Because some people have actually financially supported him. I'm not trans, but I would be devastated to know that my money went to feed someone who wants to destroy me.
I already have trouble convincing transgender people in my social circle that Lemmy as a software is safe for them to use even with the variety of trans-inclusive servers like yours, and will be safe and inclusive in the future.

A great example of (2) is the fate of PolyMC. Thankfully, the other developers forked it into Prism, but transphobia put that whole project in jeopardy for a bit.

The software is FOSS and anyone can make their own instance.

IMO that's why I'm not immediately dropping my account and running for the hills, but it's still not good. Most people don't have the technical skills or the interest in learning them to run their own instance.

I really want to understand what I might be missing.

IMO it's that even though he does not personally control how Lemmy instances are run, and even though we do have a good degree of robustness to transphobia because the software is FOSS, it is still both morally and technically ill-advised to have a transphobe at the helm of an open-source software project.