F5 Collective Sponsors USA’s First VC Diversity Bill: Here’s What You Need To Know

Written by: F5 Collective

Make no mistake, F5 is a commercial organisation. Our strategy is designed to demonstrate that investing in women can deliver fantastic social and financial returns, long-term. Backing winners and supporting them is what we do, but we’re also laser-focused on changing the game by leveraging our research and advocacy capability to push the sector forward globally. That is how we will deliver our mission; to break down the bias and inequality faced by women founders. In May 2023, we hit a significant milestone on that journey, and it’s good news that we want to share with founders, investors and our community here in Australia.

We are close to enacting a new law in the biggest global VC market that will require funds around the world to begin reporting their diversity scores for the first time.

There has never been more talk about diversity, yet the meagre 2.3% of US investment capital going to women-led startups in 2019 slipped to just 1.7% in 2022 post-covid. The figure for women of colour was just 0.6%. That trend was reflected in Australia too and was alarming enough for us to mobilise our network in a major push, “If we lose ground now, there’s not going to be a whole lot of people that your daughter can look to and say ‘this is a path for me. I can be successful in business,’ so we’re literally creating a generation of damage. Exposing this data is the first step in solving the investment bias problem,” shared F5 Chairman and Advocacy Lead Kelly Kimball. So that’s exactly what we’ve targeted with this initiative.

F5 CIO Marquesa Finch is pictured above testifying in support of SB 54, a new bill that would mandate all venture capital funds that either operate in California or receive funds from a California entity to report the diversity statistics among founders in their portfolios. California is home to the largest venture capital community in the world, generating 104 billion U.S. dollars in VC funding in 2022. A large portion of those deals flow through to international funds, including Australian VCs, bringing them under the new reporting requirements. This law will introduce an unprecedented level of transparency. For the first time, we will be able to accurately monitor and benchmark diversity across the sector. Public oversight will encourage funds to enhance their scores and facilitate better government oversight.

The bill was co-authored by California Senator Nancy Skinner and Senate ProTem Toni Atkins, drawing on research by F5 network and our Partners. Marquesa was joined by her Pyrium team, F5 Collective, and Scroobious colleagues Tracey Warren, Divya Reddy, Allison Byers and Kelly Kimball in sponsoring the bill, which passed Senate in May. Marquesa emphasised the importance of this US First. “Currently, only 1.7% of all US venture funding goes to female founders while Black founders receive less than 2%, and other diverse founder groups report similar numbers. These statistics are bad, they are embarrassing, and we need to do better to ensure opportunity is equitable. With the data SB 54 will collect, we can take first steps towards holding the industry accountable.” Passing Senate is just step one, but this bill is well on the way to becoming California law and creating significant ripples globally.

What’s the impact on funders?

Marquesa Finch – F5 Collective CIO

Marquesa stressed the need to leverage data to catch up with evolving population demographics. “Women and people of colour make up the majority of today’s global consumer base. There is around a trillion-dollar female economy. Their purchasing power only grows, and it grows exponentially. Forgetting the obvious social detriment, failure to keep up with this shift is a financial detriment to the entire industry. We must start supporting the long-neglected markets that are now simply too big to be ignored. This is a huge opportunity and an important step for the survival of the industry.”’

Kelly Kimball shared his projections for the short, medium and long-term flow through to global funds. “Such a significant percentage of money invested globally comes out of California, and a lot of funds outside California use our sovereign wealth or our retirement funds. The odds are that most of the venture capital and most of the private equity in Australia have at least solicited these funds. So The Bill will have an immediate global effect, as anybody anywhere in the world who wants that money is going to have to know and disclose their diversity score.’”

In the medium term, “If you look at the statistics for the return on investment to female-founded companies, you’ll see that they returned 60% more than male-founded companies. So this new data gives limited investors like Australian Super Funds the opportunity to look at A VC’s diversity score and say, ‘You can do better,’ or ‘That general partner over there is going to do better,’ because they’re more diverse in their investments. It shifts the idea that diversity investment is charity, allowing us to see through the numbers that it’s a really commercial strategy. Then I think we’re going to start seeing some of that money diverted away from those who aren’t participating. So I think it will become a competitive advantage to those who are diversity investors.”

The longer-term plan, once this legislation is passed, and we do believe it will pass in California, is to take that framework and adapt it not only to other states in the US but also as a model for Australia. In the future, it will become difficult for funds to invest anywhere without having to report on diversity, so there are obvious advantages for early adopters.

F5 CEO Tracey Warren emphasised that the current opportunity isn’t tied to the Bill. “We’re ready to throw real data behind this problem now because that’s a piece that’s long been missing. We are tracking our diversity metrics already, and we will start publishing them to promote good practice. We predict a growth in self-reporting from organisations keen to stand out as good corporate citizens, we don’t need a bill for that to happen.”

What about founders?

This legislation will shine a spotlight on who will give money to a female founder and who historically has not. F5 COO Divya Reddy stressed the importance of giving founders access to this data. “As founders decide who gets to be on their cap table and who gets to participate in the next revolutionary innovations, I think we will see a levelling of the current power imbalance. So the question then becomes, ‘Who do you want to make money for?’ Do you want to make money for those that have consistently supported your community or for those that continue to perpetuate inequitable systems? As a founder, you will have the data, and therefore the power to make that decision.”

This is the opportunity for the founders themselves to flip things and understand the de-risking that goes into deciding who they’re raising capital from and who will be your partners throughout your journey of building your company. De-risking doesn’t just apply to investors but also to understanding the risk that comes with the investors who come on your cap table.

Tracey adds, “I’ve mentored many women now, and I always say, ‘Not all money is equal.’ There is power in questions, and founders sell themselves short if they’re too busy pitching rather than saying, ‘Can I just understand what your exit times are?’ ‘What are the expectations here?’ ‘I’m going to need follow-on funding. What do I need to hit for you to continue to invest in me?’ because we know through the SBA Deloitte Report that that’s the fall-off point for women, just as they’re about to scale up. We encourage our founders to do the research and understand funders’ existing portfolios so they can enter negotiations armed with powerful questions.
This data will help founders identify funders who are aligned with their values and ready to support them long-term.” That will really move the dial for women.

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