A View From Venture Capital: Insights From an Early Stage Investor

Excerpts from the conversation:

Tell us a little bit about yourself and what you do.

I am general partner at XFund, the early-stage venture capital firm that was spun out of Accel Partners, New Enterprise Associates (NEA) and Harvard University. We’re an all early stage fund so in 95 percent of all cases, we’re the very first investor. The companies we invest in are about 40 percent consumer, 40 percent enterprise, and 20 percent digital health.

How is XFund different from other VCs?

Because we were co-founded by a university, we’re engineered to back and support university-based founders. We have this concept that we call ‘tipping into existence,’ which is that there are very many talented people from the nation’s best universities who … when they graduate, have so many different opportunities. We want to make them aware of the entrepreneurial path.

We pride ourselves on backing people we call ‘liberal arts founders.’ A lot of venture firms will not even speak with you if you didn’t major in computer science or engineering or some hard science. We will definitely back people who are computer scientists and engineers, but we also will back people who studied English, history, classics, philosophy. These are people who we believe are being systemically ignored by venture capital. Some of our most successful companies have been started by people with no traditional technical background.

The fact that you are not afraid of classics or philosophy majors has led to some interesting results in terms of the diversity of your portfolio companies. Is that right?

Yes. You’re talking about educational background or educational discipline diversity, which we have a great deal of.

In 2022, less than two percent of venture capital dollars went to companies founded and run by women. About one percent went to companies founded and run by Black founders and people of color. XFund’s record really does stand apart. At last count, 33 percent of our dollars have gone into companies founded and run by women, 52 percent by women and people of color, and 72 percent by women, people of color and immigrants. That 72 percent of cost basis accounts for over 80 percent of the fair market value of the portfolio. So, for us at least, these groups have really outperformed.

What do you really love about what you do?

It is really a privilege to …find amazing people who have developed amazing things, to try to understand what they’re doing and try to help them. I analogize what we do to being … art dealers: We find artists, founders who have these amazing visions. We try to understand the vision. We try to get that artist into the best galleries. We try to get that artist well-reviewed. We try to sell his paintings. If the artist is successful, then we are successful.

What is a misconception about what it’s like to be a VC?

If you’re in a startup, you rise and fall with your team. When your product is successful, everyone is cheering. You’re so happy together. If your product fails, you’re all in the dumps together. You really have operated as a team. In venture capital, you don’t work with people in that same way. When my company goes IPO, I am so thrilled. I’m not as thrilled as the CEO. My partners are thrilled, but not as thrilled as I am. So, we really don’t work with people in the same way that you do in a startup.

A lot of what founders need to succeed, I think, just can’t be taught. It’s part of their DNA, but there must be some things that founders can learn and work on.

The number one correlate to success is that you actually take the plunge. There have been so many amazing founders who could have been the next Elon Musk or Bill Gates, who instead became investment bankers or consultants.

Number two – be incredibly persistent. There have been many, many companies and founders we’ve not heard about today. Why? Because they were about to succeed, except it just got too hard or they thought they were going bankrupt tomorrow when they weren’t, and they said to their staffs, ‘Okay. It’s all over. We’re leaving. Pack it up. We’re going home.”

For the most part, having a co-founder will radically increase your chances of success.

What is some good advice you have received from a legal team?

At NEA, we backed a company that was founded as a not-for-profit. As we continued to grow, our legal counsel said, ‘If one day you want to convert into a for-profit, you should do it sooner rather than later because later it’s going to be a lot more difficult.’ A couple of years later, we thought it’d be better structured as a for-profit (but it was) totally impractical. That is a lesson – you should listen to your legal counsel.

Any advice for entrepreneurs in times when it’s tough to raise venture money?

The best, most enduring advice I could offer is just build a good business. Try to operate as leanly as possible in environments in which capital is free-flowing and essentially free. Lastly, always be closing -- on revenue, sales and funding. You should always be talking with your investors, keeping them tended and well-fed and watered because, when you need them, you’ll want them to remember you.

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