Oct 10, 2023 - Economy

California will require VC firms to report founder diversity statistics

Illustration of a pattern of piggy banks in various shades of pink and brown.

Illustration: Aïda Amer/Axios

Venture capital's propensity for backing white, male founders is about to get quantified, on a firm-by-firm basis.

Driving the news: California Gov. Gavin Newsom on Saturday signed into a law a bill that will require covered VC firms to annually report on founder diversity demographics for companies in which they invest, beginning in 2025.

  • It applies to the vast majority of U.S. venture firms, including those not headquartered in California.
  • That's because covered firms include those whose portfolio companies are based in, or have significant operations in the state, plus firms that solicit or receive fund commitments from California residents.

Details: Firms will be required to annually survey their founders, who are allowed to opt-out without recrimination, on their gender identity, race, ethnicity, disability status and veteran status.

  • Such information will be submitted to a state agency, which then will publish it in a searchable online database.
  • Firms that do not submit survey data could be fined and undisclosed amount.
  • Newsom issued a signing statement that could result in some changes, including around "unrealistic timelines" and how the program will be implemented and funded.

The big picture: The VC industry has been talking about the issue of "underrepresented founders" for more than a decade, but most of its actions have been at the margins.

  • This bill doesn't include mandates or quotas around investment decisions — instead opting for a naming and shaming approach.
  • "Sunshine sometimes works to change behavior," says state Sen. Nancy Skinner, the bill's lead sponsor. "I'm chair of the Women's Caucus, and have heard from lots of women founders about how they don't even believe they can get a meeting at a VC fund, let alone an investment. There's so much economic and innovation opportunity being lost."

In the weeds: Some VC firms could easily juke the stats, since the reporting will be done via percentages of founders rather than percentages of dollars.

  • For example, a billion dollar fund could give two underrepresented founders checks of $50k each, and then a white, male founder a check for $50 million. Per the bill, it would look like that firm backs underrepresented founders two-thirds of the time.

The bottom line: Expect many VC firms to quietly grumble over the added costs, and complaints from some founders about being asked intrusive questions.

  • But, as ICA Fund's Allison Kelly explains: "The first step to addressing inequities is to measure them. You cannot address shortcomings or make progress if you don't have data on your starting points."
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