(The Center Square) – California governor Gavin Newsom signed a new law mandating public diversity reporting for venture capital firms while vetoing a bill requiring similar reporting for his own gubernatorial appointments.
SB 54 by State Sen. Nancy Skinner, D-Berkeley, mandates VC firms operating in California to report the sex, gender, race, and veteran status of the members of the founding team of the companies they invest in to the California Civil Rights Division beginning in 2025.
However, a “covered entity” can include any VC entity that is headquartered in California, has a significant presence or office in California, makes “venture capital investments in businesses that are located in, or have significant operations in, California,” or even “solicits or receives investments from a person who is a resident of California,” a definition that covers most venture capital firms in the United States.
VC firms are required to collect the race, ethnicity, disability, LGBTQ+, veteran, and residency statistics for “founding team” members so those numbers can be released to the public in a report that also notes how many companies invested in were “primarily founded by diverse team members.”
For the purposes of this report, a “diverse team member” is a person who “self-identifies as a woman, nonbinary, Black, African American, Hispanic, Latino-Latina, Asian, Pacific Islander, Native American, Native Hawaiian, Alaskan Native, disabled, veteran or disabled veteran, lesbian, gay, bisexual, transgender, or queer.”
Firms that fail to properly disclose and report these numbers would result in substantial fines for noncompliance. A founding team member can choose not to provide his or her diversity information, and those numbers will be included in the CRD’s reports. While the information is supposed to be somehow anonymized, in cases where a VC either invests in a single firm or a firm invested in has a single founding team member reported, it would be difficult to maintain anonymity.
In light of these issues, governor Newsom noted in his signing letter that the bill contains “problematic provisions and unrealistic timelines” and would be proposing cleanup language for the 2023-2024 legislative cycle.
In a letter opposing the bill, the National Venture Capital Association claimed the bill would “produce misleading and counterproductive data that would hurt the cause of diversity, equity, and inclusion (DEI) efforts while creating unnecessary costs and risks for California venture capitalists.” NVCA, which collects similar information in voluntary surveys with Venture Forward, a nonprofit it created to address diversity in venture capital, claims “diversity surveys solely dependent on voluntary, self-reported submissions tend to distort data, as individuals from diverse backgrounds are more inclined to partake, resulting in an overrepresentation within the dataset” that it fears would be used in “litigation against diversity programs.”
NVCA also said “scenarios will arise where the data provided through a VC investor or a VC fund will be of such small scale that achieving effective anonymization becomes challenging, if not unfeasible,” given that VCs don’t invest in a large number of new companies each year and that some of the companies’ founding teams can be small. Lastly, NVCA claims the bill creates financial risk and complexity for “emerging and diverse venture capitalists” by requiring “VC funds to bear the entirety of the government’s program administrative expenses, with no numerical limitation.”
Skinner maintains that reporting requirements will increase the number of women and minority owned startups VC companies choose to invest in.
“California has landmark laws on pay inequity and the lack of diversity in both the workplace and the boardroom. With Governor Newsom’s signing of SB 54, California is extending its nation-leading efforts to expand equity by bringing transparency to venture capital investment decisions, with the goal of helping more women- and minority-owned startups access the VC lifeline upon which entrepreneurs depend,” said Sen. Skinner, D-Berkeley.”
But just when Newsom signed SB 54, he also vetoed SB 702, which would have required the collection and public reporting of aggregate data on the demographics of individuals appointed by the governor of California. In his veto message, Newsom claimed self-reported surveys do “not necessarily accurately reflect the diversity of appointees,” echoing the argument made by NVCA against SB 54.
On the ground, a recipient of California VC funding and eligible “founding team member” shared concerns with The Center Square that the new reporting requirements would likely infringe on the privacy of LGBTQ+ individuals, unfairly exclude individuals from low-income backgrounds from diversity statistics, and subject VC firms and investors to undue risk.
