The common auto-pilot statement (I’ve been guilty of it–often–as well) is that universities need more money from pre-seed venture capital to launch successful startups. After a click-whirr pause caused by our recent startup gap fund webinar(sample here), I’m not so sure.
Let’s start with a simple question, “What are 5 key needs areas for success as a venture capital investor?”
- Source of capital
- Experienced managers to govern that capital
- Source of quality deal flow
- Access to operational talent
- Access to a network/in-house technical and business expertise and advice
Now, let’s look at how the current state of leading university-managed startup funds fulfill these needs areas:
1.Universities have large and flexible sources of capital:
Outside donations from alumni, foundations, and friends of the university (many of which are entrepreneurs and angel investors themselves) account for 50 cents on the $1 reporting university venture funds. Add to that the emerging access to grant programs from states and feds and you are looking at a source of capital that can be both large enough to fund early startup formation (25M+) but with fewer strings attached. The “investors” into these funds want to help the innovation/education at their university, advance cures and create shiny new toys for future generations, and spur economic development/job creation
2. Universities are bringing in/leveraging professional investors to manage startup funds:
Smart university administrators are infusing their innovation/tech commercialization/venture groups with people that have actually started and/or invested money into actual early-stage companies. Not private equity or investment bankers, but actual early-stage startup investors. Those that don’t have the resources or need for a FT employee outsource this to subsidiary investment group or through a managed board of investment professionals
3. Universities own the upstream pipeline to the most startup-worthy technologies:
Newsflash: Universities have really smart people that are well funded to freely think, teach, and invent without the constraints of shareholders. The output is some of the most innovative breakthroughs that often find themselves the 600 startups from universities per year (AUTM data). And the kicker…the university/inventor owns it outright and have policies in place to smooth formation.
4. Universities have created entrepreneurship- and mentor-in-residence programs to infuse qualified startup leadership early and often
The University of Chicago Innovation Fund (in the event sampled above) is just one example of the many venture funds that are actively engaging tenured startup leaders into their process. These Entrepreneurs-in-Residence (EIR) and Mentor Network programs bring these leaders as early as possible, even before a funding decision has been made, to evaluate the deal, construct milestones, and if interested, take a leadership position in the early formation of the startup. This method not only insures talented insights and focused use of funds, it also builds a strong relationship the inventor to limit political conflicts that can cripple a young company.
5. Universities install advisory networks to evaluate and support the development of startups.
83% of startup funds utilize an advisory board of technical, business, and investment talent to evaluate and often make the final decision on startup funding. These members bring their experience and often open their networks and checkbooks to these startups. For this, they get to help a school they care about and get an early look at great start-ups. These groups, both geo-located and increasingly virtual, are a win-win.
All of this is a positive and should be music to the ears of venture capital firms and spur even closer involvement with these university startup funds. After all, University startups may be a less-risky-risky bet that IPO at 114% the average of other startups (Goldfarb and Henrekson (2003), and survive longer.
Sure pre-seed money from venture capital is always welcome and encouraged, it can also be a distraction from reality and resources.
By taking the focus off of the $ in pre-seed venture capital and focusing on more public and philanthropic support for investment in these emerging university startup funds models means Venture Capital firms can work to actively support these programs in other ways and find themselves in a better position to see and invest in quality startups at a stage that makes sense to their current investment criteria