Underrepresented founders — including people of color, women and members of the LGBTQ+ community — have historically received a very small piece of the venture capital (VC) funding pie.
Female founders received just 2% of all U.S. VC dollars in 2021 — the lowest percentage since 2016. In 2019, Black and Latinx founders received just 2.3% of those dollars.
The data is less clear for queer founders. Only 7.1% of American adults identify as queer (though that number seems to be steadily growing). And even fewer founders do. StartOut, a startup accelerator that offers mentoring, education and networking opportunities for queer-founded startups, found that 37% of LGBTQ founders choose to remain closeted while raising capital.
StartOut offered two explanations for why that was the case:
When fundraising, 63% of LGBT founders came out to investors during the process — most in the early stages of discussions — but a meaningful 37% chose not to self-identify as members of the LGBT community, 12% citing concerns that it might hurt their chances to get capital, while 47% said that “being out” wasn’t relevant.
There’s the rub. Though some anti-discrimination and marriage equality legislation has helped protect LGBTQ+ people over the last 30 years, the community still faces discrimination. The “Don’t Say Gay” bill signed by Florida Governor Ron DeSantis and the Alabama bill that would ban transition-related healthcare for trans people under 19 are two of many anti-LGBTQ+ bills that have either been proposed or signed in the last year.
As long as that discrimination persists, queer founders face a very real possibility that being out while fundraising could cost them dearly.
Aside from the fear of losing out on capital, some queer founders may worry that being out may cause them to be pigeon-holed into a particular sector — like one that disproportionately serves queer people. Or they may worry that investors will make other unfounded assumptions about their abilities. Female founders and founders of color face these obstacles too. It’s a common problem for underestimated founders.
A Better Future
Fortunately, there are passionate founders out there who are tackling this problem head-on. Arlan Hamilton founded Backstage Capital, a VC firm that focuses on funding underrepresented founders, in 2015. Hamilton, who identifies as a woman, person of color and a member of the LGBTQ+ community, said the lack of VC funding is not just a disappointing statistic. It’s also a missed opportunity for investors. From KingsCrowd’s fireside chat with Hamilton:
If so many of these founders who are underrepresented and underestimated have gotten this far — whatever that was to them — on their own with very little, imagine what they could do with a lot more. And then wouldn’t you want to be on the upside of that, on the flipside of that, when that comes to fruition?
For Backstage Capital, investing in underrepresented founders is not just a mission, but a business model. To Hamilton’s point, investors should remember that supporting underrepresented founders does not have to be a solely moral mission. It’s also a profitable opportunity.
And there are more opportunities to invest in underrepresented founders emerging from the VC world. Illinois-based Colorful Capital just launched this week with the goal of supporting LGBTQ+ founders of pre-seed and seed stage startups. Elevate Capital’s Capital Fund II invests in pre-seed, seed and Series A startups founded by LGBTQ+ founders, BIPOC founders and female founders. And Loud Capital launched the Pride Fund, which specifically targets the LGBTQ+ community. The list goes on.
The Wisdom of the Crowd
Crowdfunding investors don’t seem to have the same biases that pervade the VC world. KingsCrowd discovered that companies with a minority founder made up about 33.3% of total equity crowdfunding deals that closed in the first five months of 2021. And the percentage of overall funding that went to underrepresented founders was roughly the same at 32.9%.
That’s good news for both crowdfunding startups and crowdfunding investors. Innovative startups run by smart and scrappy underrepresented founders are getting the opportunity to bring their vision to life and make the world a little bit better. And investors are getting the opportunity to help — and make good money while they’re at it.
As Hamilton put it:
Today, I’m so in love with the crowd. And that’s why we took our fund — the operations — to the crowd recently, because the crowd has always gotten us. Whereas these few people with their feet on the desk who have millions of dollars to deploy, it takes them a while to catch up to the crowd.