By Nathan Beckord, Foundersuite.com
Before the covid-19 pandemic and economic slowdown, many venture firms were wrestling with diversity and inclusion and how they could tap into the female entrepreneurial market.
For the founders of XFactor Ventures, the opportunity to back ambitious female-led start-ups began with entrepreneur Anna Palmer in 2016.
Palmer says she had “a pretty personal and visceral reaction” to the US presidential election, as did many women. In ensuing conversations with women in her Boston start-up community, she says, “the women’s access to capital came up over and over and over again.”
Their experiences echoed her own as a founder of a clothing donation company.
“I found myself often pitching to investors’ wives on conference calls or kind of grabbing whoever happened to be around that was female to get advice and thoughts on the company we were building, because there just weren’t women on the other side of the table, and our target market was women.”
What: The firm says it invests in companies with a female founder, the so-called “X Factor,” who have “the insight and drive to build the next billion dollar company.”
Who: Anna Palmer launched XFactor Ventures with Chip Hazard in 2017. Aside from their joint venture, Palmer is the co-founder and CEO of Dough, a marketplace for woman-owned brands. Hazard is a general partner at Flybridge Capital Partners. He’s been an early-stage VC for more than a decade..
Team: The other investing partners on the team at XFactor Ventures includes Aubrie Pagano, Danielle Morrill, Erica Brescia, Heather Hasson, Jessica Mah, Kate Ryder, Liz Whitman, Nanxi Liu, Nicole Sanchez, Ooshma Garg, Trina Spear and Kathryn Minshew as an operating partner.
In 2017, Palmer joined forces with Chip Hazard, a seed investor and general partner at Flybridge Capital Partners, to launch XFactor Ventures, a pre-seed investment firm focused on female founders building billion-dollar opportunities.
In addition to its mission to support female entrepreneurs, XFactor is unique on the investor side. All of the firm’s investing partners, except for Hazard, are women who founded and operate businesses themselves, and they commit to hands-on support of their portfolio, which numbers about 50 companies.
Here are some highlights from an interview with Palmer and Hazard with me about starting a fund in an untapped market and finding success with an unusual model.
On doing good versus making money
We can laud XFactor for its effort to address the gender gap in VC funding, and we should. But, Hazard and Palmer point out, they’re a fund first.
“One of the things that’s so exciting about this,” Palmer says, “is you’ve seen all the statistics that [companies with] mixed-gender teams and women at the helm and in leadership actually perform better. Yes, this is mission-based, but this is also really about investment returns. It’s just a huge opportunity that’s untapped in the market.”
Identifying an unmet need and filling that gap doesn’t mean lowering the bar for companies you back, she says. It’s about talking to the people building the best companies that you expect to generate massive returns, whom other funds happen to be ignoring.
On the perceived competition
The conversation about backing female founders seems to suddenly be everywhere. But actual funding for female founders hasn’t followed with such gusto. Hazard notes that potential funders expressed concerns about competition, they worried there were already too many firms targeting female founders.
Friends thought, “Aren’t there a lot of people doing this?” he points out, “A lot is less than 1 percent of the capital in the venture industry.”
Bottom line, he says, is be careful not to get caught up in the noise of the moment. Look at the numbers to determine where the real opportunities are, and don’t be afraid to tap into untapped markets.
On raising money for a fund versus for a start-up
There’s good news for entrepreneurs who dream of one day becoming VCs. Raising money for a fund is similar to raising money for a company.
Palmer said raising for XFactor paralleled her experience raising for her first company, Fashion Project.
“You have your target list of people that you think would be a good fit [as investors], and you’re thinking about what makes the product unique and why are we uniquely suited to be the ones that fill [the need]? All of those things are exactly the same. Just who you’re going after for capital is a little bit different.”
She notes an advantage raising money for a company versus for a fund is that the differentiator is clearer. “As a fund, to really prove out why you are going to be the one that gets those returns is a little bit harder.”
On identifying potential investment partners
“I think a lot of that was just looking at who was interested in what,” Palmer says. XFactor supports companies led by women, highly ambitious founders building businesses with a billion-dollar market opportunity.
They just had to find LPs who were interested in that mission and showcase their differentiator, which includes more than the mission of supporting women founders. Because their investor team is comprised of all founders, Hazard says, “they have great insights from their experience. We can identify what an amazing founder looks like. Then once we’re involved, we can do a really good job of supporting.”
On the benefit of a one-time investment
From an investment perspective, it seems smart to reserve some funds to double-down on the most promising companies. But XFactor intentionally forgoes the follow-on rounds, because, Palmer explains, “we never wanted our companies to feel like they were competing for the next check, because we really wanted to be able to dig in and help them.”
She says this creates a dynamic that lets companies approach their investor team when they need help without minimizing or sugar-coating problems to protect their chances at the next round of funding.
Hazard agrees, while this could limit their upside, “We found that [structure] to be really effective in building our relationships with companies and really providing support on a different level,” which can lead to phenomenal growth. He adds, “A lot of the value gets created with the initial investment decision, but you don’t win if you’re not a great supporter and helper.”
Nathan Beckord is the CEO of Foundersuite.com, which develops software for helping raise capital. Foundersuite has helped startups and VCs raise over $2 billion since 2016. This article is based on an episode of Foundersuite’s “How I Raised It” podcast, a behind-the-scenes look at raising money. Beckord can be reached at email@example.com.