(Bloomberg) -- Elizabeth Gore is fighting for survival.

Just six months ago, the founder of financial technology startup Hello Alice was getting ready to close an investment round to grow its business offering grants and networking opportunities to entrepreneurs from underrepresented groups. Then it got sued.

The August lawsuit, filed by conservative activist group America First Legal, took issue with a grant program that Hello Alice co-runs for Black-owned small businesses. Only offering the money to Black entrepreneurs was, the suit claimed, discriminatory. 

The impact of the suit was immediate. Houston-based Hello Alice shared the news of the case with potential investors as part of its due diligence process, and two-thirds of the capital was pulled out. It’s spent six figures on fees for three law firms so far, and is budgeting “multiple seven figures” if the case continues.

“It was surprising how quickly we lost some key investors,” Gore said in an interview. “We just watched money go straight out the door.”

Gore, 46, is on the frontlines of a litigation war over diversity in corporate America. Conservative activists, emboldened by the US Supreme Court doing away with affirmative action in college admissions, have now set their sights on professional diversity programs. 

Right-wing legal firm AFL, created by Donald Trump’s former adviser Stephen Miller in 2021, has lodged complaints with the US Equal Employment Opportunity Commission against more than 20 companies — including American Airlines Group Inc. and McDonald’s Corp. as well as the National Football League — and filed at least six other DEI-related suits, mainly arguing that efforts to hire and promote more women and people of color amount to discrimination against others.

Read More:  NFL Diversity ‘Rooney Rule’ Target of Trump Adviser’s Group

Fighting in the same corner is Edward Blum, the activist behind the group that first sued Harvard University over its affirmative action policies. His American Alliance for Equal Rights has filed a flurry of suits against law firms and small startups including the Fearless Fund, an Atlanta-based venture capital firm that invests in businesses founded by women of color. In September, judges temporarily halted its $20,000 grant program, writing that it was “racially exclusionary.” 

Around the same time, the Fearless Fund was supposed to close an eight-figure fundraising.

“It got dismantled, just due to the lawsuit,” Chief Executive Officer Arian Simone said in an interview. A major investor in its first fund, JPMorgan Chase & Co., said it wouldn’t invest in the new fund, a Fearless Fund spokesperson said, describing the decision as a catalyst for others to walk away. Almost six months later, the firm is still trying to make up commitments. 

A representative for JPMorgan didn’t comment on the Fearless Fund specifically, but said in a statement that it remains committed to supporting entrepreneurship among underserved communities.

Blum said that it was “not surprising” that investors were pulling money. “No investor wants to participate in a business endeavor that the courts are highly likely to find discriminatory and illegal,” he said in a statement.

Both sides are still waiting on the final word. The Fearless Fund is challenging the judges’ decision, and no other case has made it through the court system to a verdict. But the threat of legal action has been enough to send a chill across diversity, equity and inclusion efforts: Even at companies that haven’t been targeted, lawyers say they’re recommending broader parameters for programs that are less likely to attract scrutiny. Meanwhile, DEI departments are shedding staff and the number of US DEI roles on the job listings site Indeed.com is 16% lower than last year. 

Some businesses are taking immediate action instead of duking it out in court. In recent months, law firms Morrison & Foerster, Perkins Coie and Winston & Strawn have each eliminated diversity requirements for fellowships, a common tool for recruiting from underrepresented groups. All were sued by AAER, which dropped its cases after the changes were made. Pharmaceutical giant Pfizer Inc. removed race-related requirements from a similar fellowship after an advocacy group for medical professionals and students challenged the program. A spokesperson for Perkins Coie declined to comment. Morrison & Foerster, Winston & Strawn and Pfizer didn’t respond to requests for comments.

A lawsuit filed by AAER against Hidden Star, an Austin-based nonprofit, wrapped up in three weeks after the company agreed to change language on its website for a program aimed at women and minority entrepreneurs. Hidden Star always allowed anyone to apply for its grants, according to founder Mike Dewey, but some of its messaging wasn’t clear. It has since taken down a specification that applicants must be a  “confirmable ethnic minority,” and removed a requirement to disclose race on the application.

Read More: Trump Allies Attack Corporate ‘Bigotry’ Against White Men

At issue in both the Hello Alice and Fearless Fund cases is Section 1981 of the Civil Rights Act of 1866, put in place after the Civil War to protect formerly enslaved people from discrimination when entering into and enforcing contracts. The conservative groups argue that programs targeting underrepresented groups discriminate against anyone that falls outside of those categories. Companies like Hello Alice counter that their grants aren’t contracts, and that Section 1981 shouldn’t be read that way, anyway.

But fighting that battle in court is costly. Hello Alice has been funding the expenses itself, though Gore said it won’t rule out asking for outside financial support in the future. At the end of last year, “a chunk of the team” was laid off, said Gore, while declining to give specific numbers.

The company said it’s nearing the close of the Series C round that got delayed last year — it was oversubscribed before the lawsuit hit, and some existing investors increased their investments — but the money is coming months later than planned.

At the Fearless Fund, too, cuts have been made: Since the suit was filed, staff at the company and its sister non-profit foundation have been cut to nine people from 16, a spokesperson said via email.

 “We have definitely seen the hardships of this lawsuit,” said CEO Simone. 

Despite the risks, Hello Alice, named for the fantastical story of the girl who fell down the rabbit hole, is prepared to fight to the Supreme Court — where federal legal precedent could be set — if it has to.

“If Hello Alice loses this case it could threaten billions of dollars that flow into small businesses every year,” said Neal Katyal, a partner at law firm Hogan Lovells who is representing Hello Alice. 

©2024 Bloomberg L.P.