One thing has become clear about the University of California system over the past month – it doesn’t mess around. The creation of UC Ventures, a $250m university venturing fund, comes just a couple of months after the institution overturned a 25-year ban on investing in its own startups, allowing the university’s 10 campuses, including research and tech transfer heavyweights Los Angeles, Berkeley and San Diego, to put their money where their mouth is.

The new direction on university venturing could be on the verge of becoming contagious. This time last year Stanford, another California-based university, announced its Stanford StartX uncapped investment fund, using the student-run incubator StartX as a sounding board for investment. And now, with UC Ventures suggesting that University of California is putting its chips down heavily on its own technology, could we be witnessing the initial snowballs that will roll into a university venturing avalanche? Discussion of whether or not universities should set up a venture fund to support spin-outs and startups would appear to be taking place. Last month, Tom Hockaday, managing director of Oxford’s Isis Innovation, suggested in his comment for Global University Venturing that many UK universities were considering the option of a fund similar to that of Cambridge Innovation Capital, a £50m ($80m) evergreen university venturing fund established last year around the same time Stanford revealed its fund.

Yet there are multiple hurdles in the way of establishing such a fund for an institution. First and foremost is the consideration of risk. In terms of culture, university campuses are essentially the polar opposite of your general venture capitalist. Whereas a venture capitalist may be more willing to invest on a riskier proposition, a university investor, with a desire to provide a steady and reliable return rather than a vast one, and also under pressure from the bureaucracy that is commonplace on campus, may be more reluctant to act.

This, of course, contradicts what a university venture fund needs to do, given the companies a university investor will have in view. Companies founded on university research normally contain unproven cutting-edge technology at best and, at worst, could be starting guns in new unchartered sectors. These companies may also need significant capital to get the ball rolling, especially if they happen to be in the life sciences field, where bringing a new drug to market can cost upwards of a $1bn. These two competing factors of new tech and large support needed can scare even the most risk-friendly of venture capitalists, meaning a university venture fund manager, under pressure to keep an even keel, needs to be even more of a gambler than his venture capital peers.
However, the objectives of investment differ between academia and regular finance. Cambridge’s model of aiming for an evergreen fund, where all proceeds are returned to the fund to provide a continuous pot of investment money, seems in line with the overarching mission of translating taxpayer-funded research into actual innovations and technologies that can have a direct and beneficial impact on those who fronted the cash in the first place. From an investment point of view, the financing that stems from university venture funds acts only to assist companies in crossing the valley of death, and then accelerating on the other side to avoid the pitfalls of financial stagnation.

It is this mission that fund managers and university leadership would do well to keep in mind. A university partner can be viewed by industry as obstructive and meddlesome, and companies backed and partly owned by a university need to prove that this is not the case to attract additional funding fromoutside the campus. In the same way that it is ill-advised to hire a researcher with no business experience to run a company, there must be a competent and skilled fund manager rather than a tight-pursed bureaucrat running a university fund, and he or she must be allowed to get on with the job without intrusive interference.

 

Another factor is the size of the fund, and whether it will be sufficient for the institution or, conversely, whether the output of the institution necessitates a fund. In the case of UC Ventures, the $250m is likely to be spread mostly across Los Angeles, San Diego and Berkeley, all of which have a high research output. However, if just one of those were to raise the same amount, it would be unlikely to generate the returns people are looking for. Perhaps, then, it is not a single fund for a single university model that institutions need to look at, but for institutions to enter into a broader collaboration with neighbouring universities to generate a fund that would not only provide crucial support for spin-outs and high-potential startups, but help bring jobs and growth to the surrounding region. Universities may wince at the thought of dealing with money when several universities are all trying to have their say on how it is spread, but overcoming the red tape would build a more valuable investment vehicle for all.

In short, a university venturing fund produces numerous headaches. How should it be structured? Where does the money come from to begin with? How can all the stakeholders be managed and appeased? How much does the university need to contribute to be effective? Will it produce the results it promises? But the upside of having that additional financial pillar to support innovation plays directly into the university mission. It is that thought alone, at least for California and a growing number of other institutions outside the U
S state, that makes university venturing worth overcoming the obstacles.