How some venture capitalists are trying to lift the profile of LGBTQ+ founders

• A growing number of venture capitalists are backing LGBTQ+ founders in an effort to help them scale their companies and create jobs.
• According to LGBTQ+ entrepreneurship nonprofit StartOut, just 0.5% of the $2.1 trillion in startup funding was raised by LGBTQ+ founders between 2000 and 2022.
• In 2021, Ben Stokes founded Chasing Rainbows, a fund currently invested in around 15 startups.

Raising capital remains an enduring obstacle for LGBTQ+ entrepreneurs. Some venture capitalists are trying to change the equation and are backing minority founders to help them scale their companies and create jobs within their communities.

According to LGBTQ+ entrepreneurship nonprofit StartOut, only 0.5% of the $2.1 trillion in startup funding between 2020 and 2022 was raised by LGBTQ+ founders, yet 7.2% of the U.S. population identifies as a member of the community, according to a 2022 Gallup survey.

StartOut's State of LGBTQ+ Entrepreneurship Report, which aggregates data from internal research and sources like Crunchbase and Pitchbook, also found that 85% of funding is accumulated in only five metro areas: San Francisco, New York, Los Angeles, Denver and Austin, Texas. The largest cities that lack any LGBTQ+ founders are Orlando, Florida; Charlotte, North Carolina; and Birmingham, Alabama.

StartOut CEO Brian Richardson told CNBC that jurisdictions with comprehensive nondiscrimination policies protecting LGBTQ+ people are the cities that have stronger benches of queer entrepreneurs.

"What we've been able to do through the limited datasets that we have is to start looking at and measuring how much cities and even states are losing out monetarily and employment-wise because they have anti-LGBTQ+ policies in place," Richardson said.

Researchers at StartOut have examined the varying geographic impacts, weighing the economic effects that public policies have on entrepreneurial outcomes by comparing states that did and didn't pass the LGBTQ+-affirming policies between 2010 through 2020. They found that implementing state employee benefits coverage for transition-related care in Texas could create more than 121,000 jobs. Additionally, implementing hate crime laws for gender identity in North Carolina could attract as many as 17,000 founders, while a repeal of so-called "Don't Say Gay or Trans" laws in Alabama could add $10 billion in funding, they said.

"These numbers are really just the very first step of a much longer process to identify the challenges and to find the very best, most comprehensive, most effective solutions," Richardson said.

One organization trying such solutions is Chasing Rainbows, a venture capital fund that works with LGBTQ+ founders to connect them with capital. The fund currently invests in around 15 early-stage companies.

"We usually write [the] first checks for a lot of the companies, particularly from an institutional perspective," Ben Stokes, founding partner of Chasing Rainbows, told CNBC. "We are very open to having conversations if someone doesn't have revenue; it's really just understanding the pathway that they have to get to that."

Chasing Rainbows takes a sector agnostic approach but focuses on four opportunity zones when considering a startup: sustainability, health care, education, and financial equity and inclusion. Stokes said the LGBTQ+ community historically has experienced some form of discrimination when trying to access these types of services.

"When a founder has experienced a problem themselves, they often know how to fix it," Stokes said. "And they have creative solutions that are often done in a very financially savvy way."

StartOut's report also found that despite operating on 16% less funding compared to the industry average, LGBTQ+ founders created 36% more jobs, 114% more patents and 44% more exits between 2000 to 2022.

"We work together to ensure that we are investing in new companies, that we believe that not only venture backers will [invest in] but will offer and deliver outsized returns for our investors," Stokes said.

Stokes said Chasing Rainbows advocates for resource allocations to consider founder diversity when selecting investments. State-level initiatives are already underway in Massachusetts and New York that would require VCs to include sexual orientation when considering capital allocation.

In California, Senate Bill No. 54 will require venture firms to report diversity statistics within their portfolios. That includes race, ethnicity, gender identity, veteran status, disability status and whether any member of the founding team identifies as LGBTQ+. The bill is scheduled to go into effect on March 1, 2025.

"This is going to be an amazing wake-up call for the industry," Stokes said, "and particularly for limited partners, who are going in on the premise of the lead investors investing in diverse teams. Is it actually true?"

An angel investor himself, Stokes founded Chasing Rainbows in 2021 after recognizing that underrepresented founders are seen as riskier investments. He credited his law professor at the University of California at Berkeley for giving him advice that led to his fund's approach.

"He said, 'Don't just be another underrepresented funder investing in underrepresented founders; be unique and be special in the industry because that's the only thing that's going to make you successful,'" Stokes said.

On top of the limited amount of funding being funneled to LGBTQ+ innovators, Stokes said 75% of founders go back "into the closet" while fundraising on concern that being part of the community would taint their brand.

"Unfortunately, this has been evidenced by the fact that general partners and other funds who do have different religious or political views have openly discriminated against someone based on their sexuality," he said. "What that means for them is that they're often code switching," referring to the practice of LGBTQ+ people deviating to more heteronormative language and behaviors.

"They will be scrubbing their LinkedIn, scrubbing all of their social media profiles," Stokes said, "essentially going back into the closet and not being their authentic selves."

Both Stokes and Richardson were invited to the White House this past week to participate in a roundtable discussion on the hurdles that entrepreneurs face.

"Some of the challenges are obvious — access to capital is the biggest one," Stokes said. "But we're looking at ways to partner with the government, in particular around grants and non-dilutive capital."

Richardson hopes the attention will lead to broader support for organizations like Chasing Rainbows, and that additional funding for data and research will lead to greater representation and expanded economic opportunities for underrepresented innovators.

"We know that queer people and queer entrepreneurs continue to face barriers," Richardson said. "But we also know that those barriers are especially steep for specific members of our community. We want to figure out and identify just how steep the barriers are and what individual members in our community continue to face."