'A Good Investment'

October 6, 2011

Every university thinks its researchers' ideas are good ones. The University of Michigan is putting its money behind its claim.

On Wednesday, President Mary Sue Coleman announced that Michigan is launching an initiative to invest some of the university's endowment money directly in start-up companies developed through university research when they seek venture capital funding.

While other institutions have sought on a limited basis to invest in (and reap rewards from) promising companies created as a result of faculty members' or students' ideas, and many higher education leaders have argued that taking a greater stake in companies' futures can help spur local development and ensure companies' success, Michigan's new policy is an unconventional bet on the future of its ideas. The norm in endowment management is to focus strictly on the best possible investment from a financial perspective, without going out of one's way to favor one category of business over another. And that can mean wealthy institutions do very little local investing.

The initiative will not only support fledgling companies, but it could also provide financial returns for the university's endowment. The effort also shows that the university is serious about entrepreneurial initiatives and supporting start-ups, which could help attract top talent, officials said.

“Simply put, University of Michigan start-ups are a good financial opportunity,” Coleman said Wednesday. “And the historical data have convinced us now to invest a small portion of the endowment in start-ups from all three campuses.”

The data to which Coleman is referring is a study the university commissioned of the success of its start-ups. The study found that if the university had invested in spin-off companies during the past 20 years, the returns would have been comparable to the returns the university's venture capital portfolio has actually seen during that period.

Under the new policy, a start-up company created through university research would be eligible for university financing once it secures an initial round of funding from an independent, professional venture capital firm. At that point, the university will invest up to $500,000 in the company through successive rounds of financing. In total, Coleman predicted that Michigan could invest up to $25 million in venture capital funding.

Details about university involvement in the start-up, such as its stake, how much it will invest, and what type of oversight it will exert, will vary depending on the company. Rafael Castilla, director of investment risk management at Michigan, noted that there will be times when venture capital firms will not want to partner with the university on the company. In those cases, he said, the university will defer.

As in other venture capital deals, the investors, in this case the university, would receive a payout when the company is either acquired or goes public. Sometimes that happens within a few years; other times it may take 10 or more years, or may not happen at all.

In recent years, the University of Michigan has placed an increased emphasis on helping university ideas make it to market. In 2009 the university acquired a former Pfizer plant adjacent to the Ann Arbor campus, and it now rents out part of the plant's office and laboratory space to start-ups. The emphasis on economic development is partially a result of the state's economy, which has been hard hit in the past few years by problems in the automotive industry. Higher education leaders argue that the universities can help diversify the state's economy.

The University of Michigan tends to be on the high end of colleges and universities when it comes to churning out commercial ideas. In fiscal year 2011, which ended in June, university researchers filed 122 patents and recorded 101 licenses. While most universities produce one or zero companies a year on average, Michigan launched 11 last year and an average of 10 a year over the past decade.

Not all are successful, however, which is a risk Michigan is taking through the investment initiative. If the companies end up not being successful, the university will lose much of what it invested. Castilla said the university's policy to only invest once other venture capitalists have signed on to the company helps ensure that the company is a good bet. Even then, nothing's guaranteed.

Castilla said the amount that the university would be investing in these start-ups is negligible as a share of the university's $7.8 billion endowment, and won't hinder its ability to invest in other options, including other venture capital initiatives not derived from university work.

Having a blanket policy to attempt investing in any company that secures venture-capital funding also helps insulate the university against real or perceived conflicts of interest, he said.

Robin L. Rasor, director of licensing at Michigan and president of the board of the Association of University Technology Managers, said she hopes the Michigan initiative will spur other universities to do more to support their own start-ups.

“We live in a different world," she said. "It is a lot harder to get venture funding nowadays. Any avenues that the university can use to help support tech start-ups are going to be to the betterment of the public.”

The Massachusetts Institute of Technology, which regularly tops charts for the number of research products it licenses, the number of companies started by students, faculty, and alumni, and the amount it brings in as a result, has a policy against directly investing in spinoffs and start-ups.

In an interview in August, Edward Roberts, a professor of technological innovation, entrepreneurship, and strategic management, and chair of MIT’s entrepreneurship center, cited several reasons for the institute’s decision not to play that role. For one, the university does not have the experience or expertise to successfully engage in venture capital initiatives.

Rasor echoed that concern on Tuesday. "We're not investment funds," she said. "We’re not venture funds. We don't always know the criteria that should go into deciding to be involved in something like this." She also noted that the venture capital world moves much more quickly than the world of higher education, which can sometimes complicate universities' involvement in the field. But she said Michigan's investment structure helps avoid some of these complications, particularly the fact that the university will only join initiatives that have already secured venture capital funding.

Roberts also noted that, in the case of MIT, the Boston area already has a fairly robust venture capital infrastructure, and there are lots of individuals vying to meet MIT innovators and get in on the ground level of start-ups. If the university started playing the role of the venture capitalist, it could scare away other potential investors, which wouldn't be fair to students.

Roberts said he could envision a situation in which there is little venture capital infrastructure in a region, in which case a university might be able to step in and provide that.

In addition to announcing the investment initiative, Coleman also laid out a "Third Century Initiative" through which the university will invest $50 million in new interdisciplinary research and teaching programs and immersive educational experiences for students such as study abroad, undergraduate research, and entrepreneurial activities. Details on exactly what the Third Century Initiative will entail are sparse, but administrators expect a "robust and collaborative review process" to determine how they spend the money.

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