Another reason Newsom makes California undesirable

California’s VC Diversity Law burdens investors, startups and is just unfair

Subscribers may be wondering where I’ve been. I’ve not posted in a while largely because I’m dealing with my youngest son’s request to leave a small private school that embraces Christian values and academic excellence for a California indoctrination school with a significantly larger campus, student body and athletic program. More on this in an upcoming essay.

Another situation I’m dealing with is the Fair Investment Practices by Venture Capital Companies, which was signed into law by California Governor Gavin Newsom in October 2023. It is the most pathetic compliance I’ve seen in the years I’ve been covering the venture capital world and investing in startups. And yet another reason why California is unbearable to live in if not for family, friends and the stunning topography and the year-round temperate weather.

For those unfamiliar - God bless you for not having to deal with this ridiculous law - also known as California’s VC Diversity Law, it makes California “the first state to pass legislation on diversity in venture capital, specifically, requiring the vast majority of VCs to report on the demographics of the founders in whom they invest,” according to Forbes. The writer thinks this is something Californians are to be proud of. It’s not.

I’m not alone in my disdain for this law. Many venture capitalists as well as the National Venture Capital Association, a non-profit trade organization for the venture industry think this law is onerous. NVCA CEO & President Bobby Franklin, in a letter to the bill’s author California Senator Skinner in 2023, wrote: “While well-intentioned in principle, in practice, SB 54 would produce misleading and counterproductive data that would hurt the cause of diversity, equity, and inclusion (DEI) efforts while creating unnecessary costs and risks for California venture capitalists.”

The obvious reason why I don’t like this law is the unnecessary cost and time. If you have an entity based in California that makes investments in startups, you’re a venture capital firm or essentially what they call a “Covered Entity.” Such entities must file with the California Department of Financial Protection and Innovation by March 1st and pay a $175 fee. As though we don’t have enough fees to pay California.

Then we have to send out a survey to the companies in our portfolio that we invested in the prior year. The survey is intended to aggregate the identities of the founders, asking founders not only about their race or sex, but their sexual preferences. I’m sorry but since when does knowing who a founder wants to sleep with in the bedroom become a relevant investment criterion. Check it out here: DEI survey. There are 28 identities to consider! Heck, why not just ask for the founders’ pronouns? Fortunately, founders can check a box that says “declines to state for all responses” - which is the box I’d suggest everyone check off.

This survey needs to go out now since survey results must be collected, analyzed and then prepared in a document that aggregates the information. This report needs to be handed into the DFPI (Department of Financial Protection and Innovation) by April 1st. Here’s that report: VC DEI report.

Salacious vs salient

The aggregate report is to determine what percent of the startups receiving funding are diverse. To be diverse, a founder must fit these identities: woman, non-binary, Black, African American, Hispanic, Latin, Asian Pacific Islander, Native American, Native Hawaiian, Alaskan Native, disabled, disabled veteran, lesbian, gay, bisexual, transgender or queer. Imagine having to think about each company founder in that way? Imagine having to think about a company and a founding team and all the salient factors that make a company great. Then having to sideline those thoughts for salacious ones. In Matthew 5:28, Jesus says that anyone thinking lustful thoughts is already committing adultery. Why is the government making us sin? Why do we have to survey our founders just because California lawmakers want to punish VCs that aren’t investing in what lawmakers want?

This is tedious, unnecessary and puts a stumbling block before investors and founders. As it says in Romans 14:13 “Therefore let us stop passing judgment on one another. Instead, make up your mind not to put any stumbling block or obstacle in the way of a brother or sister.”

If lawmakers want to understand diversity that matters, the more interesting “diversity” facts would be how diverse was the founding talent? Was the founding team consisting of one engineer, one marketer, one lawyer? Was it one engineer and one designer?

To be clear, California is now requiring companies to report demographic data, not invest in diverse founders. There is no statutory penalty for just investing in a bunch of white dudes. But! And that is a big BUT, California knows it can’t penalize firms for investing based on identity. That would be discriminatory. Lawmakers know however, that LPs (those who invest in the VC firms) or board members, or what have you, may look at the reported demographics and reward venture firms that invest in diverse founders. Startup founders may also seek these diverse identities over competance when forming their companies. This is very similar to stakeholder capitalism, the idea that companies that focus on ESG (environmental, social and governance) goals as well as DEI goals would be rewarded. You can read about how that is the case in a post I wrote: “I’m thankful stakeholder capitalism is fading.”

I’m not against diversity. I am a brown woman after all. But the reporting and cost imposition for what is a tactic to impose identity quotas undermines the competence principle that should drive investment decisions. We thought it was going away when Trump came into office. But be aware. It’s just lingering in the background waiting to rise up again. Ideological frameworks, once embedded in bureaucratic systems, have a way of persisting beneath the surface. They can re-emerge whenever the cultural climate permits.

The other reason Newsom has made California unattractive is that in 2024, Newsom also signed into law the so-called “SAFETY Act”, which is not safe as advertised. It’s a euphemism, much like gender-affirming care or reproductive healthcare - terms that sound safe but aren’t. The law prohibits teachers, instructors and counselors from informing parents about their kids’ sexuality unless the child consents. This is not going to work out great for lawmakers or medical practitioners who encourage kids to indulge in their sexual fantasies and confusions. Earlier this year, a detransitioner Fox Varian won $2 million for malpractice by a surgeon and psychologist who encouraged her to transition as a teen.

There are laws in place that should override parents. Teens shouldn’t smoke, drive or drink. But these laws should be limited. The family is the primary source of socialization and moral development. California insists on wanting that role.

Final thoughts

When the state requires parents to step aside so lawmakers can sexualize kids or requires investors to categorize founders according to race, sex, sexual identity, and a litany of demographic markers, it is not being caring and neutral, and certainly not scientific. It is compelling a particular mode of perception. It is insisting that you look at all human beings first through the lens of group identity — before competence, before character, before vision, before their identity in Christ.

(Image source: Insidehighered)