Under the recent state rules, venture capital firms operating in California were required to submit demographic information about their portfolio companies, including the gender and race of the founders of the startups they backed. But amid public criticism from some tech leaders, the California agency that administers the recent requirement suspended it just before Wednesday’s deadline by which companies must make their first disclosures.
“The California Department of Financial Protection and Innovation (DFPI) announced that it plans to initiate rulemaking in response to comments from various stakeholders regarding fair investment practices under the Venture Capital Law” – state agency sent on its website in mid-March. “Implementation and enforcement [law] will be suspended pending completion of rulemaking and entry into force of the final regulations.”
First, California lawmakers passed the measure passed in 2023 and was signed into law by Gov. Gavin Newsom shortly thereafter. For decades, women and people of color have received only a diminutive share of total startup funding relative to their representation in the U.S. population. Lawmakers hoped that increasing public control over investment decisions would lend a hand augment equity in the market, including for people with disabilities, retired military personnel or LGBTQ+ people.
The law required venture capital and certain other investment firms to submit annual reports from March 1 last year on the overall composition of the founding teams in which they invested and the amounts transferred to various founders. The companies were to collect demographic data through a voluntary survey, which was then anonymized. California authorities planned to publish the documents online. Legislators changed bill in 2024 that would delay reporting until April 1, 2026 and allow the state to impose daily fines for noncompliance.
The California Department of Financial Protection and Innovation did not immediately respond to a request for comment on the authority it used to circumvent the deadline set by lawmakers. Newsom’s office also did not immediately respond to a request for comment.
The act was supported by financiers focused on financing entrepreneurs from underrepresented communities. However, the National Venture Capital Association, the technology investment industry’s leading trade group, he opposed it. The group argued that voluntary data collection would inflate diversity statistics and that publishing faulty data could lead to unfair attacks on investors actually trying to address diversity issues. Over the past year, the Trump administration has defunded and attacked diversity, equity and inclusion, or DEI, initiatives in both the public and private sectors, prompting many companies and organizations to withdraw from them.
In February, the venture capital association he wrote to Newsom asking for the reporting deadline to be extended again because she believed the state had bungled the process. California authorities published a standard survey that founders were supposed to complete only earlier this year, and according to the association, they still have not introduced the possibility for companies to register with regulators as required by law. “This administrative schedule creates an error-prone environment and risks generating the misleading and counterproductive data that we have previously warned against,” wrote the association’s president and CEO, Bobby Franklin.
Last month, as the deadline for filing the first reports approached, some entrepreneurs and investors took to social media to complain about the effort involved in the study. “California’s Latest Malaria Requires Venture Investors to Collect/Report Race and Gender Statistics.” he wrote Blake Scholl, founder and CEO of venture-backed aerospace startup Boom Supersonic. “I want to live in a world where merit counts, not the color of your skin or what’s between your legs.”