US court decision casts shadow on diversity venture capital funding
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[July 02, 2024]
By Krystal Hu
(Reuters) - Just weeks after a U.S. appeals court blocked a Black-owned
venture capitalist from funding women-of-color-led businesses, the
ruling has had a chilling effect across the small industry of
diversity-focused venture capital funds, according to founders,
investors and lawyers who spoke to Reuters.
The Atlanta-based 11th U.S. Circuit Court of Appeals in early June found
an anti-affirmative action group's lawsuit that accused Fearless Fund of
discrimination would likely succeed, reversing a judge's decision to
allow the firm to continue making grants while the case proceeded.
The Fearless Fund, established in 2019 to bridge the gap in venture
capital funding for women of color, is facing a lawsuit by the American
Alliance for Equal Rights, run by conservative activist Edward Blum, who
led the successful U.S. Supreme Court challenge to the consideration of
race as a factor in college admissions.
While the 11th Circuit ruling against the fund affects only Georgia,
Alabama and Florida, investors and corporations running diversity
investment programs elsewhere in the country are paying close attention
to how this could expose them to similar lawsuits.
“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,’” said Ed Zimmerman, a lawyer at Lowenstein Sandler who
advises venture capital clients.
![](http://archives.lincolndailynews.com/2024/Jul/02/images/ads/current/ldn_lda_BUSDIRCOVER_2024.png)
The backlash against diversity, equity and inclusion (DEI) initiatives
has expanded from Wall Street to Silicon Valley in the past year after
the Supreme Court's decision in Students for Fair Admissions v. Harvard,
which ended affirmative action in college admissions. Companies that
championed diversity initiatives are now re-evaluating strategies to
avoid legal entanglements.
This shift in sentiment has led to increased scrutiny of programs
specifically designed to support underrepresented groups, from hiring
practices to funding initiatives. Major U.S. companies, including
JPMorgan Chase, have modified policies meant to boost racial and ethnic
representation after conservative groups threatened to sue, a Reuters
analysis shows.
Diversity-focused funds were created to level the playing field for
communities who were historically excluded from services, employment and
funding opportunities before the Civil Rights Act of 1964, which ended
segregation. Corporations stepped up their funding initiatives after
widespread protests over the death of a Black man, George Floyd, at the
hands of Minneapolis police in 2020.
The outcome of the Fearless Fund lawsuit could affect over $200 billion
committed in similar programs and roll back the scant benefits these
funds have so far given to Black founders, who received less than 0.5%
of the $140.4 billion of venture capital funding of U.S. startups last
year, according to data firm Crunchbase. Venture financing of Black
founders, which surged in 2021 after corporations pledged more diversity
spending, has plunged since then, Crunchbase data shows.
“The ruling is a significant concern to us. It contradicts civil rights
law and ignores the reality for entrepreneurs of colors,” said Ying
McGuire, CEO of the National Minority Supplier Development Council, a
nonprofit focusing on promoting opportunities for minority businesses.
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![](../images/070224PIX/news_w42.jpg)
Fearless Fund co-partner Arian Simone speaks to the media during a
press conference in New York, U.S., August 10, 2023. REUTERS/Eduardo
Munoz/File Photo
![](http://archives.lincolndailynews.com/2024/Jul/02/images/ads/current/guzzardos_lda_GENERIC_040524.png)
Some founders are already feeling the impact. Sheena Allen, founder
of digital bank startup Capway and a recipient of a Fearless Fund
investment, took down her company’s website after funding dried up
this year. The current climate has made it difficult for fintech
startups to seek funding, especially for a Black female founder, she
said.
Fearless Fund, which has invested $26.5 million into 40 startups led
by women of color, said some of its committed limited partners have
pulled out, citing the litigation. One of its cofounders, Ayana
Parsons, stepped down as general partner and chief operating officer
last week.
"People have the right to fund marginalized communities if and when
racial disparities exist, and that is something needs to be
protected," Arian Simone, CEO of Fearless Fund, told Reuters.
"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."
Other venture capital funds are exploring ways to mitigate the risks
of running diversity-focused programs, investors say.
After consulting her lawyer and limited partners, Shila Nieves
Burney, a general partner at Zane Venture Fund, another
Atlanta-based venture capital fund, decided to hold her ground and
leave intact her fund’s website description of supporting diverse
and inclusive founders.
Burney, an outspoken voice in the community of Black female
investors, organized a petition to start a campaign to rally support
for the Fearless Fund last year.
She and co-organizers gathered dozens of VC investors, most of them
Black women, to strategize on how to help fight back on the legal
challenge by conservative activist Blum.
But the efforts stalled last year due to a lack of funding, she
said. While her own fund continues to back diverse teams, Burney
fears there will be fewer capital available for Black founders and
that corporate backers will shy away due to reputational risks.
“If Fearless Fund is not able to raise their next fund, that creates
a huge gap in the ecosystem. When there's an attack on Black VCs,
who's going to fill that gap?” said Burney.
That is the question that now confronts Allen of Capway.
Allen, who has been an entrepreneur since college, was able to
self-fund and grow build her previous company. However, a fintech
startup like Capway required significant funding to scale. She is
contemplating either pivoting the company’s direction or shutting
down and starting a new venture.
![](http://archives.lincolndailynews.com/2024/Jul/02/images/ads/current/graue_sda_042021.png)
“I know it’s hard for everybody, but as Black women, we've already
had it a million times harder anyway,” she said.
(Reporting by Krystal Hu in New York, additional reporting by Nate
Raymond in Boston; Editing by Kenneth Li and Matthew Lewis)
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