US-based Stanford University’s historic decision to provide “unlimited” support from its balance sheet for a university venturing fund, Stanford-StartX has won this year’s Global University Venturing 2013 Fundraising of the Year Award. Stanford is the epicentre of Silicon Valley after its professor of engineering, Fred Terman, encouraged two students, Bill Hewlett and Dave Packard, to set up a technology company in their garage in the 1930s, which helped act as a locus for other start-ups.

Stanford remains easily the most important academic institution for turning out globally-relevant entrepreneurs with disruptive ideas. Since Hewlett- Packard’s formation, Stanford alumni and faculty have started close to 40,000 companies with annual revenues of $2.7 trillion, according to its survey published in October, while research this year into venture rounds tracked on database CrunchBase by blogger Max Woolf shows those affiliated to Stanford have raised the most by value and volume.

But while Stanford has benefited from start-up’s equity growth in three primary ways – philanthropy, committing to venture capital funds and equity as a result of licence agreements – its decision to support StartX is novel as it taps the university more directly into a host of entrepreneurial activity beyond its office of technology licensing (OTL) and areas of focus for most venture capital firms (VCs).

At the end of August 2012, Stanford held equity in 124 companies as a result of licence agreements struck by its OTL.

Last year, according to its annual report, Stanford received $76.7m in gross royalty revenue from 660 technologies, $1.23m from selling equity in four companies and shares in 17 new companies.

But with potentially hundreds of companies formed each year by people affiliated to the university, the institution has been exploring how to support them without undermining its mission of education first and financial returns second.

This is where the new university venturing fund, Stanford- StartX, now comes in.

While some StartX companies may be licensees of Stanford technology through the OTL, the terms of the OTL licence would be the same irrespective of the StartX relationship, the university said. Katherine Ku, who has been director of Stanford’s OTL since 1992, said: “No overlap at all [between StartX and OTL]. We are not co-ordinating or anything.”

According to StartX’s frequently-asked questions section: “This [uncapped fund] is the first time Stanford University or Stanford Hospital have earmarked a fund specifically for the purpose of investing in early-stage companies founded by members of the Stanford community.”

Separate from the endowment, the funding will come from unrestricted university funds, managed by Randy Livingston, vice-president of business affairs at Stanford.

The fund aims to provide 10% of the investment amount being raised by each StartX company. The idea is the fund will help entrepreneurs save time by raising the final bit of the round, which often takes as much time to source as the first 80% to 90%.

The stage of the investment can be seed or any later round provided the company is raising a minimum of $500,000 and professional VC or angel investors lead the funding syndicate.

Now legally and financially separate from the university, having been formed out of the Stanford Student Enterprises organisation, StartX is a non-profit organisation that runs an accelerator programme with three classes a year for Stanford-affiliated entrepreneurs.

The Stanford-StartX fund has already approved commitments to six companies from the 109 graduated companies from StartX and the 27 still in the programme, including Knotch, a network that allows like-minded people to connect based on shared interests, founded by Stanford alumna Anda Gansca, and Cytobank, a big data and analytics platform for single-cell technologies in healthcare, co-founded and led by Nikesh Kotecha, a consulting faculty member in the computational and systems immunology programme at Stanford University.

These are in addition to recent investment rounds for StartX-backed companies, such as:

l  Genapsys’ $13.5m series A round.

l  InstartLogic’s $17m series B round.

l  NuMedii’s $3.5m series A round.

l  Clinkle’s $25m seed round, which included company

Intuit (itself co-founded by two Stanford alumni).

l  Breakthrough’s $5m series A round.

l  Propeller’s $1.35m prize from Google and US space

agency Nasa.

l  Heap’s $2m seed round.

In total, nearly $200m has been invested in StartX’s graduated companies at an average of more than $1.8m each. And the graduated companies have also quickly had 10 exits for an estimated aggregate $130m to $150m, including:

l  Luma Camera (Instagram) 2013,

co-founded by Stanford drop-out

Alex Karpenko and acquired by

Stanford alumni.

l  WifiSlam (Apple) 2013, for a

reported $20m after funding from

AngelList’s Naval Ravikant, Google’s

Don Dodge and Start Fund’s

Felix Shipman.

l  Loki Studios (Yahoo) 2013.

l  Shopwell (HarvestMark) 2013, founded by Stanford

design school alumnus Brian Witlin and incubated at Ideo.

l  6Dot (ProxTalker) 2013.

l  Accevia, 2011, a financial services company that was

acquired by its first undisclosed client.

l  Stypi (Salesforce.com) 2012.

l  Thinkbulbs (Megatasty Labs) 2010.

StartX selects about 9% of the applicants – “those who are both smart and understand what it means to be a founder” – from the 6% to 7% of the students who apply each year. The selection process is aided by StartX’s connections to the student population that intern at the nonprofit.

These students tend to be aware of the reputation and potential for the applicants’ ideas, which VCs, such as the managers of Dorm Room Fund, have regarded as a useful vetting process.

And by waiting for institutional investors to lead the round, the Stanford-StartX fund will capture the experience of the VCs that decide which could make a good bet.

As Brad Hayward, senior director of strategic communications at Stanford University, said: “The timing [of the fund and grant] is principally a function of the development and maturation of StartX itself over the past few years.”

And also that StartX is aligned to Stanford’s core goal of education-first. In its FAQs, StartX says: “StartX is, at heart, an education-focused entity. The fund was initiated as a vehicle to help StartX companies succeed.

“As a mission-driven non-profit, StartX is able to prioritise the value of the programme for the participating entrepreneurs over everything else, including profit.

“The non-profit charges no equity for participating in the programme, which is industry and stage-agnostic. StartX can focus on developing the best entrepreneurs regardless of whether they have just developed a prototype or are raising their series A round of funding. StartX leverages the Stanford community to help run the programme, including students of all backgrounds.”

Cameron Teitelman, founder and chief executive of StartX, who graduated in 2010 with a degree from Stanford in management science and engineering, said: “In the past two years we had offers to set up a fund but we held stubbornly to our values of being a non-profit and putting founders first. Limited partners [investors] want financial returns while accelerators often try to be educational, which causes a tension. We knew Stanford was the right partner as it has not put financial returns but education is first, which avoids conflicts.

Stanford was aware of students dropping
out [such as Clinkle and Luma Camera] or starting companies [without their support], so this fund is a way for them to double down on helping them be successful because this helps source the best students and gain donations in future. But Stanford did not want an in-house incubator as professors saw in the [1990s dot. com] bubble students were overfunded and wasted five years of their lives on start-ups. People think we [at StartX] have built an incubator but we are providing training.”

The fund is also a partial answer to concerns – such as in news provider New Yorker’s April feature The End of Stanford? – about how “the leadership of a university has encouraged an endeavour [Clinkle] in which students drop out in order to do something that will enrich the faculty”.

Teitelman said no individuals from StartX or the university would take stakes in the start-ups backed by the fund.

The non-profit gains from carried interest – a share of profits – on the fund’s performance but these returns are likely to be small, at least initially requiring it to rely on grants.

Since 2009, StartX has been funded by $1.65m of grants from foundations, such as Kauffman Foundation and Blackstone Charitable Foundation, corporate partnerships, including Microsoft, Intuit, Cisco, AOL (where StartX is based), Groupon and AT&T, and venture partners, for example Greylock Partners and Founders Fund.

As part of the fund announcement, Stanford University and Stanford Hospital said they would jointly provide a $3.6m, three-year grant to StartX, to cover about half its costs for its team of eight staff and 18 volunteers, interns and part-timers, as it looks to sail to other universities in the US and round the world.