Navigating California's SB 54 and Portfolio Diversity Reporting

California recently passed SB 54, a first-of-its-kind, watershed law requiring venture capital firms to report on the demographic data of the founders they back. With California as an epicenter of venture capital and venture-backed startups, the scope and impact of this bill are incredibly meaningful.

The law applies to most venture capital firms that invest in California-based start ups or have an office within the state of California. To stay compliant, these firms need to disclose diversity data of their founders, as well as the percentage of fund capital allocated to diverse founders.

The legislation has also been the subject of some pushback, particularly around accuracy, data privacy, and administrative burden. Firms are looking for the best ways to navigate next steps.

That said, most stakeholders acknowledge the role of reporting and measurement not only in making the broader industry more equitable, but also in unlocking stronger returns and innovation. For example, recent data shows that businesses founded by women delivered higher revenue—more than twice as much per dollar invested—than those founded by men, making women-owned companies better investments for financial backers.

Over the past several years, many fund managers have made concerted efforts to increase diversity in their investment activities. This comes in the form of active efforts to hire more women and BIPOC investors, supporting portfolio leaders with internal diversity, equity, and inclusion (DEI) efforts, and, notably, reporting on diversity metrics across the portfolio.

Let’s step back to understand prevailing practices around diversity reporting in fund management, so that we can better contextualize SB 54 and the broader discourse and dynamics around diversity reporting.

Different approaches to diversity reporting

Arbor partners directly with fund managers to support their DEI and HR reporting needs via our dedicated fund product. Using the Arbor Fund platform, investment firms can stay compliant with legislation like SB 54 or regional board reporting requirements, answer limited partners’ reporting requests, and better quantify portfolio company HR and compensation strategies to serve as a stronger platform partner.

When it comes to diversity reporting, however, we understand that one size does not fit all. Should a firm tackle founder diversity, full workforce diversity, and/or board diversity? Which diversity metrics should be captured? How do we capture the information in a compliant, thoughtful, and safe way?

In short, measurement needs and approaches differ dramatically based on the investment stage, geographical location, investment focus area, relationship to portfolio companies, internal team expertise, and other priorities unique to fund managers.

We’ve seen the variation and range of approaches across our wide partner base of fund managers, and from our cofounders’ own firsthand experiences as former VC/PE investors.

That said, across all approaches toward DEI and HR reporting, we see one key theme: it all comes down to data.

Considerations in reporting strategy

Fundamentally, the movement around diversity reporting is centered around the capture of objective data, not dissimilar to the financial reporting that all stakeholders through investment management know well.

With that, investment firms of all shapes and sizes are looking to one another, to their LPs, to consultants, and to external frameworks in an effort to answer questions like:

• What metrics should we care about?
• How do I benchmark my outcomes?
• How do I do this in a way that is safe and secure?
• What is the ROI of this work?
• What do I need to do to stay compliant with SB 54?
• What are existing and prospective LPs looking for?
• How do I make this less burdensome and more value-additive to my portfolio companies?
• Do I need to report on my internal investment team?  
• How do I generate buy-in from more stakeholders?

Let’s break down these considerations.

Metric selection: With a myriad of ever-changing reporting frameworks, organizations, and systems (CSRD, SFDR, TCFD, CDP, ISSB, UNPRI, ILPA, EDCI, among others), fund leaders have the difficult work of identifying which metrics best align with their priorities (e.g., investment focus area, stage, LP requests, and more). For a deep dive into a few prevalent frameworks, consider our overview on ILPA and EDCI’s diversity reporting metrics.

Data analysis and benchmarking: After receiving the data, fund teams have the time-intensive, technical work of crunching the data, generating data visualizations, and identifying industry-relevant benchmarks. Depending on the sophistication of analysis and quality of the data received, this process can take several hours per portfolio company on each reporting cycle.

Administrative burden: If not done right, running a comprehensive reporting project may be unnecessarily expensive and time-consuming for fund platform teams and portfolio companies, both of which are already onslaught with reporting requests. It can be frustrating to be repeatedly asked to manually fill in redundant information. Having a standardized system, like Arbor, can prevent manual, repetitive reporting for different stakeholders.

Portfolio value-add: With nuanced DEI and HR data in hand, fund leaders have the unique opportunity to add value back to the portfolio company leaders that they support. Through our work at Arbor, we've seen repeatedly that HR analytics tooling, benchmarking, and individualized portfolio company reports are meaningful incentives to promote portfolio company buy-in. Having seen that, Arbor's platform focuses heavily onto making the process easy, intuitive, and value-additive to the portfolio company leader.

Compliance: A decade ago, utilizing people data for advisory and reporting was considered a ‘nice-to-have’ for forward-thinking investors. Increasingly, however, this data is not just a strategic advantage, but also a legal requirement, an LP requirement, or a must-have for modern high-growth companies. For funds, having reporting in hand is a matter of staying compliant with the law or being able to close an important LP.

Data privacy and anonymity: The data that comprehensive reporting might ask for is quite sensitive. The key to accuracy and making this a value-additive experience is cultivating trust and clearly explaining how this data will be used. Proper user consents, data storage, and anonymization are imperative to stay compliant with data privacy and security regulations.

Regional relevance: A one-size fits all approach to data collection is likely not the best option for diversity reporting. Consider, for example, the regional differences in race and ethnicity in Japan vs. United Kingdom vs. United States. Region-by-region legal and cultural literacy are critical.

About Arbor

Arbor is a people data platform that makes it easy to capture, analyze, and benchmark HR and DEI data. Built by investors for investors, Arbor Fund, our dedicated fund management product, is tailor-made to help investment teams keep up with today’s ever-changing regulatory landscape and the unique needs of portfolio management.