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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 or people of color 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.

Allison Byers, a tech policy advocate who helped ideate the bill, told TechCrunch that she wants this law to encourage funds to allocate more venture dollars to women and people of color. She also hopes that this law increases awareness of funding discrepancies and reveals the funds that are supporting diverse founders and those that do not.

“This transparency will empower women and people of color to make informed decisions about where to invest their valuable time,” she added. “Often, we dedicated a significant portion of our time pitching to fund managers who express interest in our opportunities but whose firms do not ultimately provide funding to individuals in our demographic groups.”

Before the bill was passed in the Senate, its critics, including the National Venture Capital Association and TechNet, a trade association that hails itself as “a bipartisan network of technology CEOs and senior executives,” worried the bill could harm VCs.

The NVCA wrote in a letter to Skinner that the bill could produce “misleading and counterproductive data that would hurt the cause of diversity, equity, and inclusion efforts while creating unnecessary costs and risk for California venture capitalists.”

TechNet, meanwhile, worried that VC firms would face potential liabilities resulting from the release of sensitive information to the state’s civil rights department.

TechNet and NVCA did not immediately respond to requests for comment.

Both organizations, however, had said they supported the notion of boosting diversity within venture capital. In Newsom’s signing letter, he said the bill’s language needed to be cleaned up, saying that there were a few “problematic provisions and unrealistic timelines” currently outlined.

The cleanup will be part of the 2024-2025 Governor’s Budget to “ensure this important policy to improve the diversity of venture capital investments can be implemented properly,” he wrote.

Byers said the next goal is to help push forth matching bills throughout the nation. “We are already in discussions with leaders in other states and countries who are interested in enacting similar policies,” she said.