The funding gap for LGBTQIA+ founders
LGBTQIA+ founders hide their identity and secure less investment funding, according to a first of its kind report by Proud Ventures, a network of LGBTQIA+ venture capital (VC) firms, exited founders, and angel investors. VC is a form of private equity financing aimed at startups and early-stage companies, and generally VC investors enter the business at its riskiest stage. It can be extremely lucrative, and has helped jumpstart a variety of global businesses.
Key findings from Proud Venture's report highlight the significant challenges faced by LGBTQIA+ founders in trying to access funds and VC backing:
- 75% of LGBTQIA+ founders feel uncomfortable disclosing their identity within the ecosystem;
- 79% of investors also feel uncomfortable sharing their identity;
- 35% felt their ability to raise capital had been affected by their identity; and
Of those who identify as gay, the report found that gay men raise a median of 22% more than lesbian founders. Proud Ventures attribute this to the broader trend of cisgender men raising a median of 2.5 times more than cisgender women, as well as a median of 10% more than transgender founders
Studies conducted by StartOut in the US show a clear funding gap when it comes to LGBTQIA+ founders: only 0.5% of the $2.1 trillion in startup funding raised between 2002 and 2022 went to LGBTQIA+ founders. Despite signs of progress, the funding disparity in the venture capital ecosystem must be addressed.
Understanding venture capital and fundraising rounds
When VC funding pays off, the investor benefits from the early growth of the business and maximises their return on exit.
Many of today's largest businesses have benefited from VC backing Apple, FedEx and Microsoft saw early success in the 1970s and 1980s, with Amazon, eBay. PayPal and Google enjoying VC backing throughout the 1990s and 2000s.
Today, the UK holds claim to the second most active and capital-intensive VC market in the world. The focus for the UK market is predominantly companies in life sciences, FinTech and DeepTech. Our own Fundraising Report, having advised on 172 fundraising rounds in 2023, found that technology and AI, digital, and healthcare secured the most funding overall.
The typical journey for founders in the innovation economy follows several key stages:
- Pre-Seed: Founders typically use personal funds or money from family and friends.
- Seed: Angel investors and venture capitalists invest in early, high-risk ventures for potential high returns.
- Series A: More established businesses draw significant venture capital funding.
- Series B, C, D, etc.: Later funding rounds seek more capital for business expansion.
The issue of unconscious bias
Venture capitalists know that the industry does not work without founders to invest in it.
There is a reason that the epicentre of VC funding is traditionally Sand Hill Road with its proximity to Stanford University, and the semiconductor and computer industries in the 1970s. VC firms in the UK also congregate around its universities; with four of the world's top ten universities, VC firms look to Oxford, Cambridge and London for its talent pool.
This creates a system where the most 'investable' founders mirror the VC partners or the successful founders who have come before, a significant problem for diversity in the ecosystem.
When it comes to who holds the capital in the VC, data suggests 75 – 95% of investing power sits with white men. Unfortunately, it is clear from the dearth of evidence on LGBTQIA+ VC investors that not enough thought is being given to this group. The Atomico State of European Tech Report 2022, seen by many as the leading annual research into the VC ecosystem, failed to mention sexual identity or gender identity at all (aside from the male/female binary).
Why does this matter? The Proud Ventures report demonstrates the importance of investing with conscience – whilst 80% of investors reported taking steps to be more inclusive, this figure dropped to 26% when asked specifically about LGBTQIA+ inclusivity. 54% were not aware of any LGBTQIA+ -led companies in their portfolio. However, those who did have LGBQTIA+-led portfolio companies were at least twice as likely to be taking direct action to support LGBTQIA+ founders.
These statistics show how tackling unconscious bias contributes to a more diverse VC space, with better outcomes for LGBTQIA+ founders. Where investors take active steps to diversify their portfolio in favour of the LGBTQIA+ community, they disrupt any unconscious bias they might have in favour of those people who resemble themselves or previously successful entrepreneurs.
Initiatives and recommendations for change
To combat unconscious bias and support LGBTQIA+ founders, Proud Ventures recommends several actions:
Quantify the issue
There is limited data available on the funding available to LGBTQIA+ founders. The problems reported by LGBTQIA+ founders will not be solved until they are first measured. VC firms should measure their EDI metrics within their portfolio on not just gender and ethnicity, but also LGBTQIA+, socio-economic background and disability. In tracking this data, VCs will see their own patterns of underinvestment in minority groups.
Diverse hiring
Harvard Business Review research shows that diverse investment teams generate greater returns and attract more diverse talent. VC funds should look beyond their conventional hiring practices, particularly at senior levels, to increase diversity in underrepresented groups. This would make LGBTQIA+ founders more willing to share their identities and improve LGBTQIA+ outcomes in fundraising.
Internal training
As there is a lot of progress to be made on diverse representation within VC, VC firms should look to training their workforce on unconscious bias. Importantly, this should be led by senior leadership to signal widespread adoption and serious engagement. The authors of the Proud Ventures report note that the conversations should be honest and difficult in order to identify biases and work towards eliminating them.
Conclusion
The venture capital and innovation economy is a dynamic and exciting space. As it continues to evolve, it is crucial that marginalised groups are represented and benefit from its growth. By acknowledging the funding gap for LGBTQIA+ founders and taking proactive steps to address it, the VC ecosystem can become more inclusive and equitable. Data on diverse teams is unequivocal; they produce higher business returns and more profitable exits.