Universities in the United States produce more than 800 startups per year according to the Association of University Technology Managers (AUTM). But outside of a few major metropolitan areas such as San Francisco, New York and Boston, startups in many university cities struggle to locate angel investors or venture capital funding. Furthermore, many of these startups are run by inexperienced academics and are commercializing complex technologies that are difficult for investors to understand.
The Washington Post recently ran an article “Universities are venturing into new territory: Funding start-up businesses” describing some of the efforts by universities to create venture capital funds focused on supporting university affiliated startups.
Last year the University of California system announced the formation of a $250 million venture fund focused on university spinouts. The money comes from the $90 billion pension fund and endowment that the University system holds. Like many pension funds and endowments, the University of California invest a small portion in high risk venture capital funds.
The University of North Carolina at Chapel Hill recently announced the $10 million Carolina Research Venture Fund which will commercialize technology developed at the university. This year Virginia Tech announced formation of the Virginia Tech Investors Network (VTIN). This angel investor network, not a fund, will look at investing in startups out of Virginia Tech as well as startups affiliated with Virginia Tech alumni.
Time will tell how well the recently formed venture funds perform. The Washington Post article states that venture funds have yielded, on average just under 10% over the past 10 years but that the successes were produced by a small number of venture funds. The primary challenge for the university affiliated funds is to become one of the minority of funds that produce positive returns.
The university affiliated startups provide some advantages. The technologies they are based are typically based on years of research, truly innovative and have some degree of patent protection. Those features can provide a solid barrier to entry and provide a higher valuation when the company is sold. On the other hand, the majority of the university spinouts are run by faculty with little business experience or young students. The new university affiliated funds may have difficulty producing positive returns unless they can ensure that the startups address the common management experience problem.