University startup funds begin experimenting with the profit motive

Ever since the passage of the Bayh-Dole Act in 1980, licensing of patented technologies has been the mainstay of university Technology Transfer Offices seeking to harvest and share the fruits of federally funded research activities. For most universities, licensing doesn’t generate robust returns; in fact most TTOs are cost centers for their institutions rather than revenue generators. According to a 2014 Brookings study, in 2012 84 percent of university TTOs weren’t breaking even. (It’s important to note that licensing generates traffic from industry and adds to the prospects for private-sector funded research on top of licensing income.) For public-minded institutions, operating in the red is reasonable as long as public resources continue to sustain them. After all, the mission of technology transfer is to translate scientific discovery into benefits for their communities, not to generate institutional income. But with declining state and federal support for higher education and research, this becomes harder to justify. Today TTOs are being asked to find strategies to earn more from university intellectual property while they also support — and often lead — university “third mission” efforts.

Universities of all sizes operate venture funds. Most target seed-stage companies, the startup phase when risk is high and private “gap funding” is scarce and precious. For some universities, there’s a new goal for technology transfer: to become self-sustaining — earning enough from investments to support the TTO and continue to provide startup funding. But as public dollars continue to dry up and demands for greater third mission commitments intensify, some university venture funds have been prompted to seek healthy investment returns, for their own sake.

To achieve those returns, university funds have had to rethink their place in the startup lifecycle. The University of Michigan investment fund, a member of the Osage University Partners venture capital group, for example, tapped into the university’s endowment to give it the heft required to make larger deals. UM’s fund does not invest at the seed stage, instead investing in later rounds after private venture funds have already vetted the startup and its prospects. Ken Nisbet, executive director of UM’s TTO told the newsletter “Technology Transfer Tactics,” that while healthy returns are the main impetus behind the program, its investments are “about investing in community, too, and economic development,” he says. “The university participating is a sign of commitment. I don’t think this will substitute for some other capital investment. I think it means an expansion of investment.” Last month, Osage University Partners announced the closing of its third university startup fund at $273m, bringing its total assets under management to $600m.

In late 2014 the University of California launched a similar fund (“UC Ventures”), with $250m from UC’s $91b endowment. UC’s fund is focused on “high-conviction discoveries,” later stage investments and even investments outside of the university’s research ecosystem. Why would a Bay Area startup choose the UC program for funding over any of the many Bay Area venture capital funds with better and deeper startup support networks? For one, the university can require exclusivity in its licensing, an observer of the Bay Area investment scene told Re-Code. And for researcher/entrepreneurs who studied at the investing institution, funding via the TTO and the university can be less complex than chasing private money. Eventually, UC’s fund is expected to earn enough to contribute back to the endowment, but as of April 2018, the fund was still considered by its managers to be in “an incubation period” and not yet adding value back into the endowment.       

Before seeking to transform a seed stage-focused fund designed to try and earn its keep, TTOs should consider several factors.

Evaluate the ecosystem

Louise Epstein, director of university partnerships for the Walton Family Foundation, identifies 12 key components of successful research commercialization. Beyond familiar-to-the-university features such as quality research and skilled researchers, Epstein includes availability of CEO talent (to head-up startups), private funding (to complement university investment and to provide additional vetting) and geographic resources such as startup incubators and an engaged/active business community (to sustain them). For TTOs in large metro regions accessing these resources may be easy; university TTOs in smaller surroundings may have to keep their goals more modest. 

Tap into multiple funding streams — and multiple opportunities

A profit minded university fund shouldn’t be the sole investor in its startups — and tech startups needn’t be its sole investment focus. Thinking bigger, Wake Forest University took advantage of cigarette company RJ Reynolds’ declining fortunes and the city of Winston-Salem’s desire to revitalize a dilapidated corner of the city to develop a bio-tech research center and startup incubator in the area. The Innovation Quarter, as the project is now called, is home to more than 4,000 workers and 1,000 residents.

Be aware of conflicting priorities and requirements

Even though healthy ROI is now in focus, the mission of the TTO remains the release of university tech into the wider community and for public benefit. For private venture funds, whether brought in as GPs or LPs, the goal is a profitable exit, in a relatively short period of time. As recipients of public funds, university partners in these arrangements have strict regulatory and reporting requirements, which can add to costs and reduce returns. Successful university funds recognize these priority differences early and manage them from program start up.  

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