Field Notes: Xfund's views on investing in early-stage startups

  • On Feb 9, 2018, Patrick Chung (ex-NEA) and Brandon Farwell (ex-DFJ) from Xfund gave an engaging talk at MaRS in Toronto to a room of 50+ founders and VCs.
  • Xfund is an early-stage venture capital firm (latest fund: $75M) with offices in Cambridge and Silicon Valley. Xfund works alongside top VCs (NEA, Accel) and universities (Harvard, MIT) in order to focus its investments in AI, enterprise SaaS, healthcare, and consumer.
  • The goal of the discussion / Q&A was for Xfund to provide its views on investing in Canada and in early-stage startups.

Business Lessons
Criteria used in seed investing ($500K cheque size)
  • Team-market fit: Do the founders have relevant industry experience for the problem they're trying to solve for?
  • Irrational founders: Founders who are genuinely "crazy enough" to believe they will change the world. Patrick alluded to how Mark Zuckerberg turned down Yahoo's $1Bn early offer to buy Facebook, even though Facebook was only the number 2 player in a market that hasn't yet proven to work and that a number of influential board members wanted the acquisition to go through.

Criteria used in series A investing ($3M to $5M cheque size)

  • Growth metrics: What's the DAU, WAU, MAU? What does the month to month growth look like? For enterprise SaaS, how long did it take this company to reach $1M ARR? For consumer tech, what has been the growth (e.g., users, revenue, engagement) over the last 18 months?
  • Capital efficiency: How did this company use its funds to date? Did this company experiment enough to find out which approach (backed by metrics) is going to work?

Canadian vs. US venture capital firms

  • Patrick and Brandon both believed that it's not so much a "Canadian vs. US venture capital firms", but more of an "East coast vs. West coast" investment mentality.
  • Generally speaking, east coast investors historically generated their wealth with a more conservative approach to investment. This approach relied on more proof points over a long period of time.
  • On the other hand, west coast investors were rewarded by making many initially small, yet quick investments in technology. This approach led these investors to rely more on their judgment of the team and the market opportunity.

Big tech and innovation

  • Companies like Amazon, Facebook, and Google are creating an early "off-ramp" for many early-stage companies by making acquisition offers many young startups have a hard time refusing. This effectively stifles innovation in many sectors since the new technology did not receive adequate time to truly mature and impact people at scale.

Investing in Canadian startups

  • The geographical distance does make it harder to evaluate the companies, which sometimes mean that there is a higher hurdle that Canadian companies have to meet before it becomes interesting for Silicon Valley investors. Xfund partners with locally credible VCs and institutions to help evaluate Canadian startups.
  • Part of the value of Xfund is to truly help startups and leverage its network across the east and west coast. Having a local partner makes sense so that portfolio companies can get the support they need in a timely fashion.

Overall, I had a productive experience learning from two experienced VCs. The clarity and authenticity of the discussion were refreshing for me. I look forward to applying these insights to future pursuits and investment opportunities.

NELSON + Edusight

Edusight's technology assets just got acquired by NELSON, Canada's largest educational publisher [1]. This acquisition strategically combines NELSON's best-in-class educational content with Edusight’s insightful and personalized visualizations of student learning. I'm happy we found a home for Edusight's analytics and digital portfolio product so that we can reach millions of students.

Over the course of four years, Edusight has impacted over 300,000 K-12 students across 40 countries. I'm grateful to my Edusight team, family, friends, K-12 Edusight teachers, mentors, and investors for making this journey the most rewarding experience of my life.

This acquisition marks the end of Edusight, but it's only the beginning of my path in data and tech.

[1] Press Release: NELSON Acquires Technology Assets of Edusight, Continuing to Transform Education in Canada