Universities across the country have developed entrepreneurship programs in recent years aimed at encouraging students and faculty to turn promising business ideas into actual companies. Now, an increasing number of them also are giving money to help those businesses get started.
In the past several months, some of the nation’s top universities have poured millions of dollars into venture capital funds. The goal is to help promising businesses secure much-needed money while also giving the university a chance to reap handsome returns if the firms find success.
But venture capital is a high-risk, high-reward investment. The vast majority of start-up companies fail to make it big, so investors often back many of them in hopes that one or two will yield a significant financial return.
As a result, some critics have questioned whether universities should dedicate a portion of their budgets to such risky investments, especially when many states are slashing higher-education funding and tuition is reaching historic highs.
In the Washington area, universities have organized networks of investors and introduced them to promising start-ups, many of them having ties to the institutions. But others are going further.
The University of California announced the creation of a $250 million venture fund in September that will be invested in companies with ties to its network of schools, medical centers and research labs.
“The question we’re asking is, ‘What can we do to help the ecosystem develop these ideas and participate in the upside?” said Jagdeep Singh Bachher, chief investment officer for the University of California Board of Regents.
The money comes from $90 billion that the University of California holds in its pension fund, endowment and other assets, Bachher said. The system invests $1 billion through other venture funds, but this will be the first managed by the university.
“Venture capital is attractive to have from [an investment] diversification standpoint,” Bachher said. “When you have size and scale and patience, which are three competitive advantages I believe we have, those are good characteristics.”
The University of North Carolina at Chapel Hill unveiled late last month the Carolina Research Venture Fund, a $10 million pool of money that will be funneled into companies that commercialize technology developed at the university.
The money will come from income the university has earned through other investments — as opposed to tuition dollars or state appropriations — and any returns will be reinvested into the fund to help underwrite future companies, said Sallie Shuping-Russell, a managing director at BlackRock and member of the university’s board of trustees.
The venture fund has been years in the making and aims to tackle a nagging problem, Shuping-Russell said. The university is home to groundbreaking science, research and innovation, but turning that into viable businesses requires capital that is less plentiful in North Carolina than other parts of the country.
“We have to get these companies to a stage where the more national firms want to invest,” she said. “That’s been the dilemma.”
But are universities best suited to help young companies cross the chasm? Dileep Rao, a clinical professor of entrepreneurship at Florida International University, says no. He argues that high-profile success stories — think Google, Facebook, Groupon — have given some universities a false sense that big returns are all but guaranteed.
“Basically, I see it as the triumph of hope over reality,” Rao said. “When you look at the real numbers, I think it paints a vastly different picture.”
Professional venture capital funds have yielded a 9.95 percent return over the past 10 years, according to the National Venture Capital Association and Cambridge Associates. Though that number may be higher than other investment channels, such as savings accounts, those returns are primarily the product of successes by a small number of venture funds.
“The rest of them are either breaking even or losing money, and this is something most people don’t know,” Rao said.
The University of Michigan offers a counterweight. A donor gifted $2 million to create the student-run Wolverine Venture Fund in 1997, and it has since invested in 22 companies, said Stewart Thornhill, executive director of the Zell Lurie Institute for Entrepreneurial Studies.
Though more than half of the fund’s portfolio companies never amounted to much, a handful of them went on to find success. The returns from those investments were put back into the fund, which now stands at $7 million.
“I think there’s a strong case to be made to diversify. The broader question is, ‘Are you better equipped as a university fund to do that administration or are you better off pooling your money in somebody [else’s] venture capital fund?” Thornhill asked.
In 2013, the Virginia Tech Foundation pooled money with Carilion Clinic, a medical system, and Third Security, an investment firm, to create Valleys’ Ventures, a $15 million fund that invests in southwestern Virginia companies.
More recently, a network of alumni has collaborated with the university’s newly formed Center for Innovation and Entrepreneurship to create the VT Investor Network. Modeled off of a similar program at the University of Maryland, the group provides small investments in companies with ties to the university. But the money comes from wealthy alumni, meaning Virginia Tech isn’t putting its own capital on the line or taking a cut of future returns.
“We’ve been able to identify some alumni that have gone on to do really incredible things that are now looking for opportunities to give back to the university in very specific ways,” said Derick Maggard, the center’s director.
“Anything that universities are doing to lower the barrier” for entrepreneurs, he added, “good for them.”