American Alliance for Equal Rights vs. Fearless Fund
The first example involves a case brought against Fearless Fund by The American Alliance for Equal Rights. Fearless Fund has historically provided grants and investments exclusively to women of color. However, as a result of the current litigation, the firm has been indefinitely barred from deploying its capital in that manner. This case has prompted a lot of dialogue in the space, with many firms rethinking their strategies and many others wondering about the long term implications. This is not the only case of it’s kind. In fact, there are several other active lawsuits targeting various agencies and organizations that provide capital to founders from historically underserved and underrepresented communities.
What impact will these cases have on the broader startup ecosystem? It’s hard to say at this point. However, it is clear that it is forcing many funds to think about their deployment models. Further, the implications go well beyond race or gender. These cases will set precedents that could be applied to other areas of specialization. As such, they are being watched closely.
The funding gap is a known issue in venture, with Female, Black and Hispanic founders receiving less than 5% of all annual venture capital allocations. Dozens of specialized funds were formed over the last ten years to address this disparity, and many other “established” generalist VCs and Corporate VCs launched dedicated funds, or set aside dedicated pools of capital to address this gap. Now, many of those fund managers are trying to figure out how to navigate what comes next.
TechCrunch+ recenlty spoke with some of those managers and several things became clear, 1) many managers are watching this closely, 2) this could even impact funds without a BIPOC mandate (any scoring adjustments or any special weighting would be scrutinized), and 3) it will almost certainly impact near term access to capital for under-represented founders.
In terms of Quake, we don’t anticipate any direct impact to our fund – though we recognize it could negatively impact some of our teams. Crunchbase ranked us at one time as the top early-stage investor in Female, Black and Hispanic founders (out of 3,500 VCs worldwide), and we consistently rank in the top 10. However, we have no BIPOC mandate and we make no adjustments to our weighting. Rather, we simply try to remove bias from our process, and we put a heavy emphasis on actual traction vs. schooling, job experience and/or personal connections. There is nothing in our process designed to prioritize (or punish) any founder based on their age, gender or race.
California Mandates DEI Transparency
In contrast to almost everything covered above, California recently passed a law mandating that venture capital firms (operating within the State of California) must file a report each year, disclosing the diversity of the founders they are backing (Senate Bill 54: Business and Professional Code – Chapter 40. Fair Investment Practices by Investment Advisers). The law does not go into effect until March 1, 2025, and there will likely be some challenges, but it does highlight the two extremes that fund managers are navigating at the moment.
To be clear, this legislation applies to any VC firms headquartered in the State, any that operate or have “significant presence” in the State, any that have invested in companies that operate in or are based in the State, and/or any funds that have received investments from California residents. So, as you might imagine, this includes a huge percentage of active venture capital. Reporting is extensive and includes, the race of the founders backed by the fund, their gender, sexual orientation, and disability status. Founders can refuse to supply the information, but firms are required to request the info and publicly disclose any information collected.
DEI advocates widely celebrated its passing, with many believing it will lead to more funding going to startups led by hostorically under-represented founders, and it is expected that other states will follow California’s lead. It’s worth noting that the Bill was opposed by the National Venture Capital Association and TechNet, a trade association representing tech CEOs and executives.
SB 54 is largely a non-issue for Quake, as we have tracked all of this information since inception (to continually check for bias in our selection process). However, I do think a broad understanding of the numbers would be an eye opener for a lot of people and would also give founders a better sense of both the industry and specific firms within it.
While not in direct conflict, both SB 54 and American Alliance v. Fearless illustrate the heightened tensions forming around DEI, and the challenges fund managers will face trying to navigate the rapidly changing landscape. It’s already a tough market for founders, and I’ve talked to many funds that are either sitting on the sidelines or slowing down considerably in response to economic uncertainty, gloabal volatility, and regulatory and legal challenges such as those outlined above.
