When the top-rated venture capital firm says it “loves” to have university venturing units in their syndicates you have to wonder why more academic institutions are still debating whether to set one up or increase its size for those starting out.
The attractions for venture capitalists, such as Todd Cozzens, partner at Sequoia Capital, for having them is clear if they bring practical help to the portfolio companies, such as buying and testing its products and/or services, as well as cash. As Cozzens, at the Academic Healthcare Venturing meeting at investment bank JP Morgan on 14 January, put it: “We love to have academic venturing guys in our syndicates – if they add to the boards.”
His words were echoed by the other two VCs, Thomas McKinley at Cardinal Partners and Mohit Kaushal at Aberdare Capital, sitting alongside Cozzens on the panel discussion, arranged by research-focused institutions Cleveland Clinic, Partners Healthcare, NYU and Johns Hopkins. A poll of the more than 50 attendees found that while almost all had spun out companies from their institutions that had received venture backing only about half had invested themselves.
What the VCs found more frustrating was when an academic institution or corporation invested in a syndicate having licensed the start-up with intellectual property but then did not use the product themselves as a test client.
The top VCs, such as the speakers at the event, are obvious role models for university venturers, although the panelists were candid that they expected to change portfolio company management at least 50% to 60% of the time in the first two years and looked for alignment of interest with syndicate members on financial returns.
But corporate venturing units are perhaps more similar in approach to academic institutions trying to set up a venture fund given they often have to blend strategic with financial goals and also operate somewhere from independence to closely tied to established divisions.
Bryan Allinson, executive director of the office of technology commercialization at the US-based University of Texas (UT) System and manager of its UT Horizon Fund, by email after the event said: “We are encouraging universities to think like corporate venture funds.”
The return profiles between corporate venturing and university venturing can be similar, too.
In his presentation, Allinson said UT looked at 72 cases from 2002 to 2012 it could have invested if there had been a fund and found if it had there would have been 12 exits (three of more than $1bn) returning $332.8m on $159.5m invested and remaining portfolio value of $394.7m, ie 2.1x at 54% annual rate of return.
Hence, it set up Horizon fund with $10m committed 2012-13, $12.5m for 2013-14 and additional $37.5m available and a portfolio of a dozen companies.
Top-rated academic institutions have a natural advantage in seeing innovation at early stages and thus being able to invest as the entrepreneurial endeavours form, according to the VC panel. And Allinson said that while some VCs just followed investment trends, the fact that universities were involved in research spanning decades meant it was able to see and then capture value missed by those following the latest fads.
Some universities, such as MIT and Stanford, were described by the VCs as “machines” for their success in spinning out venture-backed companies, often through connecting engineers with business school students through an incubator/accelerator-type of facility. The tools and techniques to help these entrepreneurs are becoming more evidence-based and clearer through initiatives, such as the Lean Launchpad training programme developed from the National Science Foundation’s I-Corps (see Jim Hornthal’s slides discussing this at the academic venturing event) and work by Frank Rimalovski, executive director at the NYU Entrepreneurial Institute.
But in the US the idea that they can also invest and support the student and academic faculty has only taken off in the past few years with a spate of fund launches, including UT Horizon Fund’s formation in 2011. It will be interesting to watch the others in the audience’s development in this space over the next few years.
