California passes law mandating VC firms to release investments’ diversity information

Last night, California Governor Gavin Newsom signed into law Senate Bill 54, which will require venture capital firms in the state to annually report the diversity of the founders they are backing. This is the United States’ first piece of legislation that aims to increase diversity within the venture capital landscape. The law will go into effect on March 1, 2025.

Once the law goes into effect, any venture capital firm operating in the state (that includes VC firms headquartered in California, have operations in the state, have invested in companies that operate in or are based in the state, or have received investments from California residents) must report, for example, the race of the people they back, as well as their disability status and sexual orientation. The bill also requires firms to collect and release their diversity data to the public.

The information collected will be aggregated before being publicly released, similar to how the state handles information about wages. Those who fail to comply with the new law may face a penalty as decided by the courts.

“This bill resonates deeply with my commitment to advance equity and provide for greater economic empowerment of historically underrepresented communities,” Gov. Newsom wrote in his letter signing the bill.

SB 54 will be added to the existing Business and Professional Code as “Chapter 40. Fair Investment Practices by Investment Advisers,” and will also amend part of the Government Code in relation to professions.

Tech policy advocates are thrilled that the bill has been passed. Funding to startups led by women, Black founders, or Latinx founders has never risen more than 5% in any given year, and there is hope that this bill will provide more transparency into how venture capital dollars are allocated, especially given that California is one of the biggest markets for venture capital investments.

“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. Nancy Skinner, who sponsored the bill.

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