California Suspends Enforcement of Law Requiring VCs to Report Diversity Data

Under a new state regulation, venture capital firms operating in California were supposed to submit demographic data about their portfolio companies, including the gender and race of startup founders they backed. But amid public criticism from some tech leaders, the California agency administering the new requirement suspended it just before the deadline for firms to make their first disclosures.

Unexpected Move from Regulators

The California Department of Financial Protection and Innovation (DFPI) announced in mid-March that it plans to initiate rulemaking in response to comments by various stakeholders. The agency stated: “Implementation and enforcement of the law will be suspended pending completion of the rulemaking and until final regulations are in place.”

California lawmakers first passed the measure in 2023, and it was signed into law by Governor Gavin Newsom. For decades, women and people of color have received only a small share of overall startup funding relative to their representation in the US population. Lawmakers hoped putting more public scrutiny on investment decisions would help foster greater equity in the market, including for people who are disabled, retired military, or LGBTQ+.

Administrative and Legal Hurdles

The law called for venture capital and some other investment firms to file annual reports about the overall makeup of the founding teams they had invested in and the amount of money provided to diverse founders. Firms were meant to collect the demographic data through a voluntary survey that was then anonymized, with authorities planning to publish the filings online.

However, the implementation process faced significant friction. The National Venture Capital Association (NVCA), the industry’s leading trade group, opposed the law. They argued that voluntary data collection would inflate diversity statistics and that publishing inaccurate data could lead to unfair attacks on investors.

In February, the NVCA wrote to Newsom asking for the reporting deadline to be pushed back, claiming the state had bungled the process. According to the association, California authorities didn’t publish the standardized survey until early this year and still hadn’t introduced a way for firms to register as required by the law.

Backlash from Tech Leaders

As the deadline loomed, prominent entrepreneurs and investors took to social media to complain. Blake Scholl, founder and CEO of Boom Supersonic, wrote: “I want to live in a world where merit matters—not skin color or what you have between your legs.” He stated that his company would not support any of these requests.

Joe Lonsdale, a Palantir founder and investor at 8VC, also criticized the regulation, calling it absurd to require firms to survey CEOs about their sexual orientation. After the suspension was announced, Lonsdale mocked the regulators for waiting until some firms had already sent out surveys before telling the rest they didn't need to do it.

The Future of Investment Transparency

The DFPI said it would first seek input from investors, industry groups, and founders before beginning a new rulemaking process later this year that could last up to 12 months. The goal is to promote “clarity, collaboration, and transparency” regarding the law.

Currently, the debate over Diversity, Equity, and Inclusion (DEI) remains a flashpoint in Silicon Valley. While social advocates strive for equality in capital access, a significant portion of the tech elite views these measures as government overreach that undermines market principles and meritocracy.