In 2022, just 1% of the total venture capital funding, which amounted to approximately $2.3 billion out of $215.9 billion, went to companies founded by fastcompany.com. Women founders received a slightly higher but still low rate of 1.9%. fastcompany.com
California has passed a law aimed at promoting transparency and diversity in the venture capital industry. This law requires VC firms to disclose data regarding the diversity of the companies they support. While this might encourage some firms to diversify their investments, some VC firms have been working towards this goal for years. There are mixed opinions within these VC firms about the law and its potential impact on innovation, as well as questions about whether merely revealing the data is sufficient to address the disparities.
Starting in March 2025, VC firms will be obligated to annually collect demographic information, including race, ethnicity, disability status, and gender identity, from the companies in their portfolio. This data will be made publicly accessible in an online database, and firms failing to comply will face fines, although the specific amount remains unclear.
Brittany Davis, a general partner at the VC firm Backstage Capital, believes that the statistics regarding diversity in venture capital are discouraging. She thinks that making these numbers visible will prompt some positive changes. Davis stresses the importance of this approach because many founders from underrepresented backgrounds are equally qualified as their white, male counterparts but often miss out on similar opportunities. Backstage Capital, which has funded around 200 companies since 2015, focuses on supporting “underestimated founders” who, despite their qualifications, are frequently overlooked.
Backstage Capital primarily offers early-stage funding, which can help these founders gain visibility among larger VC firms as they implement their own diversity initiatives. Supporting diversity is not only a matter of fairness but also a smart financial move for VC firms, as diverse founders often address overlooked issues with broad market potential, driving innovation.
The new law is seen as a necessary step by Davis and others because it’s challenging to change something that isn’t being measured. Public disclosures can apply pressure on funds to improve their diversity, given the increasing public preference for more inclusive policies.
Kapor Capital, based in Oakland, has been focused on diversity since 2011. Their approach involves funding businesses focused on underrepresented areas, even if the founders themselves are not from minority backgrounds. Their aim is to achieve positive outcomes, and they also encourage their founders to build diverse teams. This approach has naturally resulted in a more diverse set of founders, with 48% women, 28% Black, and 10% Latino founders, significantly exceeding national averages.
Kapor Capital’s policy arm advocated for the California bill, believing that transparency is essential for promoting change in the industry.
While many VC firms have expressed interest in increasing diversity, it remains uncertain whether their actions will align with their statements. Despite promises to address diversity issues following the protests sparked by George Floyd’s murder in 2020, more recent data suggests that these pledges may have been short-lived. In 2022, only 1% of VC funding went to Black founders, representing a 45% drop from 2021, compared to a 36% decrease for the industry as a whole.
Semyon Dukach, who is the founding partner of One Way Ventures in Boston, also supports the idea of more transparent data and emphasizes the importance of diversity. His firm, however, takes a unique approach by focusing on supporting immigrant founders.
Dukach believes that immigrants, while lacking extensive networks in the U.S., are well-suited to be entrepreneurs because of the resilience they’ve developed through overcoming adversity. He wants to highlight the economic success of immigrants to emphasize their value in society.
One Way Ventures, much like Kapor Capital, has naturally led to a notably diverse set of founders, with around 20% being women and 30% being Black and Hispanic.
Despite his support for the spirit of the new law, Dukach disagrees with the method. He’s concerned that early-stage intervention by regulation might discourage VC firms from investing in potentially disruptive or experimental businesses, which could impede innovation. He worries that any form of regulation generally reduces risk and could be problematic for the industry.
Dukach is also uneasy about the reporting burden on VC firms. He believes that survey questions could be uncomfortable, particularly when it comes to inquiring about employees’ personal details like sexual orientation.
The law won’t require reporting until 2025, allowing time to address its issues. Governor Gavin Newsom has acknowledged that the law has some unrealistic timelines and problematic provisions that need to be ironed out. Legal challenges may also arise due to the law’s broad scope.
The law’s success in California doesn’t guarantee its adoption in other states. Some conservative-leaning states like Florida have passed anti-diversity initiatives, labeling them as “woke capitalism.” For instance, an Atlanta-based VC firm, Fearless Fund, faced a lawsuit for providing grants exclusively to Black women, which was seen as a violation of federal anti-discrimination laws.
Ulili Onovakpuri of Kapor Capital hopes the law will change the momentum, but she suggests that it could go further. She points out that the law only requires reporting on the diversity of founders, not the total funding, which creates a loophole for VC firms to support numerous diverse startups with smaller amounts of funding. Onovakpuri also emphasizes the need for enforcement to prevent companies from manipulating the system, as some have done in the past by including retail store staff, which often skews in favor of minorities, when reporting diversity figures.
In the end, Onovakpuri sees the law as a positive initial step in addressing long-standing disparities in the venture capital industry. Without regulation, many people have been excluded from opportunities to build generational wealth. While she appreciates the tech industry, she questions whether it has truly benefited the majority of individuals and sees room for improvement.