Diversity and inclusion have become increasingly relevant topics for business leaders over the past decade. A new law could be poised to bring about new discussions regarding diversity in the private markets. 

In October of 2023, Governor Gavin Newsom signed California Senate Bill 54 into law. This legislation, which will take effect in March of 2025, mandates that all VCs in the state provide annual reports on the founders their firms are backing. SB54 represents the first piece of legislation passed in the United States that aims to increase diversity within the venture capital landscape. 

Let’s take a deeper dive into the potential impact of California SB 54, and the general state of underrepresented founders in the VC world. 

The state of diversity in VC funding 

Data suggests that many groups may still be underrepresented in the venture capital ecosystem. Take startup founders for example: McKinsey reported that in 2022, only 1 percent and 1.5 percent of total US venture capital (VC) funding went to Black and Latino founders, respectively. 

In any given year, startups founded by Black, Latinx, or female founders have never seen an increase of greater than 5 percent from the previous year.  

Underrepresented founders could also be disproportionally affected by economic uncertainty. In 2022, Black entrepreneurs saw a 45% decrease in VC financing, compared to just 36% for the market overall. 

What founders should know about California’s Senate Bill 54 

What is the potential impact of California’s Senate Bill 54?  

SB 54 will require venture capital firms in the state to annually report the diversity of the founders they are backing. In practice, this means that venture capital firms who operate in California—as well as those who (1) have headquarters in the state, (2) have operations in the state, (3) have invested in companies that are based or operate in California, or (4) are recipients of investments from California residents—will be required to report information on the founders they financially back, such as race, membership in the LGBTQ+ community, and disability status.  

The bill also notes that it is optional for the founding teams to disclose this information to VCs, and that those teams won’t be penalized should they opt not to. 

The bill’s proponents commend its emphasis on transparency as a major step towards greater diversity. California State Senator Nancy Skinner, who sponsored the legislation, stated that she sees this as a powerful step “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.”  

Looking ahead at diversity in the private markets 

Members of the VC community will likely be tuned into the impact of SB54 once it goes into law next year. The first-of-its-kind law could represent a change in how we think about diversity in the context of VC funding. 

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