Investors suggest funds prepare for the fallout of the Fearless Fund lawsuit, not worry about it

Investors suggest funds prepare for the fallout of the Fearless Fund lawsuit, not worry about it

Fearless Fund, which provides grants and investments to women of color, has been indefinitely barred from deploying its $20,000 grant to Black women after the American Alliance for Equal Rights, led by conservative activist Edward Blum (best known as the man who helped overturn affirmative action in education), sued them over the scheme.

The lawsuit against the venture firm could result in significant adverse ripple effects on the venture community’s efforts to promote diversity, equity and inclusion (DEI) in the startup ecosystem. In the eyes of many, banning grants targeted specifically toward minorities will serve to undo the progress made in this space to bring underserved and overlooked populations to an equal footing.

This is one of at least three lawsuits against agencies and organizations that are providing economic assistance to founders of color and is part of a more extensive backlash against the recent increase of schemes seeking to correct racial and gender discrimination in various spheres.

That backlash is also being felt in tech, with more people talking more candidly about waiting for “wokeness” to crumble. All of this is happening despite women, Black, and Latino founders never receiving more than 5% of venture capital in any given year. Emerging funds popped up over the past few years and targeted such communities with hopes of correcting some of the venture economic disparity. The Fearless Fund suit has the potential to dissuade such efforts.

To find out how the industry is reacting to this decision, TechCrunch+ spoke with one founder and four fund managers at venture firms that back women or founders of color. We focused on funds that back women because women, specifically white women, were the main benefactors of affirmative action, and as the fallout from that overturn continues, any further efforts by Blum and others to impede similar schemes will probably negatively impact them, too, regardless of race.

We spoke with:

Carlissia N. Graham, president, New Media Ventures

How do you expect the Fearless Fund case to pan out, and in what ways could the Fund losing the suit impact you? What would the short-term and long-term ramifications of this case be on the wider investment industry?

This is one to watch. While the 11th Circuit is predictably conservative and can easily rule in Blum’s favor, a few factors could tip the scales for Fearless Fund, including the delineation between contracts and grants. Even so, whether it is Fearless Fund or some other like entity, the arguments of this case will make it before the U.S. Supreme Court at some point in order to establish enough precedent to effectively prohibit any legal protections seeking to advance the socioeconomic positioning of historically marginalized groups in any way.

We don’t have a specific BIPOC mandate, though the outcome of these proceedings could impact our screening process, where we do give weight to both founders of color and communities of color as a targeted impact pool.

I’m worried about broader ramifications. In the short-term, disincentivizing institutional support to Black founders will increase the capital holdbacks we’ve seen over the last year, creating a cliff for growth capital at all stages. That means beyond the initial pre-seed and seed stages, many founders won’t have access to capital to scale their ventures precisely at a time when so many new sector opportunities (AI, future of work, entertainment platforms, etc.) are being created and could accelerate the shortening of wealth gaps.

In the long-term, allowing a civil rights statute to undermine its own intent is a legal gateway to denying the systemic impacts of racism and our responsibility as a society to [ensure] equal opportunity for all. For that, we should all be afraid. This is but an extension of the cultural wars that started with misguided bans on critical race theory and banned books in schools. If we can legally nullify race as a protective class, there will be no checks on not just unfettered wealth gaps but also the ruling class, which has historically profited on the backs of minorities.

Should funds and managers that sought to back diverse founders be worried about exposure to legal challenges?

Be prepared, not worried. Backing diverse founders or challenging the status quo in any way always comes with risks and attacks from the opposition. But it is highly unlikely that most other funds with BIPOC mandates will be attacked in the same way. These types of combatants are picky about the companies they target for legal battles based on their need for a high-profile fight.

Fearless Fund is an exceptionally great target for such an attack — their scale, their visibility, their roster of corporate and institutional partners, their jurisdiction in a conservative court with 6/12 judges appointed by Trump, a far-right state, and the second most populous state for Black female founders. Few other funds match up in the same way. So the risk to other funds is low, but they should be prepared to defend their investment thesis and support for their BIPOC founders at all costs and scenario plan two-plus years ahead if the Supreme Court rules in line with the dreaded Students for Fair Admissions v. Harvard case, which overturned affirmative action in education.

Many view the lawsuit as more than just a case over grants, but an effort to shape future legislation. What does that say about the prospects for true equality in this country?

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