Why diversity disclosures could hurt venture returns

The State of California just passed a bill that mandates the public disclosure of diversity metrics for venture capital investments. It will go into effect on March 1, 2025.

Now Tracey Warren, CEO of F5 Collective, wants to bring the law to Australia. F5 runs a $5M micro-VC fund that represents about 0.00025% of the global $2 trillion in venture funds under management, has made just seven investments, and is yet to prove it can generate returns. The law, as in California, would require that VCs disclose the sexual orientation and gender of their portfolio company founders.

Here’s why I think such bills are a well-meaning but fundamentally bad idea.

Fiduciary Obligations

As a VC firm, your primary responsibility is to generate returns for your investors, private individuals who’ve entrusted you with their hard-earned cash. Mandating diversity metrics can interfere with that sacred fiduciary duty and deliver sub-optimal returns based on playing politics instead of finding the best founders to invest in, regardless what they identify as. If VC firms are going to aim to meet investment quotas, then they need to clearly articulate this in their fund IMs and when pitching to would-be LPs, and definitely not change course half way through a fund investment period.