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At first glance, California’s new venture capital diversity reporting rules make sense: if we’re finally serious about equity in venture, we need standardized numbers on who’s getting funded and who isn’t.
Starting in 2026, California‑connected funds will have to register with the state regulator, survey the founding teams of their portfolio companies on gender, race, ethnicity, LGBTQ+ status, veteran status, disability, and more, and then report aggregate stats on how much capital is going to “diverse” founders. Responses are voluntary and anonymized, but it’s one of the first serious attempts to turn founder‑diversity metrics into a defined reporting category, not just marketing copy.
If you’ve ever run or advised a fund that claims “we’re proud to invest in women‑, Black‑, and Latinx‑led companies,” ask yourself one uncomfortable question: Who actually counts as a “founding team” in that stat sheet?
There’s no universal definition.
- Is it everyone on the cap table with at least 5%?
- Only those named in the incorporation documents?
- Only the people who were in the room on day one, even if the “idea person” left early?
California tries to address this by defining “founding team” in statute and requiring that demographic data come from a structured survey sent to each founding‑team member. That instantly makes their dataset cleaner than most “here’s our diversity pipeline” slides you see at conferences - but it’s still far from perfect.
At Venture Mechanics, we’ve been living this ambiguity in real time. We do our own ad‑hoc tallies of founder diversity, but we track it based on business starts rather than funding rounds. After all, quite a few AI-forward startups these days are getting off the ground without trackable outside funding.
Roughly 80% of our thousands of Seattle‑area founder-members would qualify as “diverse” by at least one common definition, yet the day‑to‑day reality is that MALE Indian and Asian founders dominate our tech startup landscape, while female Indian and Asian founders are just starting to come up in the ranks. We’ve joked for years about whether these males should even be counted as “underrepresented” in our particular ecosystem.
In most institutional conversations, the traditionally underrepresented groups are women, Black founders, Latino founders, and female Asian and Indian founders. The LGBTQ+ category is one of the hardest to track because not everyone is “out” in professional contexts; for that reason alone, it’s almost certainly the most undercounted slice of the diversity pie.
Even when you agree on which groups you’re trying to track, the data is still incomplete. Founders can decline to respond, identities may only be captured once while teams are changing, and different organizations apply different definitions of “founding team.” We’re moving from fully anecdotal to something that looks more consistent on paper—but it remains more art than science.
At least here in the Pacific Northwest, I’ve noticed another interesting pattern: almost every single “micro VC” (funds with less than about $100M AUM, aka "emerging fund managers") proudly states that they prefer to invest in—if not exclusively invest in—diverse founding teams. In contrast, this is almost never given even lip service by the larger VC funds.
What’s striking is that most of these emerging fund managers are not doing this as classic impact investors. They’re doing it because they believe these founders produce higher ROIs, often 2–3x the returns they see from the “average” team, and do it on shorter timelines. These are founders who have no Plan B - they’re highly driven to succeed, often the first from their community to go to college, much less to start a company and attract venture backing.
So on one hand, California is trying to standardize how we measure diversity. On the other hand, the people actually writing early checks in our region are already behaving as if “diversity” is an alpha source, not a concession. The frustrating part is that our data systems still aren’t sophisticated enough to measure that dynamic cleanly and consistently.
Layer on top of that the main analytics platforms that LPs and GPs rely on—Carta, PitchBook, and similar tools—and the picture gets even fuzzier.
Carta’s equity reports, for example, publish racial and gender breakdowns of founders and employees across tens of thousands of startups, but they rely largely on opt‑in self‑reported demographics tied to stakeholder profiles. Participation is far from universal, so a lot of what we see is based on partial samples and extrapolation rather than anything resembling a full census. It’s directionally useful, but nobody should mistake it for a complete map of founder diversity.
PitchBook, meanwhile, tends to surface diversity through tags like “women‑owned,” “minority‑owned,” or “DEI‑focused,” often sourced from public bios, marketing language, and third‑party data feeds. There’s no single audited definition behind these labels. If a company proudly brands itself as “Black‑founded,” it’s more likely to be tagged accordingly. If it doesn’t, it may never show up in diversity filters at all.
So we have:
- A state trying to push standardized collection.
- Local ecosystems like ours where micro VCs already see diverse founders as a performance edge.
- Data platforms using partial opt‑in surveys and fuzzy tags to approximate what’s really going on.
It’s progress, but it’s still pretty far from a coherent national picture.
Putting my cards on the table: California is doing the right thing by forcing structure into how VC firms measure and report diversity, even if the methodology is imperfect and the data incomplete. It’s still far better than every fund inventing its own math.
But diversity investing should not become a patchwork of fifty state‑level experiments. If we truly care about understanding how venture capital flows to women, Black and Latino founders, LGBTQ+ founders, and other underrepresented groups, we need:
- A common definition of “founding team”
- A common set of demographic categories
- A single reporting framework that lets us compare numbers across states and regions
That’s work for the federal level, not just Sacramento.
Realistically, I don’t expect the current administration to push a federal venture‑diversity reporting standard any time soon. So, for now, California will be the lab experiment; Carta, PitchBook, and others will continue filling in gaps with partial data; and operators like us at Venture Mechanics will keep running our own local tallies, knowing full well they’re imperfect.
In some ways this is like the battle between federal NHTSB CAFE standards versus California's much more aggressive fuel economy standards.
Even so, this is the direction the industry is going. The lens on who gets funded is only going to get sharper. If you’re a founder, expect to be asked about it. If you’re an investor, expect to be measured by it. And if you’re serious about performance, don’t treat “diversity” as a compliance burden - treat it as a source of insight about where the next generation of outlier founders is actually coming from.
