The Case for Investing in Diverse Founders
LGBTQ+ entrepreneurs often face additional barriers to success than their non-LGBTQ+ counterparts face, such as discrimination, rejection from friends and family after coming out, and the decreased sense of self-confidence that can accompany navigating life as a minority.
A 2018 study done by Morgan Stanley highlights the persistence of these barriers for LGBTQ+ founders, and communicates the ramifications of continued discrimination for the economy at large. Fundamentally, the article reinforces the need for Chasing Rainbows, and other funds that focus on diversity, to exist for diverse founders.
First, Morgan Stanley began their piece by making the economic case for increased investment in diverse founders. With a series of calculations from U.S. Census Bureau data, Morgan Stanley defined “the funding gap” as a $4.4 trillion dollar inefficiency that has resulted from about 200 surveyed US-based investors overlooking “multicultural and women-owned businesses” (Morgan Stanley 3).
This $4.4 trillion dollar figure came from considering a scenario where revenue for women and multicultural entrepreneurs are “proportional to their representation in the U.S. labor force” (Morgan Stanley 10). The article cites several factors for investors’ “blind spot,” including “risk perception,” “lack of exposure” to startups founded by diverse founders, and “lack of familiarity” with industries served by diverse founders (Morgan Stanley, 2018). This trillion dollar gap not only emphasizes the colossal disparity that underrepresented founders face in access to capital, but also shows the missed economic opportunity for potential to earn above-market returns for all involved parties.
Further, diverse founders often know how to cater to the demands of diverse populations, a customer segment that is rapidly growing in size (Morgan Stanley 10). It should be an exciting time for investors to contribute to this innovation in market supply and demand, and reap the benefits of working with founders who can reach extensive customer segments.
Next, Morgan Stanley discussed two staggering studies that quantify the disadvantage that underrepresented, specifically female, founders face when raising capital.
The first study, done by Boston Consulting Group on 350 Boston-based startups, found that on average, women raised less than half as much money as men, yet earned “78 cents per dollar invested,” compared with “31 cents for the men” in the study (Morgan Stanley 10).
The second study, conducted by a prominent seed-stage venture firm, found that teams with at least one female founder did 63% better than all-male founder teams when looking at the change in valuation since the initial investment (Morgan Stanley 10).
What makes the two studies so astonishing is the results of success that these underrepresented founders were still able to realize even in the face of discrimination and major disadvantages.
Furthermore, one of the last pieces of data that Morgan Stanley examined demonstrated that even though diverse founders agree that they derive more favorable outcomes by interacting with VC firms with diverse leadership, only 11% surveyed said they have seen or been able to work with a diverse VC firm (Morgan Stanley 8). These results only accentuate the need for massive change in the VC world.
Morgan Stanley concluded their piece by outlining “7 steps to more equitable funding,” which can be found at the bottom of their page here (Morgan Stanley, 2018).
The funding gap” is beyond upsetting because VC investment decisions are often the catalysts to economic growth and transformation. This report makes the business case to VCs that closing the funding gap is a “strategic imperative,” and provides concrete steps for these VCs to simultaneously make a difference and take advantage of an emerging market (Morgan Stanley 4).
It is clear underrepresented founders are not getting the support they need, and Chasing Rainbows believes that the idea of underrepresented founders actually manifests in these founders being underestimated.
It has and is not enough for investors to abstractly “hold themselves more accountable” for investing in more diverse founders. Concrete actions are necessary, and Chasing Rainbows has positioned itself in accordance with the “7 steps to more equitable funding,” outlined by Morgan Stanley, to initiate positive social change for underrepresented founders (and specifically the LGBTQ+ community).
Chasing Rainbows looks to continue making a difference for underrepresented founders by sustaining our investment thesis of investing in companies whose founding team includes at least one member who identifies as LGBTQ+. As the premiere LGBTQ+ angel investment fund, we are driven to mitigate these barriers by elevating LGBTQ+ founders through funding, strategic advice, publicity, and much more!
Read the full Morgan Stanley article here!