California passed a bill earlier this month that requires venture firms operating in the state to report the diversity breakdown of their investments. The news of its passing spread quickly through the startup world, and immediate reactions to it have been split.
There are those in favor of the bill, those who support it but with caveats, and those who simply don’t think this will bring any change. Oh yes, and those who simply made fun of it. Still, most people brought up good points in their support and criticism of the bill, called SB 54, and we spoke to industry players to put everyone’s thoughts on the bill into one place.
Bernard Coleman, a lawyer at the Coleman Law Firm, said that it remains to be seen whether SB 54 will result in any significant increase in the diversity numbers regarding VC investments. “It may end up being all bark and no bite,” he told TechCrunch+.
There are nuances in how money moves in tech, he said: Venture capitalists are funded by the wealthiest and most powerful people in society, many of whom have the means to circumvent legislation they don’t like and the power to fund the rescission or modification of legislation that threatens them.
“With California’s new legislation, I expect that many VCs will move operations out of California and make efforts to avoid becoming subject to this legislation,” he said.
Granted, it would be hard to avoid this bill. SB 54 targets any firm operating in the state, which includes funding startups based in California and even raising from California-based limited partners. Going to such extremes to avoid the bill would send a bad signal, said Madison Long, the CEO of Bay Area–based startup Clutch.
“If people are wanting to leave the state because of this type of reporting, then honestly, more power to them,” she said. The tech community is small, and “if that’s the message you want to send, the message will be received.”
Long likes that the bill will provide more data transparency, which is typically hard to come by in the world of venture capital. Funds releasing info on who they back will help minorities better navigate the investing landscape. “I hope that long term, [the bill] can be used for good,” she said. “Maybe interesting stats will come out, that the firms investing in a more diverse slew of founders are really outperforming, and people can see that as a strategy for them, and other fund managers might think about their allocations differently or think about being more open-minded.”
Eric Bahn, a co-founder and general partner at Bay Area–based Hustle Fund, said that collecting the data is the first necessary step before benchmarks or policies can start to be formed. It’s hard to improve on something if you can’t measure the actual scope of the problem, he said. “The spirit of this thing is something that I really do appreciate; let’s measure and see where the dollars are flying to and hold a little bit of the investors’ feet to the fire,” Bahn said. “The spirit of it is really good. The ‘what’ of it is really good, but I am a little more cautious about the how.”
But many, including Long and Bahn, are concerned about the data being skewed. That’s because a lot of the information that comes from founders is optional; they don’t have to reply if they don’t want to — it’s only the firms that are required to conduct and report it.
But still, Sarah Millar, the COO of Diversity VC, said that while the ability for founders to opt out does mean that they might not get fully accurate numbers, the fact that the initiative is run by the state instead of a diversity-focused organization like Diversity VC means they actually may get a more comprehensive look than what’s currently out there. She also thinks the state leading it will give the data an additional layer of credibility.
Bahn said he understands why some firms aren’t excited about collecting this data: It adds something else for them to do, and some of the questions, especially regarding whether someone has a disability or identifies as a member of the LGBTQIA+ community, can be sensitive for founders to answer. But, he said, it might be more of a task for the firm auditors rather than the firms themselves.
“From a fund perspective, I can see why they are annoyed,” he said. “A new audit requirement is more expensive for us, it’s awkward. But, eh, I mean, is it really? It just doesn’t sound that hard, and the outcome could be great.”
This could also be a way for founders to answer those sensitive questions without going through their VC firm directly. Since the bill does not go into effect until 2025, Millar said that two years is a lot of time for the industry to create a standardized form that would make collecting this data as anonymous and easy as possible.
But even with the threat of skewed data, that doesn’t mean that it’s not worth the effort.
Marcos Fernandez, a managing partner at Fiat Ventures, said that this bill could force investors to slow down before just throwing money out to someone who looks like them or went to the same elite college. “It forces you to look at their business in different ways,” he told TechCrunch+. “This [bill] is a very simple first step, and we certainly need to do more.”
Something else investors are interested in: other state governments doing the same work to gather diversity data from firms in their states.
New York could be next, and the U.K. has already started taking steps to formalize data collection as well. But there is potential for this bill to go further in California, like extending it to limited partners. Even as it stands, limited partners could start using this data to help them make decisions on which managers to back.
“I would imagine a lot of LPs who have started to make a dent into investing in diverse fund managers and managers that back diverse founders, they will start to look at this as the benchmark,” Millar said. “If I am looking for these types of funds, I’m going to be comparing them to the median funds in California.”