Fortune Magazine's Term Sheet has been regaling us with tales of small venture capital partnerships gone melodramatically wrong. The latest has been Expansive Ventures, but that's not to upstage the ongoing mess surrounding Xfund, a seed-stage venture fund started in the Boston area. While Xfund’s co-founders and managing partners, Hugo Van Vuuren and Patrick Chung, engage in a legal duel, the Boston community has removed itself from the situation - except for the portfolio companies caught in the middle.
As David Frankel, managing partner of seed fund Founder Collective, explained the situation surrounding Xfund, "This is a divorce that’s going on and it’s like every divorce: It’s incredibly unfortunate; mud is slung in every direction; and most people who are smart start to stay on the sidelines."
The backstory
In 2014, Xfund was spun out from the Experiment Fund - which Van Vuuren and Chung formed with Accel, Breyer, New Enterprise Associates (NEA) and Polaris to support startups from the Harvard and MIT communities - and Van Vuuren and Chung were both at the helm. But since the fallout between its managing partners this past winter, a public battle has ensued, which Fortune, The New York Times and BostInno have covered, among others.
Van Vuuren filed a lawsuit against Chung in May of 2016. The suit won’t be heard in court until the fall, but the two parties have already been wrestling with smaller legal disputes. On the one hand, Van Vuuren alleges Chung had been engaging in “fraud, self-dealing, mismanagement and abuse of Xfund’s female employees.”
On the other hand, Chung claims that Van Vuuren has threatened violence against him and his family, taking out a temporary restraining order against his business partner. The TRO was withdrawn on April 11, 2016, following mediation - but not before the limited partners met to decide Chung would run Xfund.
How Xfund's East Coast investments are coping
Angel investor and entrepreneur Andy Palmer has seen Xfund’s legal problems as a notable issue for at least one portfolio company in Boston, Rest Devices. Palmer, who sits on the startup’s board, told us “Rest [Devices] got caught in the middle and got screwed. It’s an example of a venture fund not doing what’s in the best interest of the entrepreneurs. You wouldn’t see Andreessen Horowitz doing something like this. It’s a massive distraction for the entrepreneurs… These people are the ones taking real risks in their day-to-day lives.”
Frankel explained, from the perspective of Xfund’s investments, “They’re not getting the benefit of the partnership, but these companies are carrying on… I’ve heard three people to say to me, ‘It’s like a divorce. They just have to sort it out and move on already.’ And like a divorce, everyone feels sorry for the protagonist, but life carries on.”
Despite the disappointment, some feel the unfortunate events surrounding Xfund won’t have a longstanding effect on the local ecosystem. There are still other seed stage funds investing in Boston startups, and it’s expected to stay that way.
Frankel said, “I don’t think this is a systemic problem… I don’t think that it’s consequential. There are a number of seed stage funds that have been funded and are funding still. I don’t think there’s anyone out there saying, ‘Oh, because Xfund didn’t work, I’m not going to form a seed stage fund on the East Coast.’"
Everyone feels sorry for the protagonist, but life carries on.
“It’s also much ado about nothing,” Palmer said. “It’s a tiny fund in the big scheme of things.”
Where Boston stands
Since Chung, based in San Francisco, has wrestled control of Xfund from Boston-based Van Vuuren, the balance of the fund's portfolio has decidedly shifted in a westerly direction. To date, its investments include Zumper (San Francisco), Philo (Cambridge), Ravel (San Francisco), Kensho (Cambridge), Rest Devices (Boston), LandIt (New York), Guideline (San Mateo), 23andMe (Mountain View) and Halo Neuroscience (San Francisco).
Founders at Kensho, Philo and Rest Devices declined to comment.
But Chung said Boston is still on his radar. "I founded Xfund in 2011 alongside my venture firm partners with a mission to support the extraordinary, technologically-gifted liberal arts entrepreneurs that Boston has cultivated for generations," he wrote in an email. "Our commitment to the Boston entrepreneurial community remains unchanged today: we are excited to continue to support and invest in our portfolio companies, and to expand Xfund's contributions to this talented community in the years to come.”
Van Vuuren emphasized that he stands by the original scope of the fund: supporting entrepreneurs with a Boston tie. He wrote, “Experiment Fund, anchored at Harvard, thrived as a transparent, pioneering partnership between Accel, Breyer, NEA and Polaris. We put founders and faculty first. We invested locally, and our early results showcased the burgeoning entrepreneurial potential of the greater Boston ecosystem.
“Unfortunately, on December 19th 2014, Xfund 2 became antithetical to the values and principles of Experiment Fund and our founding partners.”
Palmer echoed those sentiments, especially with regards to Xfund’s commitment to local Boston ventures. He said, “The whole purpose of the fund was to invest in Harvard and MIT startups on the East Coast. Now, most of the portfolio companies are on the West Coast, and many of them don’t even have a connection to Harvard or MIT. It feels to me that the original purpose of this fund has been changed. It’s weird.”
This story has been updated.
