Embrace the rainbow: The investment case for LGBT fund managers and startups

Guest Author

Patrick Driscoll

Adaptability and innovation are a recipe for success in the dynamic world of entrepreneurship. For LGBT folks, these two words are deeply ingrained in our DNA. 

Many of us have had to adapt to a world where we were told we didn’t belong. We were unwilling disruptors, forced to think outside the box and create innovative solutions for our community’s survival. Successful founders are the same. With their disruptive ideas and groundbreaking solutions, startups fuel economic growth and drive societal progress. 

These success drivers make investments in enterprises that can draw talent from the LGBT community attractive targets for investment. And the growing cohort of LGBTQ fund managers are best positioned to identify, support, and grow such startups. 

The timing for these fund managers could not be better as this historic opportunity remains vastly undercapitalized. Across the landscape of venture capital, only 0.5% of VC funding goes to founders who identify as LGBT – missing out on huge amounts of unrealized ROI.

In this post, I’ll explore the importance of investing in LGBT startups and fund managers, shedding light on the untapped potential within our catalytic community. 

Funding disparity

The current state of venture capital funding reveals a stark contrast between the potential of LGBT entrepreneurs and the resources available to them. StartOut’s report, State of LGBTQ Entrepreneurship, found that only 0.5% of venture capital funds find their way into the hands of LGBT founders. 

Anecdotally, founders often share they are not even able to get in the room with “old school” investors. Or, when they do, the investors act uncomfortable and ask unrelated questions pertaining to their personal lives. This is especially true for intersectional queer founders, trans founders, and founders who act “too femme” or “too butch.” 

An obvious solution is the creation and empowerment of more LGBT-focused capital allocators like Chasing Rainbows. However, these fund managers face similar challenges when raising from their own prospective Limited Partners (LPs) due to perceived biases and outright bigotry towards them and their portfolio companies. 

Jumping back in the closet

One of the alarming trends identified in the startup ecosystem is the prevalence of closeted identities among LGBT founders.

Proud Ventures found that a staggering 75% of founders actively conceal their sexual identity or choose to go back into the closet, fearing potential discrimination or bias. Founders often scrub their social media before raising a round, especially if they are involved in advocacy work with rainbow flags or speaking engagements. They will also “code switch” by putting on an act that makes them seem more gender-conforming, just to eliminate the perceived red flag that gender non-conforming behavior may raise for investors. One founder in Boston was advised to say his husband was actually his wife when raising his Series A.

This not only speaks to the persistent challenges of inclusivity in the VC world but also highlights the loss of talent and potential innovations that could flourish if these entrepreneurs were empowered to be their authentic selves. Imagine what could be accomplished if founders were not wasting valuable time hiding their authentic selves. 

Investing in LGBT equity and inclusion

In a promising turn of events, a recent Morgan Stanley study indicated a growing interest among U.S. investors in investable products and strategies that advance LGBT equity and inclusion. Almost half of all U.S. investors (45%) express interest in such initiatives, signaling a positive shift towards a more inclusive investment landscape. 

One way to activate this growing investor bloc is to engage with VC funds like Chasing Rainbows, which only invests in LGBT founders. More queer-focused capital allocators are beginning to enter the market as investor interest rises. For LGBT founders and fellow investors, the more, the merrier.

The power of the rainbow

One of the most frustrating components of the lack of funding for queer founders is the statistically proven value that they bring to their investors when given a chance. StartOut’s report, State of LGBTQ Entrepreneurship, also found that LGBT founders file 114% more patents and create 36% more jobs than their peers. More importantly for investors, the data reveals that LGBT-founded startups have 44% more exits. This demonstrates that investing in LGBT entrepreneurs is not only a socially responsible decision but also a financially sound one. It’s just good business.

Another study by Wells Fargo and US News found that higher proportions of LGBT citizens are associated with higher economic growth in U.S. states. It’s all very clear when you look at it from a macro perspective: a capitalized LGBT community means more dollars for everyone.

The numbers don’t lie—investing in LGBT fund managers and founders is not just a matter of equality; it’s a strategic move towards unlocking untapped potential and driving innovation. For investors and LPs, it’s a way to unlock above-market ROI while simultaneously creating generational wealth opportunities for a community that is historically undercapitalized. 

It’s time to recognize the immense value that LGBT fund managers and founders bring to the table and invest in a future where queer-driven innovation knows no boundaries. In 2024, investors need to wake up and embrace the rainbow. 

——————

Patrick Driscoll is the General Partner of Chasing Rainbows,  an LGBTQ+-led and focused VC firm that invests in LGBTQ+-led early-stage startups with validated traction

If you would like to learn more about investing in Chasing Rainbow’s Fund I as a Limited Partner, please contact [email protected]. Disclaimer: Chasing Rainbows is a 506c fund that allows us to solicit our raise publicly. All are welcome to apply to become an LP; however, commitments to Chasing Rainbows will only be accepted by accredited investors