The new Berkeley Frontier Fund reinvents the venture capital model by building in donations to University of California, Berkeley.
In the autumn of 2019, University of California (UC) Berkeley’s business school dean Ann Harrison joined a dinner with alumni in Hong Kong, where she told attendees that only 13% of Berkeley’s budget was covered by the state despite being a public institution.
“Everybody around the table was a donor, but our donation budget was very small,” Richard Chan, who hosted the dinner, tells Global University Venturing.
UC Berkeley’s ecosystem is rich in opportunities. It has spun out 273 companies that have raised some $1.6bn in venture funding, while undergrads and MBA students established a combined 1,852 startups between 2006 and 2021. It is the home of luminaries like Prof Jennifer Doudna, who won the Nobel Prize for her Crispr discovery and has founded multiple spinouts herself.
The university has investment rights in its spinouts but historically seldom exercised them, partly because as a public institution it is unable to invest federal money into private companies, partly because venture funds are a relatively recent addition to its arsenal.
The university only established the Berkeley Catalyst Fund and its sister vehicle Berkeley Catalyst Philanthropic Fund through UC Berkeley Foundation in 2016, but regulatory filings show there is just around $23m to invest and that money is spread thin, with the remit also including the Lawrence Berkeley National Laboratory and UC San Francisco.
UC Berkeley’s accelerator SkyDeck announced a first $24m fund in 2018 and this past March followed it up with a $60m second fund. Chan’s venture capital firm IronFire Ventures even became the first limited partner in SkyDeck’s fund.
However, venture funds could not solve the problem of limited donation budgets.
Or could they?
Half venture, half charity
“We realised that instead of focusing on the donation part of it, what if we can focus on the investment budget of every alumnus? What if we can create a fund that invests in the best Berkeley startups, which a lot of alumni want to support and invest in, and in return, we donate a substantial portion back to Berkeley?”
A venture capital fund that also does philanthropy sounds like a wild idea and, legally speaking, it turned out to be a complex and expensive task to create a workable model that would satisfy UC Berkeley’s own requirements.
The idea of a philanthropic vehicle is not new. Indiana University, for example, can tap into the IU Philanthropic Venture Fund, which receives donations from alumni to invest in companies. And the Berkeley Catalyst Fund operates in a way where the general partner (GP) donates a portion of their carry share back to the school.
“We wanted to take it to the next level,” Chan declares. If only the GP donates, that is one person, “but we wanted to be able to expand this to 50 or 100 and, in the future, maybe more. Alumni can rally behind this.”
Raising capital from alumni, or any investors, for a venture capital fund that makes traditional investments in a portfolio but then donates a set proportion of its returns to the university is a new concept. As a rule of thumb, for every dollar that an alumni invests in the Berkeley Frontier Fund, they can expect to see 50 cents go to the university as a donation by the end of it. “That is meaningful,” Chan says. If all goes according to plan, the fund will donate at least $25m.
This setup means that the Berkeley Frontier Fund’s pool of potential LPs is for all intents and purposes limited to UC Berkeley alumni, because only people with a stake in the ecosystem can be sold on the donation part. “If they do not value it, that becomes a tax,” Chan says. It also means that the Berkeley Frontier Fund will focus exclusively on startups aligned with UC Berkeley.
“Our mission is really to create a sustainable and meaningful revenue source for Berkeley,” Chan notes. “We spoke with the UC Regents leadership and they asked us the question, can we replicate this model for other schools like UCLA, Davis or San Diego? Absolutely. You just have to find someone to run this. We are happy to share our model.”
If they copied it, finding someone to run it would be a challenge in and of itself, Chan ponders. “This is half venture, half charity. If you look at the economics, the operating team are taking more like a stipend. It is not easy. I have been running a VC fund for the past 10 years and I pulled part of my old team over to focus on this. We all share the same vision. It is not a pure for-profit VC fund, so you have to align with people who have that mission in mind.”
Despite the challenges, Chan would like to see more funds like this launched, perhaps ones focused on a specific sector like biotech or artificial intelligence.“The idea is to let this model flourish.”
The Berkeley Frontier Fund for its part is focused on deep tech in relatively broad terms. “We are talking about biotech, artificial intelligence, material science, natural resources like energy. If they are successful, these are industry-forming companies.”
A win for founders, investors and Berkeley
One company in the Berkeley Frontier Fund portfolio is Prof Doudna’s Mammoth Biosciences, which is working on repositories of Crispr-based proteins for use in medicines and diagnostics. Mammoth most recently unveiled $195m in funding in September 2021, split across $45m series C and $150m series D rounds from investors like e-commerce and cloud computing giant Amazon.
Squeezing into the cap table of such a famous company can be difficult, but the Berkeley Frontier Fund used its official relationship with Berkeley and leveraged the donation angle, says Chan. Essentially, the fund asks founders like Prof Doudna to let them participate in the next funding round and it does not cost them anything – they still raise the same amount for the same equity – but when the fund makes its donation it will name it after the founder and the company. “It is a win-win for everyone,” notes Chan.
It also helps that the Berkeley Frontier Fund’s advisors and donation committee members hail from across the ecosystem, with UC Berkeley’s chief innovation and entrepreneurship officer Rich Lyons providing campus oversight.
Persuading these people to sign up was a breeze, Chan says. “Almost everyone we talked to said, absolutely, this is the right thing to do. They share the same challenges, they feel the pain, the budget crisis and all that.”
The Berkeley Frontier Fund invests at the growth stage and this is deliberate strategy. “We want to optimise for the donation. Doing it this way, one, the hit rate of the companies we invest in is much higher. Two, it is closer to the exit event, when we can make money and make the donation.”
Chan and his team have identified some 600 companies with Berkeley founders or C-suite executives that are in the fund’s target zone – series B and later. The problem is not so much finding late-stage companies but deciding which of these to invest in – Chan says that the Berkeley Frontier Fund will invest in only around 15 businesses from its initial capital commitments.
After this initial capital is deployed, a second fund or an evergreen model could both be on the cards. Or the Berkeley Frontier Fund could do both at the same time. “Interestingly,” Chan explains, “some alumni have set up a donor-advised fund to invest. This will continue to go on and will become an evergreen part of it. I am hoping that maybe 30% of the fund will come from donation efforts that want to keep this as an evergreen fund, and continue to give back. As Rich Lyons said, it is a gift that keeps on giving.”
Whatever happens, Chan is keen to keep assets under management lean rather than raise ever-larger funds.
For now, Chan is looking to generate more awareness among founders about the fund. Talking to him is a chance they all ought to jump at because founders, investors and the next generation of researchers all win. It is rare to be able to claim that when pitching to a VC.