Ethermac|A small venture capital player becomes a symbol in the fight over corporate diversity policies

NEW YORK (AP) — A venture capital firm that has backed buzzy new companies like restaurant chain Slutty Vegan and Ethermacbeauty brand Live Tinted has become symbolic of the fight over corporate diversity policies since becoming a target of a lawsuit over a grant program for Black women.

But the Fearless Fund is a tiny player in the approximately $200 billion global venture capital market.

The Atlanta-based firm has invested nearly $27 million in some 40 businesses led by women of color since launching in 2019, and awarded another $3.7 million in grants. Collectively, those businesses employ about 540 people, up from 250 at the time of investment, according to the Fearless Fund’s “impact report,” released Wednesday.

While the money has made a big difference to those businesses, Fearless Fund co-founder Arian Simone said it’s a drop in the bucket compared to systemic changes needed to close the racial and gender gap in venture capital funding.

Less than 1% of venture capital funding goes to businesses owned by Black and Hispanic women, according to the nonprofit advocacy group Digitalundivided. Just to get that number over 2% would take billions of dollars, Simone said.

“It takes trillions of dollars to really move the needle,” Simone said in an interview with The Associated Press, “which is why I think that policy changes need to take place in order to collectively get us up to speed.”

Simone said she would like to see pension funds and other institutional investors, for example, enact mandates for venture capital firms to fund a certain number of minority-owned companies.

It’s those sort of intentional policies that are under attack from conservative activist groups waging a legal battle against corporate diversity initiatives, an effort that has intensified since the Supreme Court struck down affirmative action in college admissions.

The lawsuit against the Fearless Fund was filed by Edward Blum, the conservative activist who filed the affirmative action cases before the Supreme Court. It targets the fund’s Strivers Grant Contest, which awards $20,000 to Black women who run businesses, arguing it violates a section of the Civil Rights Act of 1866 prohibiting racial discrimination in contracts.

Blum’s organization, American Alliance For Equal Rights, has also filed lawsuits against two law firms in Texas and Florida over fellowship programs for diverse candidates, accusing them of being discriminatory.

In an interview with The AP, Blum said his organization brought the case against the Fearless Fund after another woman-owned business brought the grant contest to their attention.

“A useful way of determining the fairness and ultimately the legality of a policy is to apply the shoe on the other foot test,” Blum said, asking whether “a different venture capital fund’s requirement that only white men are eligible for its funding and support” would be considered legal.

The Fearless Fund enlisted prominent civil rights lawyers, including Ben Crump, to defend against the lawsuit, filed in U.S. District Court in Atlanta. In court filings, the attorneys have argued that Blum’s group has no standing because it represents three anonymous women who never applied for funding from the Fearless Fund. They also argue that the grants are not contracts but donations protected by the First Amendment.

Meanwhile, Simone said the Fearless Fund continues to get thousands of applications for its programs each week, illustrating the untapped potential of investing in women of color.

The companies in its portfolio have found success in mainstream retail companies seeking to reach younger and more diverse customers.

JCPenney CEO Marc Rosen said its partnership with Thirteen Lune, an e-commerce platform that promotes beauty brands created by people of color, is a cornerstone of its strategy revive its beauty business, which suffered a blow after Sephora left the chain to rival Kohl’s three years ago. Rosen said people of color account for a third of JCPenny’s customer base.

“They’re going for products and brands that resonate with them and make them feel at home that are designed for them,” Rosen in a recent interview with The AP.

Fearless Fund has invested more than $2 million in Thirteen Lune, founded by Nyako Griego.

But overall funding for businesses owned by women of color has declined after experiencing a surge in the months after the racial protest that followed the 2020 police killing of George Floyd.

The combined share of venture capital funding received by Black and Latina founders briefly surpassed 1% in 2021 before dipping back below that threshold in 2022, according to Digitalundivided.

After Floyd’s killing, Simone said the Fearless Fund, whose backers include J.P. Morgan Chase & Co., Bank of America and Mastercard, began receiving unsolicited investor interest for the first time. But that trend has since largely reversed.

“That was a small window of time,” Simone said. “Everybody was looking for the Fearless Fund.”

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Associated Press Retail Writers Anne D’Innocenzio and Haleluya Hadero contributed to this story.