Venture capital firms and founders with ties to California need to be thinking about diversity and inclusion.
A new law will take effect March 1, 2026, requiring all venture capital firms with a nexus to the state to report annual diversity data on their portfolio companies’ founders. Importantly, the data being reported is taken from the prior calendar year, so venture capital firms and companies will want to be thinking about diversity through this statutory lens throughout the calendar year of 2025.
California’s Civil Rights Department will post the information on its website in an easily searchable and downloadable format. It also may publish aggregate results garnered from the reports and use the information as evidence in civil actions. Further guidance will be required from the Department as to which information will be aggregated and therefore kept anonymous.
Who Must Report?
California passed Senate Bill 54 last year and subsequently amended it in June with Senate Bill 164.
Under the law, any venture capital firm operating in California must report on the demographics of the founders of the portfolio companies in which they invested in the prior calendar year.
For the purposes of the law, a venture capital firm must report if it meets two criteria. First, the venture capital firm must satisfy either of the following:
- it primarily engages in the business of investing in, or providing financing to, startup, early-stage, or emerging growth companies; or
- it manages assets on behalf of third-party investors, including, but not limited to, investments made on behalf of a state or local retirement or pension system.
Second, the venture capital firm must satisfy any of the following:
- the venture capital is headquartered in California;
- the venture capital company has a significant presence or operational office in California;
- the venture capital company makes venture capital investments in businesses that are located in, or have significant operations in, California; or
- the venture capital company solicits or receives investments from an individual or entity who is a resident of California.
Founding Team Reporting Requirements
Each venture capital firm must report the following information about each founding team member of all the businesses in which the venture capital firm made a venture capital investment in the prior calendar year:
- the founding team member’s gender identity
- the founding team member’s race
- the founding team member’s ethnicity
- the founding team member’s disability status
- whether the founding team member identifies as LGBTQ+
- whether the founding team member is a veteran or disabled veteran
- whether the founding team member is a resident of California
- whether the founding team member declined to provide any of the information described above
A founding team member is defined as:
- a person who has been designated the chief executive officer, president, chief financial officer, or manager of a business, or who has been designated with a role with a similar level of authority as any of those positions; or
- a person who satisfies all of the following:
- a person who owned initial shares or similar ownership interests of the business;
- a person who contributed the concept of, research for, development of, or work performed by the business before initial shares were issued; and
- a person who was not a passive investor in the business.
Other Reporting Requirements
Additionally, the law requires venture capital firms to disclose, on an annual basis for the prior year, the number of venture capital investments it made to businesses primarily founded by diverse founding team members, as a percentage of the total number of venture capital investments the venture capital firm made. The law defines a “diverse founding team member” as a founding team member who self-identifies as a woman, nonbinary, Black, African American, Hispanic, Latino-Latina, Asian, Pacific Islander, Native American, Native Hawaiian, Alaskan Native, disabled, veteran or disabled veteran, lesbian, gay, bisexual, transgender or queer.
What Happens if a Firm Doesn’t Respond?
If a venture capital firm fails to file a report by the deadline, the Department will give the firm a warning with a 60-day response period. If the firm still doesn’t submit a report, the Department may seek an order from a superior court to compel the firm to comply and require the firm to pay a penalty, reasonable attorney’s fees and costs. The court also could order other relief that it deems appropriate.
How Can Venture Capital Firms and Founders Prepare?
The Department plans to design a standardized survey to collect the required data from venture capital firms, but it is not yet available. In the meantime, venture capital firms may want to conduct their own surveys to better understand the makeup of their current investment portfolio. They should, however, consult with legal counsel regarding current state or federal privacy laws.
Venture capital firms and founders should also be cognizant of the reporting requirements as they make or seek investments because, unless SB 164 is successfully challenged before it takes effect, this information will now be in the public domain.
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