in the recent affirmative action decision, did not address military academies, and let stand that diversity may be considered by military academies. That same reasoning could apply in venture capital, especially considering the funding gap.”
Still, as Jomayra Herrera, an investor at Reach Capital, noted, this is an important reminder that venture capital is not immune to the broader political polarization that is happening across the country.
Minority fund managers and founders are understandably nervous. According to Luke Cooper, the founder of Latimer Ventures, which focuses on backing founders from Black and Latinx communities, this suit would only make it harder for Black founders to receive funding. Grant programs such as the one Fearless Fund offers are often the only way such founders can access money.
“An event like this is deeply concerning because it holds existential risk to the good work that many of us are doing,” he said. “I think it will have the unintended consequence of shedding light on the tattered cordage of this industry’s rigging.”
Brandon Brooks, a founding partner at Overlooked Ventures, called this a “bullshit case” but conceded that Blum was likely to win, especially after his success with toppling affirmative action in college admissions.
“Any funds or sub-funds based on diversity investing will have to shift focus; LPs will be scared to invest in those funds for fear of lawsuits,” he added.
Indeed, there is a new crop of diverse fund managers from overlooked backgrounds who are focused on funding their communities. “This case will certainly impact Black and even female-focused funds,” Dorwart said. “But, again, it’ll be interesting to see how it plays out, considering these are not employer-employee relationships. Perhaps the court will hold that any funds that receive funding from government entities or institutions are subject to the statute Blum cites.”
The American Alliance for Equal Rights winning could result in more litigation overall against businesses, universities and government agencies’ programs that target marginalized groups, Shill said. This could turn out to be detrimental to not only Black people, but also all people from underrepresented backgrounds.
Kate Tamera, a trans founder of gender-affirming health service Euphoria, stressed how much founders like her rely on grant programs since funding for trans people is almost nonexistent.
“There’s no concrete evidence to support the claim that majority founders are being denied equal opportunities when the existing system already disproportionately favors them at the expense of minority founders,” she said.
Shill said that Blum’s victory would also likely not have an impact on the funds that exclusively or disproportionately back white founders, explaining that funds that do this often do so subtly and implicitly, and the direction of the law in the last few years makes it very difficult to prevail on such a claim.
Instead, it’s likely that this grant contest would be shut down or retooled, and “other efforts at remediating the effects of racism in this country will be more vulnerable legally,” he said.
But even if Blum ends up winning, it doesn’t mean that funding for Black founders has to stop. “If he wins, Fearless Fund’s solution, in my view, is to still provide grants that benefit Black women, or Black founders in general, but to [also] provide some smaller percentage of grants to other races,” Dowart said.
He also believes, though, that the same type of lawsuit has just as much of a chance as succeeding against the typical large VC funds “since Black and women founders are at like less than 2% of funding,” he continued. “They are being forced out of the market and discriminated against in the same way under the same statute.”
This story was updated to add a quote by Thomas Dorwart and clarify the class Gregory Shill teaches, along with Blum’s Harvard suit.