New California law would force firms to report diversity metrics

SB 54 passed the state Senate 32-8

California is set to pass the country’s first legislation that aims to increase diversity in venture capital.

SB 54 passed the state Senate with a vote of 32-8; next, it will go to Governor Gavin Newsom’s desk. The bill requires venture capital firms operating in California to report the diversity breakdown of the founders they fund to the state; this includes reporting on the gender and ethnic and racial background of the founders, in addition to the dollar amount given to them.

Senator Nancy Skinner, the bill’s sponsor, told TechCrunch+ that she’s very optimistic that Newsom will sign the bill.

“Venture capital firms might not be aware that their rate of investment is so low,” she told TechCrunch+. “So this disclosure, this transparency, hopefully, will nudge them to do better.”

Supporters of the bill see it as a massive step toward increasing transparency in the venture capital industry, where less than 3% of all capital is allocated to women and Black founders. SB 54 would also require firms to collect and release their diversity data to the public. It is currently hard to accurately track where venture funding goes because the industry is opaque in allocating funds. Aside from collection, the bill proposes that the state’s Civil Rights Department investigate those violating the bill’s terms, and firms that fail to report may face a penalty to be decided by the courts.

Founder and tech activist Allison Byers, who helped ideate and draft SB 54, said bills like this have precedence in California, pointing to SB 826, which mandated more gender parity on public corporate boards. That requirement helped increase the number of women board directors and influenced corporations to follow suit. (This law was struck down by a judge who ruled that it violated the state’s equal protection clause, deeming the law unnecessary. The state is looking to appeal.)

“The funding is nosediving. It’s not just bad, it’s crushing,” Byers told TechCrunch+ regarding the dismal amount allocated to women and Black founders. “We know this type of bill can make a measurable difference.”

Not everyone is a fan of SB 54, however. TechCrunch+ reviewed letters that the National Venture Capital Association (NVCA) and TechNet both wrote to the bill’s sponsors last week opposing SB 54.

The NVCA wrote that SB 54 would produce “misleading and counterproductive data that would hurt the cause of diversity, equity, and inclusion efforts while creating unnecessary costs and risk for California venture capitalists.” Justin Field, NVCA’s chief strategy officer, told TechCrunch+ that the way in which the bill seeks to gather metrics depends too much on self-identification, which could lead to unreliable data collection.

“Those who have diverse teams are going to be much more likely to fill out the survey and take the time to do it than those with non-diverse teams,” he said. This could lead to overstating just how diverse the ecosystem truly is. “The bill will have the state of California endorsing a set of numbers that are outside the reality of the startup community, which will actually impede efforts at diversity.”

TechNet, on the other hand, is worried about the release of sensitive information, like disability status or sexual orientation. TechNet mentions in its opposition that “many founding teams can be quite small, sometimes just a few people, making it easier for bad actors to reidentify this sensitive information.”

But Skinner rejected this claim, saying that the information sent by the firms will always be aggregated before being released to the public. She also said that the rules would be similar to the state’s already existing pay equity laws.

“In general, [the] business sector does not like to have any mandates or any regulations; that’s par for the course [and] we’re used to that,” she said. “But I think this is very legitimate information when you look at California’s demographic profile. We want it to thrive, so nobody should be excluded. And that’s really the motivation for the bill.”

TechNet is also concerned with how firms could be punished as the bill proposed to allow the civil rights department to use any collected information to take further action against a firm. TechNet said this was a potential liability and could make firms less likely to report accurate information, if any at all. TechNet did not respond to TechCrunch+’s request for comment.

But even with their opposition, both groups said that they support the bill’s premise of boosting diversity within venture capital. Among the differences, it shows one thing everyone agrees on: Something needs to change.

“There needs to be additional diversity in the startup ecosystem across the country, as well as the premise that we need better data to benchmark what those challenges are and understand how to make progress,” Field said.