In June 2023, the U.S. Supreme Court made the pivotal decision to end the use of affirmative action in college admissions. The decision overturned a 45-year-old precedent and prompted a swift increase in anti-DEI and reverse discrimination lawsuits that targeted a broad set of agents. While the immediate focus was on higher education, access to economic resources and business opportunities also came under scrutiny. This paper examines how the affirmative action ruling affected the allocation of capital to Black-owned businesses in the venture capital (VC) industry. I show that the policy change increased the cost of investing in Black startups, leading to a significant decrease in capital allocated to Black founders. After the ruling, Black founders received fewer deals and smaller deal sizes, particularly at the early stages of investment. I verify that Black startups were of similar or higher quality than non-Black startups before the ruling, and the quality of funded Black startups increases even further after the ruling. The decline in funding is primarily driven by investors without strong diversity preferences, as diversity-focused investors continue investing at similar rates pre- and post-ruling. VC firms with strong diversity preferences struggle to fundraise new funds post-ruling, effectively incurring a market penalty for their investment preferences.
