Why Xfund Loves “Liberal Arts” Entrepreneurs

“Peter Thiel [the PayPal co-founder] studied Philosophy at Stanford. Ben Silbermann [co-founder and CEO of Pinterest] read Political Science. Brian Chesky [co-founder and CEO of Airbnb] studied Industrial Design. But now entrepreneurs with non-scientific backgrounds can’t even get meetings with most venture capital firms,” says Patrick Chung, General Partner and Co-Founder of Xfund. “Firms have so many talented people with scientific and technological backgrounds to meet. Why bother with the rest?” Chung’s team takes a very different view. In this week’s Future Planet Blog, he sits down to discuss start-up investing in a world where success stories are often driven not by extraordinary technological innovation, but by unique social insight.

          Patrick Chung, General Partner and Co-Founder, Xfund

          Patrick Chung, General Partner and Co-Founder, Xfund

Patrick Chung, General Partner and Co-Founder, Xfund

“Cherry told me a great story that really encapsulates our philosophy,” says Chung. He’s talking about Cherry Murray, former Dean of Harvard’s School of Engineering and Applied Sciences, with whom Xfund forged its initial and formative university collaboration in 2011.

“MIT engineers had undertaken a project to design the perfect mosquito net—they painstakingly optimized the net’s mesh size, tensile strength, and concentration of insecticide to create a technically optimal product.  But when they manufactured and distributed thousands of them to villages in Uganda and Kenya, the nets went entirely unused. Why? They were white—a colour associated with death in many African and Eastern cultures.”

It is just one of many stories at Chung’s fingertips illustrating that technological prowess doesn’t necessarily lie at the heart of startup success. This is especially true in the fields where Xfund concentrates its investing: consumer software, enterprise software and digital health.

“Look at AirBnB: it isn’t a stunning technological achievement. It’s a website with a bunch of photos of people’s guest rooms and a simple calendaring function. But that company has built enormous value on a social insight that fell out of favour in the West: that strangers can open up their homes to each other in trust and belonging. Look at Uber: it of course has developed some very sophisticated technology today, but it didn’t start like that: it started with a unique social insight that anyone could moonlight as a taxi driver, taking cars and pollution off the roads.”

Today, Chung argues, a technological edge is less necessary to many startups than it was five years ago. “If you wanted to start a simple e-commerce site a few years back, you might have received calls at 3:00 in the morning from your server centre to say that your website had gone down. Your ability to wake up, get dressed, get down to the facility, take it offline, debug it, get it back up… those technical skills were a core competitive differentiator, because they affected the uptime and reliability of your service. If you want to start an e-commerce site today, you simply turn on Amazon Web Services. You’ll never be able to optimise a data centre or have better uptime than Amazon.”

“In a world where you can now outsource your data centre, your entire infrastructure, the design of your data tables, even your very logo—to the point where almost every major technical skill can be abstracted away—the question is, ‘What’s left?’ We believe that the true differentiators now often lie in the non-technical stuff: the lateral thinking and social insights that broadly-educated liberal arts graduates are taught,” argues Chung.

Most venture capitalists, he says, still have a strong bias towards founders with rigidly technical backgrounds and are unlikely to take a meeting with someone who studied history, classics, or philosophy—even if these graduates are technically gifted. “Firms have so many talented people with scientific and technological backgrounds to meet. Why bother with the rest?”

This is certainly not to say that Xfund ignores STEM-type founders. “We see the full gamut,” says Chung. “We evaluate intensely interesting technologies that have emerged from university departments where the IP has to be spun out; and other companies like Facebook that they can be built with a laptop in someone’s dorm room.” In fact, Xfund’s first office was at 33 Oxford Street, literally within Harvard’s engineering school, in the Computer Science building donated to Harvard by Bill Gates.

One challenge that Xfund has certainly faced is overhwhelming dealflow. “When we started the first fund, we thought we’d see 500 opportunities. In that first year we saw 3,500.” Over the years that breadth has only increased as the firm expanded its relationships with Stanford and Berkeley as well as MIT. Since the start, Xfund has always been open to founders who do not have any affiliation with the four major universities it covers.

Filtering down this massive universe to a small set of deals is no easy task. Xfund has made 11 investments to date: 23andMe, Fonticons, Guideline, Halo Neuro, Kensho, Landit, PartsMarket, Philo, Ravel, Rest Devices, and Zumper.

Having begun its life as a wholly-owned subsidiary of two of the world’s most respected and successful venture capital firms—Accel Partners and New Enterprise Associates (where Chung was head of the Consumer investment practice)—the firm spun out in 2015 to become an independent entity and the the two founding firms became anchor LPs alongside a roster of endowments, foundations, pension funds and prominent family offices. “It’s rare to find great venture capital firms investing in other venture capital firms,” says Chung. “We are very lucky to have begun life with such extraordinary parents.”

“Today we’re very enthusiastic about our partnership with Future Planet. Like FPC, we’ve sought out and supported some of the world’s top universities in their core educative missions. For that subset of students, faculty, and alumni who want to create a new enterprise, we are there to help them produce their maximal social, intellectual, and financial impact in the world.”