In August of 2016, StartOut delivered its inaugural study investigating the state of LGBT entrepreneurship in the United States.  Focusing exclusively on emerging high-growth companies with a sample size of 140 LGBT entrepreneurs, this study is the most comprehensive of its kind, and is intended to paint a clearer picture of the LGBT entrepreneurial experience in the US. To supplement data gathered from the entrepreneurs, StartOut researchers also surveyed 87 early-stage angel and venture capital investors. We then conducted in-depth interviews with ten LGBT entrepreneurs and five early-stage investors. Finally we culled public data sources and StartOut’s membership list to compare 6,703 LGBT growth entrepreneurs with 92,096 entrepreneurs whose orientation was straight or unknown.

When analyzing the data and survey sets as well as the more in-depth qualitative interviews of founders and investors we began to uncover trends around LGBT founder profiles, their location and migration patterns around launching their business, their willingness to present their authentic selves as part of the financing process, and their success or lack thereof in raising capital. StartOut researchers were additionally able to delve into investor mindsets around investing with diversity within their portfolios and the impact of diversity on portfolio performance. Following are several key themes and trends that emerged from the research. For more detail please download StartOut’s full study, The State of LGBT Entrepreneurship in the US.

LGBT Entrepreneurs in Investor Portfolios

With regard to the profile of LGBT growth entrepreneurs we found that:

  • LGBT founders are primarily motivated to start their businesses by a passion for the idea or opportunity, with 67% of our sample citing that as the reason for launching their ventures. The second most frequent response of being one’s own boss was cited by 14% of our sample.
  • LGBT people choose to start and run their businesses in places that are more open, tolerant and friendly to the LGBT population. 84% of our sample companies operated in cities that earned a 100% positive ranking on the Human Rights Campaign’s (HRC) Municipal Equality Index.
  • 75% of LGBT growth entrepreneurs are concentrated in three sectors – software, internet/media and consumer goods/recreation.
  • 48% of investors surveyed could identify at least one openly LGBT founder in their portfolios.
  • While 48% of our surveyed investors said they actively invest with diversity in mind, that focus did not lead to a higher incidence of having LGBT founders in their portfolios. Nor did being LGBT themselves correlate with the presence of LGBT founders in their portfolios. Of our 12 self-identified LGBT investors, half could identify LGBT founders among their investments and the other half could not.
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Three Themes Emerged from the Data

  • States with policies unfriendly to the LGBT community lost many, if not all, of their nascent growth entrepreneurs before they founded their companies. Later, when LGBT founders moved the headquarters of their companies to a new state, 78% moved to California, New York and Illinois. This translates to over 1 million jobs lost for states unfriendly to the LGBT community.
  • Gender trumps LGBT status in adding difficulty to the funding process – in this sample, approximately 38% of both male and female entrepreneurs raised outside capital to help fund their business but 70% of female LBT entrepreneurs raised less than $750K while 47% of male GBT entrepreneurs raised more than $2M, mirroring the gender funding gap seen in entrepreneurship in general.
  • Many LGBT founders choose to remain closeted while raising capital – 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.

Implications for Stakeholders

  • LGBT growth entrepreneurs – “Coming out” during the entrepreneurial process remains a difficult decision for many. Evidence suggests most investors normally would value such openness as part of building a healthy entrepreneur-investor relationship.
  • Investors– For angels, VCs and syndicates interested in LGBT diversity within their portfolio companies, it may be necessary to actively signal this acceptance of LGBT founders to lower the risks LGBT people feel in coming out during the process.
  • Policy makers – Communities seeking to capture a share of new job creation driven by high-expectation entrepreneurs should create LGBT friendly environments. Otherwise they are driving away an active segment of job creators and damaging their local economies.

As we reflected on the research results we found that “Out” is relevant. Possibly to business performance in both positive and negative ways. But certainly to the early-stage entrepreneur–investor relationship. While it is not necessarily appropriate to “test” investors by announcing upfront, “I’m LGBT and I’m raising capital,” it does behoove LGBT entrepreneurs as they build relationships with potential investors to be authentic and forthcoming about personal aspects of their lives as they come up in conversation. That authenticity helps create trust that can strengthen the business connection going forward.

Perhaps one way to avoid having to find a way to elegantly insert the coming out process into conversations is to publicly signal LGBT affiliation in social media profiles like LinkedIn by using membership in organizations like StartOut or the LGBT Chamber of Commerce. Knowing that investors use these data sources in their due diligence process allows that information to be tacitly conveyed prior to discussions.

More role models are needed. Aside from Tim Gill and Michael Kors there are few very visible successful LGBT entrepreneurs showcased in the popular media. Millennials are less inclined to be “out” at work than older, more established LGBT workers with only 5% of LGBT young people ages 18 to 24 being totally open at work versus 32% of LGBT people ages 35 to 44. Evidence shows there is still a penalty to be paid for this openness – almost 40% of LGBT workers report discrimination and harassment when they are “out” at work, compared with the 10% who experience the same challenges while closeted[1].

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LGBT founders need to consider broadening the industries they choose to innovate in. With over half of LGBT founders focusing on internet/media and consumer goods/recreation startups, they find themselves competing in industries with relatively low cost of entry, lacking in intellectual property barriers to entry and receiving only 6% of angel dollars and 14% of VC investment.

It’s time to include the LGBT community when thinking of diversity in investment. Our research shows we are an active source of emerging high-growth businesses. An LGBT inclusive diversity policy can help attract deal flow and increase return on investment.

For investors, funds and syndicates interested in LGBT diversity within their portfolio companies, it may be necessary to actively signal this acceptance of LGBT founders to lower the risks of LGBT people in coming out during the process.

Given that young LGBT people in general tend to migrate towards states and municipalities with higher levels of tolerance for difference, investors seeking LGBT entrepreneurs would do well to expand their geographic parameters to source opportunities in New York and the Great Lakes regions in particular where LGBT entrepreneurs are over-represented relative to current investment dollars.

In recent years, the LGBT community has gained substantial positive representation and visibility in politics, entertainment, Corporate America and even professional sports, culminating in the June 2015 Supreme Court Decision legalizing marriage in all 50 states. While there is much to celebrate there is more work to do.

Since the mid-twentieth century demographers have struggled to gain an accurate picture of the number of LGBT people in the United States and these data remain elusive today. While the collective buying power of US LGBT adults is estimated at $884 billion, much less is known about the LGBT community’s contributions to driving economic growth. StartOut’s inaugural report, The State of LGBT Entrepreneurship in the U.S., is a launch point in the economic discussion of the important role LGBT entrepreneurs play in American entrepreneurship. As entrepreneurial activity plays an increasingly important role in the overall U.S. economy, the goal of this and subsequent research is to provide more clarity, visibility, and contour around the experiences and contributions of LGBT entrepreneurs.

About StartOut

Economic equality is a critical step along the continuum of progress for the LGBT community. While LGBT people are often stereotyped as being affluent the reality is the opposite: 21% of LGBT people have an income of less than $12,000 per year, versus 4% of the general population[2]. The LGBT community has made political strides, yet the economic playing field is not level for our community when compared to the rest of Americans.

Founded in 2009, StartOut’s mission is to enable economic empowerment for our community through entrepreneurship. We do this by supporting LGBT entrepreneurs and the next generation of business leaders. With six chapters and a growing constituency across the US, we hold educational and inspirational events; connect qualified LGBT entrepreneurs to investors; provide mentorship for lesbians and enable digital and in-person networking for our members. Through our events, networking platform and research program, we will continue to enable LGBT entrepreneurship in the U.S. and shine a light on any inequalities that hinder progress for our community.

Waverly Deutsch, PhD, is Clinical Professor of Entrepreneurship at University of Chicago Booth School of Business. Her research focuses on the execution issues entrepreneurs face as they grow their businesses, especially marketing, sales, operations and team building.

Vivienne Ming, PhD, is a theoretical neuroscientist, technologist and entrepreneur. She co-founded Socos, where machine learning and cognitive neuroscience combine to maximize students’ life outcomes. Vivienne is also a visiting scholar at UC Berkeley’s Redwood Center for Theoretical Neuroscience, where she pursues her research in neuroprosthetics.

Mary Shea, PhD, is a Principal Analyst serving Forrester’s B2B Marketing Professionals. Her research looks at how go-to-market organizations can prioritize and maximize their sales enablement investments. Mary is also an Adjunct Professor of Marketing at the Booth School of Business.

Chris Sinton is an Internet and philanthropic trailblazer. In 1994, at Cisco Systems, he pioneered the B2B Internet with cisco.com identifying, articulating and helping create a new business paradigm. In 2000, as an early driver of digital philanthropy, he saw that as the Internet changed the way business was done, it had could change the way people helped each other.

[1]    “A Survey of LGBT Americans”, Pew Research Center—Social & Demographic Trends, June 2013

[2]   “Paying an Unfair Price: The Financial Penalty for Being LGBT in America”, Center for American Progress & Movement         Advancement Project, November 2014