Janice R. Andrews
A few weeks have passed since a U.S. appeals court barred a Black-owned venture capitalist from providing investment to women-of-color-led enterprises. The decision has caused a ripple effect throughout the tiny community of venture capital funds that prioritize diversity. In interviews with Reuters, founders, financiers, and solicitors conveyed serious worries about the implications of this choice.
Early in June, the 11th U.S. Circuit Court of Appeals in Atlanta determined that the lawsuit filed by an anti-affirmative action group accusing Fearless Fund of discrimination was likely to be successful. This decision overturned an earlier finding by the same court that had permitted the firm to keep awarding funds while the case was pending.
Courageous Fund In Danger
Fearless Fund was founded in 2019 to close the funding gap for women of color in venture capital. The American Alliance for Equal Rights, headed by conservative activist Edward Blum, is suing the organization right now. Blum was successful in his prior challenge to the Supreme Court’s ruling against the use of race in college admissions.
Even though the 11th Circuit’s decision against the fund primarily affects Georgia, Alabama, and Florida, investors and businesses across who manage diversity investment programs are keeping a careful eye on this development. They worry they might be the target of lawsuits along similar lines.
Ed Zimmerman, a lawyer at Lowenstein Sandler who counsels venture capital clients, said, “We are already seeing the interim effect, where people say, ‘We are either going to restructure the descriptions or documents we use, or we’re not going to say things out loud but will engage in the same practices.”
DEI Initiatives’ Wider Effect
Wall Street and Silicon Valley have seen an increase in opposition to diversity, equality, and inclusion (DEI) initiatives, particularly in the wake of the Supreme Court’s ruling in Students for Fair Admissions v. Harvard, which outlawed affirmative action in college admissions. Businesses that supported diversity initiatives in the past are now reassessing their tactics to stay out of legal hot water.
The way that programs that promote underrepresented groups are being scrutinized has changed due to this shift in mood, and this includes financial initiatives as well as hiring policies. According to a Reuters investigation, major U.S. firms, including JPMorgan Chase, changed their racial and ethnic representation policy in response to threats of lawsuits from conservative groups.
Historical Background and Current Issues
Prior to the Civil Rights Act of 1964, diversity-focused funds were first established to level the playing field for groups who had previously been denied access to financing, jobs, and services. Following the massive demonstrations in response to George Floyd’s death in 2020, corporations greatly increased their funding activities.
The verdict in the Fearless Fund lawsuit may have an impact on the more than $200 billion allocated to comparable initiatives and may even reverse the meagre advantages these funds have given to their Black founders. Black founders received fewer than 0.5% of the $140.4 billion in venture capital funding for U.S. firms last year, according to data firm Crunchbase. After companies promised to increase their diversity expenditures in 2021, Black founders’ venture financing skyrocketed; however, it has since collapsed.
We find the decision to be quite concerning. As per Ying McGuire, CEO of the National Minority Supplier Development Council, a nonprofit organization that advocates for minority-owned businesses, it defies civil rights laws and fails to take into account the realities faced by entrepreneurs of color.
Direct Repercussions
The effects are already being felt by a few founders. Sheena Allen, the creator of the digital bank startup Capway and a recipient of funding from the Fearless Fund, removed the website for her business this year after funding dried up. Fintech startups have a hard time getting capital in this environment, especially those with Black female founders.
Fearless Fund has committed $26.5 million to 40 firms run by women of color; however, as a result of the litigation, several of its limited partners have withdrawn. Ayana Parsons, one of its co-founders, recently left her position as general partner and chief operating officer.
Fearless Fund CEO Arian Simone stated, “People have the right to fund marginalized communities if and when racial disparities exist, and that is something that needs to be protected.” “People who are serious about this work will find creative ways to do it regardless, but they shouldn’t have to find a creative way to do it.”
Prospects for the Future
Other venture capital firms are looking on ways to lessen the risks associated with managing programmes that prioritise diversity. General partner Shila Nieves Burney of the Atlanta-based venture capital firm Zane Venture Fund has made the decision to uphold her fund’s dedication to helping inclusive and diverse founders in spite of any legal issues.
Last year, Burney—an active supporter of the Fearless Fund among Black female investors—organized a petition to garner support. Burney is devoted to supporting diverse teams even though her attempts to seek help from other VC investors—mostly Black women—stalled owing to a lack of finance. She worries, too, that corporate investors may be reluctant to provide money to Black founders because of reputational concerns.
“There will be a significant hole in the ecosystem if Fearless Fund is unable to raise the funds for their next project. Who will cover for Black VCs in the event of an attack? Burney asked.
The recent ruling by a U.S. court against Fearless Fund has clouded venture capital investment with a diversity focus. The industry must navigate these obstacles as the corporate and regulatory landscapes change, all the while trying to continue supporting marginalized populations. The sustainability and flexibility of individuals dedicated to fairness and inclusivity will now determine the direction of diversity in venture capital investment.
