California bill could lead the way in diversifying venture capital investments

Sand Hill Road in Silicon Valley’s Menlo Park is often referred to as the main street of venture capital. Funding from these influential firms can launch a startup into the big time — sometimes unicorn status.

But just 2% of venture capital goes to all-female teams. That figure is even lower for Black women and Latina founders. A bill just passed by California lawmakers, SB 54, offers a first-in-the-nation push to gather the statistics on who’s getting all that highly sought-after cash.

Gov. Gavin Newsom has until next week to sign it into law. Marketplace’s Lily Jamali spoke with reporter Hanisha Harjani of The Fuller Project about how it would work. The following is an edited transcript of their conversation.

Hanisha Harjani: This bill would require venture capital firms to, for the first time ever, disclose the demographic data of the founders they fund to the California Civil Rights Department. It would apply to venture capital firms that are based in and have significant operations in California, as well as those investing in California companies and soliciting investments from residents of the state. So since venture capital is a huge industry in Silicon Valley, this would likely ripple beyond the state to Wall Street and the rest of the country, maybe even the rest of the world.

Lily Jamali: And what sort of penalties does the bill outline, if any?

Harjani: If companies refuse to disclose this demographic information, the bill empowers the state to take them to court and penalize them for their noncompliance. It also states that the Civil Rights Department could potentially use the data provided to bring further civil action against VCs in the future as well.

Jamali: So you asked the 10 venture capital firms making the largest AI investments for demographics of their partners and who they funded. None of them shared that data, and none of them would even agree to an interview with you.

Harjani: Yeah, correct. We reached out via email, I called them, but I really struggled to even get a response.

Jamali: So the issue of venture capitalists’ funding going mostly to people who look like them — we’ve talked quite a bit about that on this show, and it’s well documented — but how does that bias issue spill into funding, do you think, for AI startups? Why is it especially problematic in that space?

Harjani: Artificial intelligence is completely transforming the way we live and the way we work. We know that AI can reproduce the discrimination we see in real life, and that bias can be introduced at different levels. So in the data that’s used to train AI models and their algorithms, or even in the responses that they generate, there has been reporting on how this disparity manifests across sectors. But there was a really interesting report on how it manifests in health apps. If we look at a lot of medical data, studies have been conducted with men. And so the data that exists is true for men, but not necessarily true for women. So if we look at cardiovascular disease, for example, the data that’s being used doesn’t really represent the way that symptoms show up in women. So when we have health apps that are asking women for their symptoms, and those symptoms do represent cardiovascular disease, but the data that the AI model has been trained on isn’t aware of that, because those symptoms are not the symptoms that show up in men, we could pose potentially life-threatening risks to women when we’re using AI to do things now, like diagnose illnesses.

Jamali: What is the value of having this data about who is getting funded, which is what this bill under consideration in California is trying to address?

Harjani: There are a lot of reasons why. We’re missing out on more than half the population in terms of who’s getting to start these companies and who’s getting to build generational wealth. I also spoke to quite a few female founders for this story. One of them was Ellen Pao, a co-founder of Project Include, which provides recommendations to tech companies to help them increase their diversity. Here’s what she told me about how this bill might change the industry:

Ellen Pao: I think this will help pinpoint folks who need to do a lot more work. I think it also sends a message. It’s trying to now bring venture capital firms into the changes that we’re seeing throughout much of the rest of society.

Harjani: And this sentiment is echoed by a lot of the female founders that I spoke to. Historically, venture capital has been disproportionately white and male in both the partners at the firm as well as the founders of the companies that are funded. And there seems to be a sense from the female founders I spoke to that there’s this comfort with the status quo. So this bill might push venture capital to be a little bit more uncomfortable and think more critically about how they are investing.

Jamali: And you write in your article for The Guardian that “female founders say diversity and venture capital is simply good business.” What did they tell you about that, why they think that?

Harjani: I mean, there’s been a lot of reporting done from financial institutions and consulting groups that show that minority-owned businesses are oftentimes less risky and more profitable for investors. There’s a report from 2018 that showed that businesses founded by women delivered more than twice as much per dollar invested than businesses founded by men. And from my conversations with founders, it seems like this is because women are generally more conservative in their projections. They tend to underpromise but they over deliver. So there’s definitely benefits beyond diversity to this bill.

More on this

For a closer look at Hanisha Harjani’s efforts to get top venture capital firms to share the statistics of their partners and the founders they fund, read their recent article in The Guardian. While the National Venture Capital Association also declined to be interviewed by Harjani, its president has publicly called the bill “inefficient” and “unnecessarily punitive,” adding it would violate the privacy of partners and founders.

The bill’s sponsor, California state Sen. Nancy Skinner, recently told TechCrunch that VCs might not be aware of what their statistics look like, so disclosure and transparency, she said, will hopefully nudge them to do better.