California Passes Groundbreaking Law Requiring VC Firms To Report Diversity Of The Founders They Back

The California Senate Bill 54 (SB 54) has been signed into law by Governor Gavin Newsom, requiring venture capital firms in the state to report the diversity of the founders they back annually.

This is the first piece of legislation in the US that aims to address racial disparities in the venture capital (VC) landscape.

There is currently no official data on how VC firms invest their money founder and tech activist who helped ideate and draft SB 54, Allison Byers said.

She added that California is responsible for 36% of the US venture capital, meaning the bill will have a global impact. 

Senate Bill 54

SB 54 applies to all venture firms connected to the state, whether because they are based in California, have an office in the state, invest in companies here, or solicit investments from state residents.

It will require firms to collect demographic information from the founders they invest in and then report that data annually to the state Civil Rights Department.

The report will include, for example, the race of the people they back, their disability status, and sexual orientation.

Read: Meet California’s New US Senator: Laphonza Butler

The legislation, which will go into effect on March 1, 2025, also directs that department to make those reports publicly available via its website.

Those who fail to comply with the new law may face a penalty as the courts decide.

“This bill resonates deeply with my commitment to advance equity and provide for greater economic empowerment of historically underrepresented communities,” Gov. Newsom wrote in his letter signing the bill.

SB 54 will be added to the existing Business and Professional Codes as “Chapter 40. Fair Investment Practices by Investment Advisers.” It will also amend part of the Government Code in relation to professions.

Increasing diversity in VC

Typically, Black entrepreneurs receive less than 2% of overall dollars each year in VC funding.

Additionally, by the end of 2022, adverse market conditions led to a 36% drop in overall VC dollars, but Black entreprenuers saw a 45% decrease in financing.

Additionally, less than 1% of business funding goes to Black women yearly; in 2022, VC firms deployed $288 billion, with women of color founders only receiving 0.39% of the total funding.

Byers told Tech Crunch she wants this law to encourage funds to allocate more venture dollars to women and people of color.

She also hopes that this law increases awareness of funding discrepancies and reveals the funds that are supporting diverse founders and those that do not.

“The first-of-its-kind bill has already inspired more people to take action, and we are in active discussion with leaders in other states and other countries,” Byers wrote.

“Our small yet mighty team isn’t done yet either.”