California State to Require Venture Capital Companies to Collect Diversity Data

California recently passed a bill, SB-54, in an effort to increase transparency regarding diversity in the venture capital industry and to encourage investments in diverse founders. SB 54 will require “covered entities” to collect and maintain diversity data about their portfolio companies starting March 1, 2025, and the state of California will make such data publicly available on an anonymized basis. As defined in the bill, the term “covered entity” includes traditional venture capital funds and their investment advisors, family offices, certain corporate venture funds, accelerators and incubators, that are, in each case, based in or have a substantial connection to California.

SB 54 requires covered entities to issue a survey that is provided by the California Civil Rights Department to their portfolio companies on an annual basis to collect the diversity data listed below. The founding team of each portfolio company can decline to participate in the survey, and even if the founding team does elect to participate in the survey, any founding team member can decline to respond to any given question in the survey. In addition to collecting and reporting diversity data from responsive portfolio companies to the California Civil Rights Department, SB 54 requires covered entities to report the financial data listed below. The bill requires covered entities to maintain the financial and diversity data for a period of four years.

• Diversity Data: Covered entities would have to request the gender, race and ethnic identity, disability and veteran status, sexual orientation and California residency status of each of their portfolio companies’ founding team members.
• Financial Data: SB 54 would also require each covered entity to present the following financial data in a tabular format for the prior calendar year:
  • The total number of investments it made in portfolio companies that were primarily founded by diverse founding teams (i.e., where the majority of the founding team is diverse), reported as a percentage of the total number of investments in the aggregate and broken down according to the diversity data categories listed above;
  • The total amount of money it invested in venture capital investments (i.e., operating companies that the covered entity’s investment advisor has some management rights over, including as a board director); and
  • The principal place of business of each of its venture capital investments.

SB 54 provides the California Civil Rights Department authority to enforce the bill. The potential remedies available to the department include issuing a warning and notice to comply, instituting an action to compel compliance, asking the court to charge a covered entity a reasonable penalty and any other relief the court deems reasonable.

Key Takeaways

• SB 54 covers a broad range of persons, or covered entities, including traditional venture capital funds and investment advisors, family offices, certain corporate venture funds, accelerators and incubators. 
• Following the bill’s effective date, covered entities can expect to incur additional costs related to the administration of surveys to portfolio companies, the aggregation of data, and the maintenance of the data and all relevant correspondence. 
• SB 54 explicitly states that portfolio companies may voluntarily participate in the survey but have no obligation to complete the survey and that no adverse action will be taken against them for declining to complete the survey. Moreover, the bill permits a founding team member to decline to answer any given question in the survey.