Jennifer S. Fan, Startup Biases, 56 U.C. Davis L. Rev. 1423 (2023), https://digitalcommons.law.uw.edu/faculty-articles/936
startup, corporate governance, bias, gender, diversity, equity, inclusion, racial, ethnic, minority, minorities, homophily, HBCU, venture capital, limited partner, private companies, private ordering, investor, director, board, disclosure, entrepreneur, corporation, founder, diverse, technology
This Article provides an original descriptive account of bias in the startup context and explains why litigation is eschewed and what happens when it is used as a mechanism to combat bias in the venture capital ecosystem. Further, this Article identifies two particular phenomena in the startup context that exacerbate gender and racial bias. First, homophily—the idea that like attracts like—abounds and has been part of the DNA of venture capital since its inception. The thick networks that developed as venture capital made its way from the East Coast to the West Coast were limited to an elite group that were predominantly white and male. Second, because startups are not subject to a robust set of rules and regulations, they operate under a private ordering structure which allows startups to focus on growing the company. Therefore, whether gender or racial bias is addressed (if at all) depends on the company’s priorities. This lack of rules and regulations is both a blessing and a curse in the startup world. While it allows startups maximum flexibility, it also prevents startups from being subject to a set of laws like it would be in a public company setting. Indeed, evolving practices in the public company realm have limited applicability in the private company setting. This Article offers both legal and non-legal tools to address startup biases, including legal reform applicable to unicorns and investors of a certain size, the diversification of deal leads and referrals, the recruitment of more investors who are women and racial and ethnic minorities, among others. The proposed solutions are intended to disrupt the homophily-influenced infrastructure of startups so that long-lasting changes can occur. Otherwise, we will be where we always are—with women and racial and ethnic minorities receiving a paltry share of venture capital funding.