When venture capital firms implode, it usually happens quietly. Once all the lawyers and mediators and PR pros are done, the mess is cleaned up for public consumption. Orderly transition. Amicable divorce.
But that is not the case at Xfund, an early-stage venture capital group with deep ties to Harvard University. Instead, the firm’s two general partners—Patrick Chung and Hugo Van Vuuren—have engaged in an acrimonious breakup that has included employee firings, name-calling, bank account freezes, and even a restraining order request.
What follows is based on court records and background conversations with nearly a dozen sources who are familiar with, and in some cases directly involved with, the Xfund debacle. None would agree to be identified, citing possible legal repercussions.
It all started so well…
Xfund began life in the fall of 2011 as something called The Experiment Fund, a partnership between established venture capital firm New Enterprise Associates and Harvard University’s School of Engineering and Applied Sciences. The idea was to make seed-stage investments in startups based on research done at Harvard or other local universities. It was located on Harvard’s campus, and staffed by Hugo Van Vuuren, a serial entrepreneur and “expert-in-residence” at Harvard. The person responsible for Xfund on NEA’s side was Patrick Chung, a Silicon Valley-based partner who mostly focused on consumer technology investments.
Three more VC firms—Accel Partners, Breyer Capital and Polaris Partners—would join up in mid-2012, with each receiving a seat on The Experiment Fund’s investment committee. The basic set-up was this: Van Vuuren would source the deals. More experienced VCs would help vet them, and then, if acceptable, okay the investments. More than 70% of the deals in Experiment Fund, sized at $10 million, emanated from Harvard and MIT. Another 9% came from Stanford, with the remainder spread out among a few other schools.
By mid-2014, The Experiment Fund seemed to be a success. For Chung, it also represented a new opportunity. He had been with NEA for nine years, but his path to general partner was unclear. So he proposed raising a much larger Experiment Fund, to be renamed Xfund, alongside Van Vuuren. The founding VC firms would still contribute capital, but only one would serve on the limited partner committee (LPAC), a group that represents all of a VC fund’s investors. The other two spots would be filled by investors Jasper Ridge Partners and Top Tier Capital Partners, while Chung and Van Vuuren would serve as Xfund’s two general partners. Chung continued to work out of NEA’s offices in Silicon Valley, while Van Vuuren remained at Harvard (even though the University had no legal or financial relationship to Xfund).
In early December 2014, Xfund announced its independence, and that it had raised $100 million for its new investment pool, Xfund 2. Included in that was the purchase of The Experiment Fund’s entire portfolio, which was effectively rolled into the new fund.
“We deliver the best of both our academic and investing worlds,” Chung told Fortune at the time. (Read: Harvard-affiliated VC fund raises $100 million)
Seeds of discontent
The first paperwork for XFund 2 was drawn up in June 2014, so that the new fund could take advantage of an investment opportunity. It described a true 50/50 partnership between Chung and Van Vuuren, in terms of both economic interests (e.g., carried interest) and corporate governance. Shortly after announcing the fund’s existence in December, however, Van Vuuren was sent documents that effectively gave Chung governance control. If there was a “tie” in terms of an investment or personnel decision, Chung’s vote would carry the day.
Van Vuuren approved the amended documents via an electronic signature, but effectively claims in a court filing that he was bamboozled. From the filing:
While Van Vuuren was abroad helping his family, Chung went to Xfund 2’s counsel, Peter Laybourn of Ropes & Gray LLP, without informing Van Vuuren, and misrepresented to Laybourn that Van Vuuren had agreed to amend the Xfund Management Company operating agreement to give Chung a controlling vote on all matters (not just investment decision stalemates). Laybourn, under the mistaken impression that Van Vuuren had consented to this arrangement, instructed a junior associate to revise the operating agreement according to Chung’s instructions and email the amendment… Ropes & Gray did not advise Van Vuuren of the impact and significance of the revisions or recommend that he have them reviewed by personal counsel… At Chung’s repeated insistence, in the midst of dealing with a family emergency, by cell phone, and without internet, Van Vuuren attached his electronic signature to the amendment.
Fortune has spoken to several limited partners in Xfund, and they differ in understanding of how the fund was supposed to operate. Some say it was believed that Chung would have a tie-breaker, given that he was the much more experienced venture capitalist. One says he believed the two would be equal partners in all things. Moreover, a Ropes & Gray attorney named Aaron Katz, who was brought in later to help manage Xfund’s fraying relationship, allegedly wrote Van Vuuren an email saying he was surprised by the amendments, because it seemed to violate “a marriage of two equals.”
Van Vuuren appears to have resented the agreement once he claims to have fully understood it in early 2015, and he and Chung began to bicker. Moreover, Chung alleges in a court filing that Van Vuuren’s productivity declined precipitously, and several times sent Van Vuuren disparaging messages that, depending on your point of view, read like justified frustration or abusive bullying.
The true flashpoint, however, came when Chung decided to terminate Kristen Ostro, a onetime NEA employee who had joined Xfund as an operations adviser (and later took on the added responsibility of marketing director). Ostro wrote in an email at the time that she believed that the termination was in retaliation for her “whistle-blowing Patrick” in June 2015 for “actively bullying, and mentally and emotionally abusing me and the entire team.” Sources close to Chung say he simply felt her work performance was below par, and that she had come up short on a performance plan devised largely by Van Vuuren (charges Ostro disputed at the time ― she declined comment when Fortune reached out). Either way, Chung and Van Vuuren did not agree on firing Ostro, and it made the “tie-breaker” an even sorer bone of contention.
It all falls apart
What happened next depends on who you believe. Those siding with Chung claim that Van Vuuren became unhinged, going so far as to threaten violence against both Chung and Ropes & Gray attorneys (in part, Chung believes, because Van Vuuren was worried about his immigration status). Van Vuuren denies such allegations, saying they were a smokescreen manufactured to help Chung maintain control of Xfund. He also claims in court papers to have uncovered financial improprieties that improperly enriched Chung, according to court documents.
The two partners met repeatedly with attorneys—both from Ropes and Gray, and also Van Vuuren’s personal counsel at K&L Gates—but to no avail. By mid-January, the limited partner advisory committee decided to quietly suspend Xfund’s ability to make new investments (it had only deployed around 10% of its $100 million), although it could participate in follow-on deals for existing portfolio companies. In March, Chung chose to terminate Van Vuuren, a move that could become the basis for a later legal action by Van Vuuren against Xfund (based on an argument, made in court papers, that there is no provision by which a managing member of the fund can be terminated).
“While Xfund’s differentiated investment model is working, as evidenced by outstanding portfolio company performance, high deal flow, and unique collaborative relationships with our university partners and LPs, there was a breakdown in the General Partnership that ultimately required us to terminate Mr. Van Vuuren,” according to a statement provided to Fortune by Xfund (which effectively is now Chung). “Xfund will continue to fully back our existing portfolio companies as we work through this transition and move forward. We are very grateful for the support we’ve received from our extraordinary LPs.”
At around the same time, Silicon Valley Bank froze Xfund’s accounts, due to what it referred to as a “dispute among the partners.” (XFund subsequently opened a new account at First Republic Bank.)
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Less than a week later, Chung filed a temporary restraining order request in Santa Clara Superior Court, claiming that Van Vuuren had repeatedly threatened violence against Chung and his family. While the incidents had occurred much earlier in 2016, Chung said in court papers that the timing of his request was tied to Van Vuuren’s plans to attend an Xfund-related event in Silicon Valley, over Chung’s expressed wishes that he remain in Massachusetts. Chung also claimed that Van Vuuren had threatened at least one attorney at Ropes & Gray, and that the law firm retained “armed security personnel” to provide personal protection. The law firm also allegedly put Van Vuuren on a “do not admit” list, though Ropes & Gray has declined comment. Finally, Chung alleged that Van Vuuren had “forged my signature” on certain immigration documents, per his court filing.
Van Vuuren denied the allegations in a lengthy response that included letters from two former Xfund employees—Ostro and Halah AlQahtani, who resigned around the time Van Vuuren was fired—that seemed supportive of Van Vuuren’s point of view. His response also included the aforementioned text messages from Chung, and a letter from immigration attorney Jeff Goldman that said his status would not be materially affected by losing his affiliation with Xfund. Moreover, Goldman tells Fortune that it is “somewhat common” for law firms to sign someone’s name on immigration documents if authorized to do so (particularly as faxed or scanned signatures are not accepted).
Chung later would withdraw the temporary restraining order request, as the two sides reached an out-of-court arrangement.
As all of this was going on, the limited partner committee retained its own counsel (Nixon Peabody), and Ropes & Gray recused itself as Xfund’s counsel to avoid an appearance of conflict (it was replaced by Lowenstein Sandler). While the LPAC itself cannot officially assert a managerial role, a letter obtained by Fortune shows that it has recommended that Chung be allowed to continue running Xfund. LPs have been asked to ratify a plan whereby they would effectively remove the current “general partner,” and then create a new one led by Chung (two LPs suggested that he also might have some sort of monitor to make sure he is acting in the fund’s best interest). That move might not only remove Van Vuuren from any decision-making capacity, but also theoretically deprive him of carried interest from existing Xfund investments.
Several LPs who support the proposal say that their decision is mostly influenced by Chung’s experience, and their belief that he was responsible for the vast majority of XFund’s deals (and its fundraising). Van Vuuren supporters, for their part, argue that he sourced the fund’s single-most valuable investment, Kensho.
“The problem here isn’t that a two-person fund can’t be truly 50/50, or that it can’t work when one person has a tie-breaker,” one LP explains. “All that matters is that the two people agree on the set-up, and it doesn’t appear that Patrick and Hugo did.”