Why it matters for LGBT entrepreneurs to come ‘out’

Openness is critical to building trust with funders

Waverly Deutsch | Aug 22, 2016

It’s commonplace to think that a person’s sexual orientation is a private matter and irrelevant in business. After Apple CEO Tim Cook came out as a gay man, a substantial portion of social media comments, tweets, and shares asked, “Why would he do this?” which seems to imply that, first, no one should care, and second, people don’t want to know Cook’s orientation. 

But conventional wisdom is wrong. Research suggests that, for LGBT entrepreneurs at least, and perhaps others in their orbit, being “out” is relevant in many ways.

There have been only a handful of articles, conference and research papers, and chapters written about lesbian, gay, bisexual, and transgender (LGBT) entrepreneurs. In 2005, Syracuse University’s Minet Schindehutte and two coauthors published the largest study ever undertaken until that point of LGB entrepreneurs in the United States. Their data set included responses from more than 300 LGB founding business owners and clearly established that LGB entrepreneurs, when starting their companies, face greater obstacles than their straight counterparts. Being LGB adversely affected their ability to engage suppliers, obtain licenses, market their businesses, hire employees, and access loans from commercial banks. 

And it’s harder for LGBT entrepreneurs to raise money from early-stage angel and venture-capital investors, according to comprehensive research I conducted this year in collaboration with my Chicago Booth colleague Mary Shea, and StartOut’s Vivienne Ming and Chris Sinton, on behalf of StartOut.org, a nonprofit founded in 2009 to empower LGBT entrepreneurs. Despite these numbers, many LGBT entrepreneurs profess that their orientation isn’t relevant to their start-ups. I believe it is.

We surveyed 140 early-stage growth entrepreneurs and culled public data sources to compare 6,703 LGBT growth founders with 92,096 entrepreneurs whose orientation was straight or unknown. 

Two-thirds of survey participants had raised outside capital to help grow their businesses, or expected to raise capital in the coming 12 months, and 63 percent of them had come out to their prospective investors, the vast majority early on in discussions. The remaining 37 percent had chosen not to come out to investors, and nearly half of them said they didn’t consider it relevant. Twelve percent said they thought it might hurt them in the process.

Impact of LGBT status on business performance

Is being out relevant in business? To answer that, we first need to address the relationship between being an LGBT entrepreneur and the performance of your business. In addition to the entrepreneurs, we surveyed 87 early-stage angel and venture-capital investors. Almost half of our sample said they had an openly LGBT founder or C-level executive team member in at least one of their portfolio companies. We asked those respondents how the performance of the LGBT entrepreneurs’ companies compared with that of the rest of their portfolio companies. The results from those who answered were as you might expect—a mixed response of “same,” “better,” “worse,” and “too early to tell.”

But our analysis suggests that being LGBT may impact the amount of money an entrepreneur is able to raise. We collected public data to establish baseline values for nearly 92,100 growth entrepreneurs in general, and compared that with data we collected on more than 6,700 LGBT entrepreneurs. Over the 10-year period of our analysis, LGBT-founded start-ups raised at least $23 billion, including angel and institutional investment. This is about 89 percent of what would be predicted from a similar population of entrepreneurs selected at random. 

We interviewed entrepreneurs for the StartOut report, and two shed some light on this phenomenon:

I haven’t found it easy to get venture capitalists interested, although I don’t think it’s discrimination as much as just the business model we are working on . . . The whole thing is pretty gay. The way it comes up are that people, particularly investors, have said, ‘I don’t understand that niche market so I am not going to be able to invest.’ So that’s hard. Because with the vast majority of the venture capital and wealth of our country being controlled by straight white men, that makes it really challenging.
—Lesbian entrepreneur

In the absence of a strong network of LGBT investors, there is a gap of common experience. So common experience is something that can bridge a gap between people. You went to the same college; you both play volleyball. I don’t know what the representation percentagewise is among institutional investor and LGBT individuals. Based on my experience, my guess is that it’s not very representative. So this creates a chasm in common experience between LGBT entrepreneurs and prospective investors.
—Gay entrepreneur

So it is entirely possible that merely being a member of the LGBT community may impact the performance of one’s entrepreneurial venture.

Location and migration

It is clear from the research that being LGBT also impacts where entrepreneurs choose to start their companies. There is a distinct migration away from intolerant locales toward states and cities with prodiversity policies and cultures. In our sample, states such as Arizona, Florida, Georgia, Missouri, New Mexico, Pennsylvania, South Carolina, and Tennessee lost most or all of their LGBT then-would-be entrepreneurs before these people established their companies. 

In general, entrepreneurs are 12 times more likely than the average American to relocate to Washington, DC; for LGBT entrepreneurs, it’s double that. This pattern repeats across many states that are more progressive, despite the higher costs and often-stricter business regulations found there. LGBT entrepreneurs are almost four times as likely to move to California. They are 260 percent more likely to go to Massachusetts, 230 percent more likely to go to New York, and 221 percent more likely to go to Colorado. 

Setting up shop
Being LGBT impacts where entrepreneurs choose to start companies. There is a clear migration away from intolerant locales toward states and cities with prodiversity policies, even when those states and cities are more expensive places to live and do business. And for every one average American who relocates, many more entrepreneurs and LGBT entrepreneurs migrate there, taking job creation with them.


This is definitely a diversity issue, not an entrepreneurship one. Fast Company’s research ranked the top five states for innovation, factoring in the number of start-ups per capita, the health of young firms, and the number of jobs created, among other things. Florida, Texas, Maryland, Arizona, and Alaska lead the list. 

California comes in sixth. From sheer volume perspective, the top five states for new company launches in 2015 were California, Florida, Texas, New York, and Pennsylvania. LGBT entrepreneurs are not leaving because of a lack of entrepreneurial activity in their states. 

What about funding potential?

When we compare the amount of angel and venture funding to where businesses in our sample are headquartered, we see that the LGBT entrepreneurs are not chasing capital. A disproportionate number of them are in New York, which sees much lower venture-capital and angel investment, relatively speaking. 

 This indicates that diversity and tolerance seem to motivate the entrepreneur’s location. However, for the 10 percent of entrepreneurs in our sample who moved their headquarters to a different state, LGBT friendliness is rarely the stated driver. While 78 percent of these entrepreneurs chose to move to California, New York, or Illinois, the most frequently cited reasons for making the move were economic drivers—although it is hard to imagine someone moving to California or New York to be in a cheaper location!

Nevertheless, 84 percent of the companies represented in our survey were located in cities that receive a perfect score on the Human Rights Campaign’s Municipal Equality Index, which factors in nondiscrimination laws, equality of employee benefits, and community relationships with the LGBT community.

Someone can choose an LGBT-friendly location to start a venture without necessarily publicly identifying with the LGBT community. But our report revealed two critical dimensions on which being out is relevant: the investor relationship and diversity benefits.

The investor-entrepreneur relationship

A plethora of academic and business research has established the importance of trust in business relationships, and has demonstrated that trust is easily granted to members of a shared affinity group. University of Illinois’s Ola Bengtsson and Wharton’s David Hsu find that having a shared ethnicity nearly doubles the chances of getting an investment from a particular investor. The only way to overcome the disadvantage of difference is through communication and relationship building. In our follow-up interviews with five early-stage investors, every single one stated that a good personal rapport was critical to a strong business relationship.

I invest in things that I think should exist, things created by people whose values and goals I share. Value rapport and personal rapport are tremendously important.
—New York angel investor

In the end, people will only confide in people they trust. They will reach out to people with whom they like speaking and spending time. It’s all about having a genuine relationship with them.
—Silicon Valley VC

Generally you want to think that you are going to like [the founder]. You are going to spend a lot of time with the person. You are going to be in the trenches with them. If you get the feeling that you aren’t going to like them early in the deal, you probably shouldn’t do the deal. An investment is like a minimarriage.
—Midwest VC 

In fact, more than one investor indicated that if they don’t get a good feeling about an entrepreneur, they pass on a deal.

In terms of founders we haven’t invested in, we get excited about the business, get excited about where it might go, but when you get to the true colors of the founder, you just sit there. You’re just like, ‘This is not comforting.’ You also have to be open and honest about it.
—New York VC

We also spoke with 10 founders who had chosen to obtain outside capital and asked them about the relationships they had with their investors. For the majority, the capital was essential for the survival of their young companies. For others, the capital was important in driving growth that could not have been achieved otherwise. Eight out of 10 described their relationships with their current investors as “close.”

I have a great relationship with [my investors], business and personal. Businesswise we have grown from the beginning when it was a colder relationship. You know. They were my investors; they were my colleagues; they were my partners; now they are my friends.
—Lesbian entrepreneur

 Our lead investor led seed and stayed around. I feel strongly that he is investing for success. He has our back [and] gives us good advice and direction. I feel we have really good relationships with all of our investors.
—Gay entrepreneur 

There are still risks associated with being out in the business world. In 28 states it is legal to fire an employee for being LGB. For transgender employees, the number of states is 31. A 2014 study by the HRC indicates that 53 percent of LGBT workers in the US hide their sexual identity at work. Another study by New York University’s Kenji Yoshino and Deloitte’s Christie Smith finds that 83 percent of LGBT persons “cover” some part of their sexual or gender orientation at work. LGBT entrepreneurs do not seem to be immune to these pressures. But in the investor-entrepreneur relationship, where being authentic and wholly present is critical in overcoming the barrier of difference, coming out can be one important way to build trust. 

There is a certain honesty you will have to have with potential investors that establishes trust with that person. If that isn’t there, I would imagine, you are not going to get the investment.
—Gay entrepreneur

Inclusion in the diversity discussion

Recently Intel Capital announced a $125 million diversity investment fund for women and minorities. As GeekWire reported, “According to the company’s announcement, it was not considering LGBT start-ups because they didn’t fall under the federal government’s definition of ‘underrepresented minorities.’” Comcast’s Catalyst Fund is aimed at women and minorities, AOL’s BBG Ventures fund is for women, and the Indiana Diversity Investment Fund supports women, minorities, and veterans. 

As one of our survey participants put it, 

It would be super great if LGBT entrepreneurs were capable of receiving diversity consideration for government grants or loans.
—Gay entrepreneur

This will not happen until and unless entrepreneurs are willing to self-identify, and until more research is done to establish that the LGBT community belongs in the diversity conversation.

Many in the LGBT community and progressive business people would prefer to believe that we are in an era of posthomophobia, in which we can all agree that who you choose to love shouldn’t matter in business. Perhaps someday it won’t. But for now, being a member of the LGBT community does matter. It matters in economic and social terms, and it impacts the entrepreneurial experience.

Waverly Deutsch is clinical professor of entrepreneurship at Chicago Booth.