Investing in a University Spinout with a Faculty CEO

I recently touched base with a university asking if they had any good technology candidates for our startup foundry program. They responded that university faculty were starting businesses on all of their best technologies. I found that disappointing. We don’t build startups where the faculty is the CEO. But a lot of universities push the faculty CEO method now. And admittedly there have been some very successful startups run by faculty. But the odds of a faculty CEO with no business experience building a strong company are probably rather low.

How can you tell if a faculty CEO is investable? We advise investors to consider the “three Cs”; competence, commitment and coachability.

Competence: The first thing we consider is the faculty members’ business competence. Some faculty have had significant experience in a corporate business environment or even with a startup. Some have built and exited from pervious startups and clearly have the ability to serve as CEO for some period of time. But many do not have any experience and naively believe they can develop the necessary skills overnight. I like to ask potential faculty CEOs about their understanding of equity dilution as something of a test question. Often they respond that they don’t know the term, which tells me they probably don’t even have the basic knowledge and skills.

Commitment: Faculty are used to juggling many commitments and projects, including teaching multiple classes, mentoring doctoral students, managing research projects and writing papers. Many believe they can add running a startup as another part-time activity. While that may work if the startup is a just providing consulting project, or securing government grants for research projects it is not appropriate for a startup that is ready to receive equity capital. A simple question to ask a faculty CEO is “are you willing to leave your faculty position and lead the startup full-time if I invest?”

Coachability: Most faculty are high achievers. Over time this can result in a certain level of arrogance, and in turn an unwillingness to listen to others who are not clearly superior in their field. I’ve heard many investors state that coachability is the most important trait in an entrepreneur, and some faculty fall grossly short in that area. I typically find this issue is greater the longer the faculty has been in an academic environment. Young faculty are often very open minded, but may lack commercial sector experience and the willingness to take try entrepreneurial risks.

While I don’t want to argue that all faculty run startups are doomed to failure, I do think investors need to take a critical look at faculty serving as CEOs. In another article, we’ll take a look at the issues around persuading a faculty member to give up the CEO position and majority control of the startup.

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