Gov. Gavin Newsom has signed into law a bill that will require venture capital firms to report to the state the race, gender, sexual orientation and other demographic information of the founders they back.
Signed by Newsom on Sunday, Senate Bill 54 applies to all venture firms that have a connection 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.
The new law, which was passed by the state Senate and Assembly in early September, will require such firms to collect demographic information from the founders they invest in and then report that data annually to the state Civil Rights Department. The legislation also directs that department to make those reports available to the public via its website.
"This bill resonates deeply with my commitment to advance equity and provide for greater economic empowerment of historically underrepresented communities," Newsom said in a letter explaining why he signed SB 54.
Starting March 1, 2025, the legislation will require venture firms to collect demographic information from their founders via a state-issued survey. The founders' participation in the survey will be voluntary. The survey will ask for information on each founder's race; ethnicity; disability, if any; sexual orientation; military service background; and whether they are state residents.
The law will require venture firms to aggregate that data and provide it to the state. It will also require firms to break out the number and amount of their investments that go to founders in each of those categories and to all non-white, non-heterosexual male founders as a percentage of their total investments.
Backers of the bill see the measure as a way to help increase funding for founders from traditionally underrepresented groups. Last year, startups with female-only founding teams received just 2.1% of all the venture capital money invested across the country, according to a report by PitchBook Data. Startups founded by Latinx and Black people received 2.1% and less than 2%, respectively, of all venture funding, according to Crunchbase.
SB 54 is the first piece of legislation in the country aimed at increasing diversity within the venture landscape, according to Sen. Nancy Skinner (D-Berkeley), the measure's sponsor.
"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," Skinner said in a news release.
Newsom wants corrections
Some in the venture industry also cheered Newsom's move.
SB 54 provides an opportunity to finally push diversity to the forefront of the venture business, Allison Kelly, CEO of ICA Fund, an Oakland-based venture firm, said in a news release. Kelly added that she hoped other states would follow California's lead.
"For too long, the benefits of venture capital have been predominantly confined to those who are white, wealthy, and male,” she said in a news release. “It's past time that venture capital firms reassess their funding practices with an eye toward equity."
Although he signed the bill, Newsom in his signing statement criticized it for creating a new requirement for the Civil Rights Department to determine whether and which venture firms would be covered by the new requirements. Getting the department up to speed to do that and to administer the new law will require "significant" funding from the state's general fund, he said.
"This bill contains problematic provisions and unrealistic timelines that could present barriers to successful implementation and enforcement," Newsom said in the statement.
The governor said he would propose cleaning up the measure's language as part of his budget for the state's coming fiscal year.
Prior to Newsom signing the legislation, critics of it, including the National Venture Capital Association, argued against it.
The bill would be costly for venture firms to implement, the NVCA said in a letter to Skinner. And the data it would collect would be questionable at best, given that founders from traditionally underrepresented groups would be more likely to take part in the surveys than white, male founders, the group said.
"While well-intentioned in principle, in practice, SB 54 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," the NVCA said in its letter.
When the bill was going through the state Assembly, tech industry lobbying group TechNet and the California Chamber of Commerce raised concerns that venture firms could be sued based on the diversity data they submitted the state, especially if the data was faulty because founders didn't participate in the surveys.
"Attaching potential liability to these surveys could be incredibly problematic," they wrote to the Assembly.
