New California law would force firms to report diversity metrics

California is set to pass the country’s first legislation that aims to increase diversity in venture capital.

SB 54 passed the state Senate with a vote of 32-8; next, it will go to Gov. Gavin Newsom’s desk. The bill requires venture capital firms operating in California to report the diversity breakdown of the founders they fund to the state; this includes reporting on the gender, ethnic and racial background of the founders, in addition to the dollar amount given to them.

Sen. Nancy Skinner, the bill’s sponsor, told TechCrunch+ that she’s very optimistic that Newsom will sign the bill.

“Venture capital firms might not be aware that their rate of investment is so low,” she told TechCrunch+. “So this disclosure, this transparency, hopefully, will nudge them to do better.”

Supporters of the bill see it as a massive step toward increasing transparency in the venture capital industry, where less than 3% of all capital is allocated to women and Black founders. SB 54 would also require firms to collect and release their diversity data to the public. It is currently hard to accurately track where venture funding goes because the industry is opaque in allocating funds. Aside from collection, the bill proposes that the state’s Civil Rights Department investigate those violating the bill’s terms, and firms that fail to report may face a penalty to be decided by the courts.

Founder and tech activist Allison Byers, who helped ideate and draft SB 54, said bills like this have precedence in California, pointing to SB 826, which mandated more gender parity on public corporate boards. That requirement helped increase the number of women board directors and influenced corporations to follow suit. (This law was struck down by a judge who ruled it violated the state’s equal protection clause, deeming the law unnecessary. The state is looking to appeal.)

“The funding is nosediving. It’s not just bad, it’s crushing,” Byers told TechCrunch+ regarding the dismal amount allocated to women and Black founders. “We know this type of bill can make a measurable difference.”

Not everyone is a fan of SB 54, however. TechCrunch+ reviewed letters that the National Venture Capital Association and TechNet both wrote to the bill’s sponsors last week opposing SB 54.