Discrimination lawsuit against Atlanta VC firm has far-reaching impacts
On a sunny Wednesday last August, Arian Simone was having a great morning.
She was working in her sunroom, having just been booked to speak with Gayle King on “CBS This Morning” about a summit her Atlanta-based and women of color-focused venture capital firm, Fearless Fund, was hosting later that month.
By the afternoon, things changed. Her employees were getting emails from the media to comment on a lawsuit against the fund and were asking Simone about it.
She thought it was a scam at first, “just like we got those emails back in the day, where they say, oh, ‘Send your African cousin $10,000,’ I thought it was one of those,” she said on her podcast in February.
But it was real.
A year ago Friday, the American Alliance of Equal Rights sued Fearless Fund and its foundation over a $20,000 small business grant program to Black women entrepreneurs, alleging it was discriminatory. The man behind the Alliance, conservative activist Edward Blum, had just successfully challenged affirmative action in college admissions at the U.S. Supreme Court and then set his sights on Simone’s VC firm.
In the year since, both sides have traded legal losses and victories. But in June, in a 2-1 ruling, an 11th U.S. Circuit Court of Appeals panel ruled against Fearless and issued a preliminary injunction against the grant, saying the program causes irreparable harm.
Over the past 12 months, the lawsuit has become part of a national push by conservative groups to change or dismantle diversity programs in the corporate world. But the impacts are also being felt far and wide in other fields.
Difficult funding landscape
Simone, who was not made available for an interview, founded Fearless Fund in 2019 alongside fellow entrepreneur Ayana Parsons and actress Keisha Knight Pulliam, who have both since left the firm, to invest in businesses owned by women of color.
Black-owned businesses have historically attracted a paltry amount of startup funding in the U.S., but it’s especially so for Black women-founded companies.
In 2022, female founders of color received just 0.39% of all venture capital investments, according to the fund.
Through its Fund I, Fearless invested $26 million into dozens of startups founded by Black, Latina and Asian women, at least eight of which were based in Atlanta, including the hit restaurant concept Slutty Vegan.
Some of the first funding Atlanta entrepreneur Veronica Woodruff got for her travel services startup Travelsist was from Fearless. The VC firm put $250,000 into her company, which then led her to raise an additional $900,000 of seed money, she told The Atlanta Journal-Constitution.
“If I didn’t get the opportunity, like I wouldn’t be where I am today,” Woodruff said.
Simone and her team began securing investment for their Fund II in 2022. They had raised at least $16 million as of May 2023, according to a Securities and Exchange Commission filing. Two months later, the Alliance sued Fearless.
“My life changed in that moment,” Simone said on her podcast. “I went from being literally a VC founder, just a businesswoman, to having to be a public figure and a face for women and civil rights without even necessarily choosing this.”
Though the lawsuit did not target the firm’s venture investments, Fearless has not filed any Fund II updates with the SEC since the Alliance’s suit, indicating it has not raised any new significant funding. The Fearless Foundation’s revenue also dropped nearly 38% to $2.6 million in 2023 compared to the year before, according to the nonprofit’s tax filings.
Simone told Inc. magazine in February that all but two of the firm’s corporate partners have backed out in the wake of the lawsuit.
“It all fell apart due to litigation,” Simone said. “You’re talking millions of dollars we’ve lost, and it’s truly impacting our operations.”
That worries Sequoia Blodgett, founder of the artificial intelligence content creation startup Frame Me. She moved to Atlanta in early 2022 from California for a better community, which she found, but didn’t realize she would also encounter a difficult fundraising environment.
“Atlanta is an ecosystem that supports each other, the issue is there’s just not enough capital being dispersed,” Blodgett told the AJC. She’s had to go to investors in Silicon Valley to try to get funding for her startup.
Across the U.S., venture capital investment for Black-owned startups plummeted last year, with metro Atlanta seeing one of the worst declines, according to data firm Crunchbase. Funding for Black-owned businesses fell 71% nationally in 2023 compared to 2022. In the Atlanta area, such funding declined by 79%, Crunchbase found.
Blodgett said Fearless was a crucial part of the city’s funding ecosystem, so “taking them out of the system, now you have even less access to capital.”
That’s part of the reason why Blodgett recently signed a letter alongside dozens of other entrepreneurs and investors asking U.S. senators to support two bills they say would increase access to loans and venture capital.
On the investor side, the Fearless lawsuit has not impacted fundraising, said Jewel Burks Solomon, managing partner at Collab Capital, an Atlanta-based VC firm that invests solely in Black-owned firms. In 2021, her firm closed its first fund at $50 million and she is currently raising a second fund.
“I’ve talked to probably hundreds of limited partners and although there is conversation about the lawsuits, it’s not cited as a reason that they would not invest,” Burks Solomon said. “The reason that is most typically cited is that they do not have the dollars to allocate because they’re waiting on liquidity in the market.”
Legal, philanthropic fields impacted
The legal argument against the Fearless Foundation’s grant program comes from Section 1981 of the Civil Rights Act of 1866, a post-Civil War law that prohibits discrimination based on race when making and enforcing contracts. The law was enacted to protect and boost the economic circumstances of Black people, including freed slaves.
The Alliance alleged that Fearless is entering into a contract with grant applicants and that three of its members, white and Asian businesswomen, are being discriminated against since they do not meet the racial criteria. Blum, the president of the Alliance, declined a request for an interview. Fearless argued the grant is not actually a contract, it’s a charitable donation and that type of giving is protected under the First Amendment.
Fearless also argued the Alliance didn’t have standing to sue because the three members it alleged were being harmed were anonymous plaintiffs who submitted affidavits saying they would be eligible for the grant if it weren’t for their race but hadn’t specified how they were harmed.
But the Eleventh Circuit appeals panel found the Alliance did have standing to sue, which Sara Lewenstein, a labor and employment attorney at the Nilan Johnson Lewis law firm, said could have impacts across the legal field.
“The issue is how much proof, how much evidence does a plaintiff have to provide?” Lewenstein said. “It should be something more than just saying ‘I’m able and ready to apply,’ because then anybody can say that.”
Proving a person has standing to sue has been an “initial hurdle for plaintiffs to get over,” but the 11th Circuit’s decision now “provides a road map” for future plaintiffs if they have similar affidavits to the Alliance members, she said.
Fearless’ legal team is still considering next steps and has not yet filed a response to the 11th Circuit panel’s ruling, but Simone said in an Instagram post Friday, “Our case is still active, we are looking to resolve this soon.”
But philanthropists are spooked by the case, too. Independent Sector and the Council on Foundations, two organizations that represent nonprofits, filed an amicus brief in December in support of Fearless.
After the June appeals panel ruling, Independent Sector’s President and CEO Akilah Watkins said in a statement, “the court’s decision threatens the right of the charitable sector to address urgent, unmet needs.”
“In undercutting philanthropy’s basic First Amendment protection, this ruling makes it harder to support historically marginalized groups,” Watkins added.
DEI under attack
The lawsuit against Fearless Fund was one of the first filed against corporate diversity, equity and inclusion initiatives in the wake of the Supreme Court overturning affirmative action in college admissions.
The Alliance has since sued Southwest Airlines and the Smithsonian Museum of the American Latino over programs aimed at Latino students. The group also sued Minnesota Gov. Tim Walz over a requirement that a certain number of members on the state’s Board of Social Work come from a community of color or an underrepresented community. Similar conservative organizations have targeted major corporations like McDonald’s, Target and Progressive.
The Alliance dropped lawsuits against two law firms over their diversity fellowships after the firms changed their eligibility criteria.
Corporate DEI initiatives were meant to address systemic disparities and got a big boost in 2020 after the murder of George Floyd, but recently companies have pulled back. Google and Meta made cuts to DEI teams, while Zoom and Microsoft laid off workers in those programs altogether.
But Lewenstein, the labor attorney, said corporations don’t have to retreat in the wake of these legal threats, though she understands they want to balance how to mitigate legal risk while supporting DEI efforts.
“It’s not the nail in the coffin, it’s not the sky is falling,” Lewenstein said. “It’s a hurdle that plaintiffs have gotten over and something to take note of. But employers and corporations can still have robust DEI programs and can still support DEI efforts.”
DEI has also become shorthand in some conservative circles to say a person of color was only hired because of their race. Recently, some Republicans have called Vice President Kamala Harris, the presumptive Democratic nominee for president, a “DEI hire” in an attempt to undermine her.
For John Hope Bryant, an Atlanta-based entrepreneur and founder of the nonprofit Operation HOPE, the term DEI has become a political lightning rod and he thinks the language needs to change.
“It’s been so abused, it’s been so manipulated, and some people are now using it even tied to a presidential candidate who has got advanced degrees and who has gone to the second highest office in the land,” Bryant said. “When it gets to that point of ridiculousness, I think you just have to find another thing. Now you’re arguing over the phrase and arguing over what it means versus the fact that we need diversity.”
He said he’s talked with CEOs behind closed doors who want to continue diversity initiatives and see the business case for it, but don’t want to use a politically unpopular term.
Blum told The New York Times shortly after the Supreme Court overturned affirmative action he believes an individual’s race or ethnicity should not be used to help them or harm them. He’s been filing cases since the 1990s trying to get race out of America’s laws.
“The interesting part about all of this, I actually want the same thing that Ed Blum wants,” Simone said on her podcast. “He wants a world where race does not matter. I want the same thing he wants. But guess what? That is not the world that we live in today. So, these programs exist to get us there.”
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About the Author
Mirtha Donastorg is a reporter on The Atlanta Journal-Constitution’s business team focusing on Black wealth, entrepreneurship, and minority-owned businesses as well as innovation at Atlanta’s HBCUs.
