CA, MN University Systems Take Different Approaches to Startup Support

Within the past month, two of America’s major research universities – the University of California system (first in total R&D expenditures, according to the NSF) and the University of Minnesota-Twin Cities (eleventh in total R&D expenditures) announced new funds to increase the rate at which their students, faculties, and researchers are able to commercialize their ideas into new businesses. While the UC system announced the establishment of a $250 million venture fund, Minnesota announced that it was scrapping a plan for a $70 million investment fund and was pursuing programs that provide early stage seed funding instead. Universities are likely to continue to play a role in providing financial assistance as a means of commercializing university technologies; however, as can be seen in the Minnesota case and in several others throughout the country, a traditional venture capital fund is not the only method to do so.

Seeded with money from the University of California endowment, the $250 million venture capital fund within the UC system will be one of the largest in the nation of its kind. The new funding entity, called UC Ventures, will focus specifically on opportunities arising from or associated with the work being done at the university’s 10 campuses, five medical centers, and three national labs.  The announcement, however, was not without controversy.  According to Joe Kiskis, a physics professor at UC Davis and a member of the Council of UC Faculty Associations, as quoted in The Wall Street Journal: "Judgments about faculty support…are supposed to be made on the basis of the quality of scholarly work or research, not the basis of whether or not this is something that could make money." Furthermore, the announcement of the fund comes in the wake of a California Court of Appeal decision last December that overturned a lower court’s ruling that would have required the UC system to obtain and turn over confidential financial documents from two venture capital firms with whom the university has previously worked.

In December 2012, the University of Minnesota announced plans for two venture capital funds – one $20 million in size to make seed stage investments in university startups, and another, $50 million in size, to invest in startups nationwide. Last month, however, the university announced that it was scrapping these plans in lieu of establishing the Discovery Capital Investment Program, where the school will invest up to $350,000 in equity financing in new technology companies working to commercialize products or services. This approach, according to the university, allows for the reduction in administrative and management expenses, while increasing the amount of matched equity from outside sources. Still, this decision was not without some controversy.  Writing in Forbes, Dileep Rao, a professor at the Carlson School of Business at the University of Minnesota, argues that the new fund is taking an even higher risk than most VCs by focusing on the developing stage where it is extremely difficult to forecast success, is over-reliant on “experts” both within the necessary qualified management team and in the review of business plans, and fails to emphasize the importance in staying in Minnesota post-commercialization.

University managed venture capital and private equity funds (university-managed funds, or UFs), although receiving significant attention recently, are hardly a new phenomenon. As described by Harvard Business School Professor Josh Lerner, the American Research and Development Corporation (ARDC), the first modern venture capital firm, was actually founded by academic leaders in Boston and designed to focus on technology-based spinouts from the Massachusetts Institute of Technology shortly after World War II. While some schools tailor their funds to specific geographic areas, according to Shane (2004), the University of Rochester (NY) affiliated fund was initially capitalized in 1973 with $67 million from the parent university, yet most of its investments in the 1980s took place in Silicon Valley – nearly 3,000 miles away. Still managed by four of its co-founders, ARCH Venture Partners at the University of Chicago was founded in 1986 to commercialize university technologies and follows the model of most European UFs, where funds are managed by experienced executive teams and advisory boards with a specific geographic or institutional focus. In addition to varying degrees of size and scale, UFs also differ in management. The University Venture Fund at the University of Utah is student run and manages more than $18 million in assets, making it the largest student-run fund by assets under management in the country, while the recently announced Green D Founders Fund, seeded by a group of Dartmouth alumni, provides a model for alumni investors hoping to invest in companies that share their university connections. Many other universities throughout the world are also actively engaged in venture capital in other ways, such as through the investment of portions of their endowment in independent investment firms.

Three Italian researchers from the Polytechnic University of Milan sought to catalog the UFs in the United States and in Europe in 2013. Writing in The Journal of Technology Transfer, the authors note that UFs can be described as vehicles for direct equity investments in which the parent university, typically though its technology transfer office, acts as a general partner in an investment process that resembles that of independent VC funds. UFs as described by the Thomson One database used by the researchers are “University Affiliated Programs,” or programs funded by a university or college to make private equity investments.  According to the database, from 1973 to 2010, only 26 UFs were active – 11 of which were in the United States. So, the establishment of two new UFs at major research universities is particularly noteworthy.

Tom Hockaday, the managing director of Isis Innovation, the technology transfer office of the University of Oxford (UK), suggests that, from the university perspective, the disadvantages of UFs must be weighed against the potential benefits, and the real winners are ultimately the people who manage the funds, using their experience to earn themselves a great deal of money. According to Hockaday, advantages to universities include more ready access to investment finance, a share of carried interest in returns from the fund, PR benefits, and the ability to attract co-investors. Disadvantages to universities investing in venture funds include the potential of failure, the likelihood of follow-on funding decreasing if tied funds turn down university research, potential conflicts of interest, and the use of a one-size-fits-all approach where research is forced down the commercialization pipeline.

Universities are likely to continue to play a role in providing financial assistance as a means of commercializing university technologies, just as they have done for nearly 50 years. As can be seen in the Minnesota case and in several others throughout the country, a traditional venture capital fund is not the only method for universities to play an active role in funding their own (or even other) technology-based businesses. Ultimately, context matters most. During their last fiscal year, the University of Minnesota spun out 15 startups – a record – while the University of California system hatched 71.  When determining how, where, or whether to be involved in tied funds, it is critical that each university is cognizant of where the fund fits into both the university and its region’s broader economic development ecosystem. A $250 million venture fund is probably not the best option for all universities hoping to play a role in commercializing technologies; however, it is certainly a sign of new and interesting things to come.