Inc.'s Fundery has identified more than 50 venture capital funds that invest predominantly in women. But very few of those have any ties to the older, more traditional funds that have long invested mostly in men. Industrywide, about 83 percent of venture investments go to companies whose founding teams are exclusively male, even though there's lots of research showing that gender-diverse teams perform better. Now, after two years and 28 investments, XFactor, which is loosely affiliated with Flybridge Capital, is announcing a second fund, at $8 million.

"We've proven this model can work," says Anna Palmer, who launched XFactor with Chip Hazard, a general partner at Flybridge Capital. "We've seen more than 1,500 companies come through our network, and our portfolio is performing really well." XFactor has invested in co-working company the Riveter, networking company Chief, and legal services company Court Buddy. 

When Palmer was raising money for her first startup, designer clothing reseller Fashion Project, "I was frustrated with how few women there were on the other side of the table," she says. At the top 100 venture firms, only 7 percent of the partners are women. Palmer met Hazard while working on an initiative called SuitUp, which brought people together to discuss issues affecting women in local communities after the 2016 election. Hazard, who works with three other male general partners at Flybridge, also was frustrated with the homogeneity of venture capital. "The fact that the industry is as undiverse as it is, is to me, personally, a problem," says Hazard. "Starting XFactor is the way we could have the greatest impact on that as soon as possible."

When Boston-based XFactor was launched in 2017, as a $2.9 million fund, it had multiple goals: to earn venture-level returns, to get women entrepreneurs better access to capital and networks, and to get more women involved as investors. "We saw a huge opportunity for women to be mentoring the next generation of women," says Palmer.

To that end, both the original XFactor fund and its successor operate on an unusual model. Each fund has Flybridge as an LP, although the funds have also raised money from other LPs. Flybridge provides back-office services for XFactor. The investments are made by a group of women who are all active entrepreneurs and have raised their A rounds, or achieved a similar level of progress by bootstrapping their companies.

The first XFactor fund had 10 so-called venture partners, including Hazard, while the second will have 23. Those 23 were chosen not only by a search for successful entrepreneurs, but also by trying to fill geographic gaps -- Los Angeles, Seattle, Denver -- and adding expertise such as agricultural technology, health care, and additional knowledge in fintech. The second fund will also write slightly larger checks: about $150,000 per investment, compared with $100,000 for the first fund. Both funds invest across a wide variety of industries. When both funds are fully invested, Hazard estimates they will have provided very early-stage funding to about 80 companies.

Palmer, who sold Fashion Project and is working on a startup called Dough, which is designed to make it easier for women to patronize women-owned companies, hopes the XFactor model will become self-replicating. "The people we're investing in now could potentially become investors in the next fund," she says. As an example, she cites Amy Nelson, the founder and CEO of the Riveter, which runs co-working spaces. Nelson received an investment from XFactor's first fund and is coming on as a partner in the second. 

Aubrie Pagano, the CEO and co-founder of personalized clothing company Bow & Drape, says she was excited about getting to "dip my toe in investing" when she became a venture partner in XFactor's first fund. "People really want to understand my perspective as a female founder," she says. "The industry is perking up its ears to try to listen to that unique voice." She says the experience has made her more likely to become an angel investor, and she's had an inquiry from a venture capital firm about joining its ranks in some capacity.

Hazard says XFactor has made a difference at Flybridge, as well. Before the launch of XFactor, he says, Flybridge's deal flow was 80 percent male and 20 percent female. Now, he says, the ratio is more like 60/40. "For us," says Hazard, "that's transformative."

Published on: May 30, 2019