From partnering with other universities to working with an existing external VC fund, here are models for universities to consider.
Setting up university funds is becoming a trend, with many of the top academic institutions in the US telling us that they are considering launching funds to invest in their spinouts.
This is partly driven by the fact that government grants — which fund much of universities research — are becoming more linked to economic development. Governments increasingly expect some type of commercialisation or return on the money they invest in universities, including the creation of jobs and economic stimulus. Grant funding may become less accessible if academic institutions do not have a viable path to economic impact.
University venture funds are proven to increase universities’ rates of being able to create new spinout companies. But only a third of US research universities have a fund, Global University Venturing research shows. And it is not just small institutions that don’t have one. Elite universities such as Princeton, Yale and Columbia don’t have a venture fund.
Multiple models for university funds
Universities that have funds vary a lot in structure, proving there is no one-size fits all for launching one. Some large universities have their own fund. The University of Michigan, for example, has the Accelerate Blue Fund, which invests exclusively in spinouts from the university.
Some universities have more than one fund such as the University of California, Berkeley. The Massachusetts Institute of Technology has one of the largest, a $398m third fund, part of Engine Ventures, which is also backed by Harvard University.
Other universities have teamed up with multiple academic institutions to start a fund, particularly if they are in the same state. The recently launched Michigan University Innovation Capital Fund, for example, invests in spinouts from the state’s 15 public universities.
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Here are some case studies that show the different ways to set up a fund.
Tap endowment money
The University of Oregon wanted to create a venture fund to help commercialise ventures spinning out of its campus. But as a publicly funded university it is prohibited from using state money to make equity investments in companies.
But what it does have, like many large universities in the US, is a foundation that administers private donations made to the university to further its mission. The more than 100-year-old University of Oregon Foundation, which manages $2.8bn of assets and is a separate legal entity to the university, stepped in to create a limited liability company venture fund wholly owned by the foundation.
Launch Oregon, set up in March 2023, is a small fund of $3m created out of a surplus of foundation money. The University of Oregon Foundation is its sole limited partner.
Fund director Nate Costa expects most of its investments will be in life sciences. The university recently benefited from a new bioengineering and applied science facility on campus that was funded through a donation from University of Oregon alumni Phil Knight, the cofounder of sports apparel company Nike, which is headquartered in Oregon. “It is very life science heavy and probably 75% to 80% of our deal flow will be in life sciences. I don’t think Launch Oregon would exist without the Knight campus. There just wouldn’t be enough access to quality deals,” says Costa.
Launch Oregon has so far made investments in three spinouts: Cascade Prodrug, a developer of drug for treating solid tumour cancers; InVivo Biosystems, a lab services company; and Penderia Technologies, a developer of sensors for orthopaedic surgery.
The fund also advises founders and entrepreneurs on business creation such as legal structures for new companies and navigating cap tables.
Boosting the number of investments and transforming into an evergreen fund are Costa’s goals for the venture fund. Longer term it may even change its legal structure to add external limited partners as a way to grow. Costa says he has seen a lot of interest from investors wanting to join the fund.
“We’ve already had a lot of outside university-affiliated people that want to either angel invest or want us to set up an SPV [special purpose vehicle] so they can invest in certain companies or be an LP [limited partner] or whatever for our next fund.”
Many universities without a venture fund could emulate the University of Oregon’s model, says Costa. “If you look at our fund size of $3m – I know it that’s not a small amount of money – but I think it is something that most major research universities could do,” says Costa.
“There is an opportunity to start small, but you really have to take the leap to get it done.”
Partner with an independent fund
Partnering with an existing external fund to invest in spinouts is a good way for publicly funded universities to get around the perceived conflict of interest of having an internal fund.
The University of Washington took this route in 2021 by partnering with Pack Ventures, a legally separate venture capital firm that invests in the university’s spinouts and in companies founded by University of Washington alumni.
The University of Washington used to have an internal fund, W Fund, that relied mostly on state funding. It closed after facing several limitations including bureaucratic hurdles.
“If we are fully independent, we can reduce the conflict of interest burden that would require an internal fund to have to get multiple rounds of approvals through the leadership of their university or at the Washington state level,” says Ken Horenstein, founder and partner of Pack Ventures.
Pack Ventures targets alumni of the university by investing in their startups, but it also welcomes them as limited partners in the fund. In this way Pack Ventures acts an alumni engagement tool for the university. “When you think of the most prolific startups universities in the world, they do exceptionally well because their alumni base is activated,” says Horenstein.
Horenstein is a former alum of the University of Washington but comes from a venture capital background, having worked at Microsoft’s VC fund, M12, and the Seattle Angel Fund. The firm maintains strong connections to the university by being located on campus. The head of the university’s technology transfer office is an academic advisor of its advisory board. A number of professors are also limited partners.
Pack Ventures is raising a second fund that has a $30m target. Its first $5m fund invested in 26 companies at the pre-seed and seed levels. Most of the fund’s limited partners are independent wealthy individuals and family offices. To attract alumni and underrepresented LPs, the minimal investment size that partners have to make is $100,000, the lower end of what is typical. Horenstein is also targeting larger funds to become limited partners in its larger second fund.
Pack Ventures recently became the preferred venture partner or the University of Washington and CoMotion, the university’s incubator. The affiliation with the university and its alumni is critical to its success as an independent fund, says Horenstein.
“To me that is our wedge. We want to be the best at this ecosystem, get into the best deals. There are a lot of general funds that are looking globally at startups. We thought that by having a really tight focus that it can lead to a better performing fund,” he says.
Team up with other universities
Partnering with other universities is an efficient way to start a fund. Smaller universities that would find it hard to launch a fund because of lack of resources or deal flow can benefit from joining forces with other academic institutions.
It is most common to do this at the state level in the US. The US state of Maryland launched the Maryland Momentum Fund in 2016 with a $10m commitment from the University System of Maryland, its sole limited partner. The system consists of 12 public higher education institutions and three higher education centres. It covers a diverse range of institutions, including large research universities, and urban and rural colleges that cater to 130,000 undergraduates and 37,000 graduate students.
University venture funds that serve multiple academic institutions in a single state like Maryland are viewed as important economic drivers, creating jobs, developing workforce skills and attracting and retaining entrepreneurial faculty. The emphasis should not be on creating a fund whose only purpose is to making money, says Mike Ravenscroft, managing director of the Maryland Momentum Fund.
“One of things that can go very poorly if you are trying to start a university venture fund is assuming that its sole job is to make money,” says Ravenscroft, adding that university funds will often not have the kind of scale that VC funds have to make money from exits. “You need to understand what value you are trying to create and building a structure that enables that.”
The Maryland Momentum Fund invests in a diverse range of companies that must be affiliated with the University of Maryland system. It has 29 active companies in its portfolio that cover range of sectors, reflecting the diversity of subject matter of its academic institutions. Portfolio companies are in technologies such as cyber security, life sciences, retail and hardware.
The fund benefits the university system’s several technology transfer offices that take equity and royalties in the companies it invests in. It is also part of a broader push to encourage faculty interested in starting businesses to join and stay in the system. It recently started placing students in internships with its portfolio companies that are based in Maryland as a way to encourage workforce development.
“We have structured things such that we’re not looking at this as a single mechanism for creating value. This is an opportunity to do something much more holistic for the University System of Maryland,” says Ravenscroft.
This view filters down to its approach to taking investments. Because it invests small cheque sizes of between $150,000 and $350,000, it is not in a position to lead financing rounds. Instead, it prefers to be part of a larger syndicated round, requiring founders to secure funding from outside investors that match or exceed its own investment.
“We work with entrepreneurs early on to help them develop sort of a roadmap for venture capital raising, helping them to connect with other investors, helping them understand how the VC system works,” says Ravenscroft.
