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.