California lawmakers have passed a landmark bill that will require venture capital firms to publicly disclose the backgrounds of founders they've supported in a bid to improve investment transparency.
The law, which is due to come into effect in March 2025, means VCs operating in the state will be required to disclose information on founders they pledge financial support to.
This includes information on a founders’ ethnic background, gender, sexual orientation, or disability status. The bill marks the first of its kind from US lawmakers, and is aimed at improving diversity within the venture capital sector.
Under the terms of the bill, information on founders will be collected and aggregated before being publicly released on an annual basis, lawmakers said.
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Personally identifiable information pertaining to individual founders will not be published, however.
“The bill would require this information to be collected and reported in a manner that does not associate the survey response data with an individual founding team member,” the bill states.
Companies that fail to disclose diversity metrics within a specific time frame could face financial penalties.
“If the covered entity has not submitted the report after those 60 days have elapsed, the bill would authorize the department to commence prescribed proceedings seeking specified relief, including a penalty.”
Transparency and diversity in venture capital
The passing of this bill follows well-publicized concerns over the volume of funding secured by founders or founding teams from minority backgrounds in recent years.
Data from Crunchbase this year showed a 45% drop in overall venture capital funding for black founders in 2022 - the largest year-on-year decrease for black entrepreneurs in a decade.
In other minority groups, such as the LGBTQ+ community, venture capital funding rates are also a recurring point of contention, with founders from these backgrounds typically raising less than their heterosexual counterparts.
Analysis from StartOut, a non-profit for LGBTQ entrepreneurs, found that between 2000 and 2022, founders from the community only raised 0.5% of the $2.1 trillion in venture capital funding allocated to startups over that time frame.
LGBTQ+ startup founders were found to have created 36% more jobs, 114% more patents, and 44% more exits despite securing 16% less funding than their counterparts.
Nancy Skinner, a democrat senator who sponsored the bill, said the introduction of the legislation will foster greater transparency and accountability in the venture capital space.
“California has landmark laws on pay inequity and the lack of diversity in both the workplace and the boardroom,” she said.
“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.”
