“What can be done to wean university start-ups off to grants, and is this addiction holding them back from venture fundraising?”

There was the nice question asked by Abhijit Bannerjee, director of business development at the Oregon Health and Science University, at this past week’s 24th IBF Venture Capital Investing Conference in San Francisco, California.

Josh Kopelman, founder of early-stage venture capital (VC) firm First Round Capital, replied that its seed investments mainly – “70% to 80%” – looked at the people involved at the start-up rather than the technology. The challenge for university-originated start-ups being they often were missing a key person so his fund tended to avoid them, Kopelman said.

However, to keep an eye on ideas and talent coming out of major university ecosystems in the US, First Round has set up a Dorm Room fund with $1.5m to invest in 75 companies chosen by students at three universities.

As Kopelman said: “They [the students] are better at seeing the talent than we would be.” And when they create a reputation for being able to do so the venture money is following.

Steven Kaplan, Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, by email said in the past four years, 13 teams in his school’s New Venture Challenge (NVC) have raised more than $200m from some of the world’s top VCs.

These start-ups include GrubHub, which raised more than $81m from Benchmark and DAG Ventures before its merger with Seamless; Braintree, which gathered $70m from Accel Partners and NEA; BenchPrep, which raised $8m from NEA and Lightbank (founded by discount coupon provider Groupon’s founders); FutureSimple, which raised $8m from Index Ventures and OCA Ventures; AllTuition and FeeFighter’s $4m and $1.6m, respectively, from Hyde Park Angels (HPA) after graduating from the Excelerate Labs 2010 class; 2011 Excelerate Labs alumnus Power2Switch that gather more than $1m from HPA and angel Michael Polsky.

The latest participants in NVC include CancerIQ that has been accepted in the Rock Health Incubator and Project Fixup, which has joined Chicago Tech Stars, while a former contestant, Dhiraj Rajaram, the founder of Mu Sigma, has raised $108m from Sequoia and General Atlantic in 2011.

To Bannerjee’s question, some of Kaplan’s NVC class, including Aquarius Biotech ($750,000) and Quantitative Insights ($150,000), have gained non-dilutive funding from the US government’s Small Business Innovation Research (SBIR).

Aydin Senkut, founder and managing director of Felicis Ventures, added to Kopelman’s response to Bannerjee by saying that government grants were great to have “but would not break or make a company”. Of more importance to him was how clean the legal structure around the university technology was?

Jim Kim, co-founder of Formation 8, said when the SBIR grants were made to an area adjacent to a start-ups main business it was a distraction to apply for but if it was in a core area it could be worth spending time with the SBIR team to pre-write a grant application that would help the business.

These were good answers to the question but if a start-up is “addicted” to grants it is probably the case that they remain more interested in being academics rather than entrepreneurs.

There is plenty of research showing university start-ups from business classes are more, well, business focused, while those from other faculties are more academic oriented so they can see if their ideas work. For more, please see last month’s issue where Roman Lubynsky, senior venture adviser at MIT Venture Mentoring Service and author of the paper, From Lab Bench to Innovation: Critical Challenges to Nascent Academic Entrepreneurs, looked at 10 nascent academic entrepreneurs (NAEs) involved in eight ventures at the Massachusetts Institute of Technology’s (MIT) Venture Mentoring Service and the implications of their experiences for universities and policymakers.