School-based venture capital funds
grow -- but you need old school ties
By Jenny C. McCune • Bankrate.com

Colleges aren't just for higher education anymore. Now they're getting into high finance by setting up venture capital funds.

While there aren't exact numbers on how many colleges or universities are organizing such funds, the practice is clearly on the rise, according to Jesse Reyes, managing director of Venture Economics in Newark, N.J.

A decade ago there were only about a dozen such funds. Now there are hundreds, according to Reyes. And he says that it's a geographically diverse crowd, not just limited to big-name schools involved in high technology in the Northeast or in California. "Schools across the country are doing this," Reyes says.

Colleges that have their own venture funds include Vanderbilt University in Nashville, Tenn.; Duke University in Durham, N.C.; North Carolina State in Raleigh, N.C.; Babson College in Wellesley, Mass.; and the University of Michigan in Ann Arbor, Mich.

Most colleges see such funds as beneficial both to themselves -- they can make higher returns as direct investors -- and to the businesses they finance. "The entire Babson curriculum is focused on creating a community for entrepreneurs," explains Kate O'Halloran, associate director of the Arthur M. Blank Center for Entrepreneurship at Babson. "The Babson College Seed Capital Fund is a great extension of that."

Required: Old school ties
The key difference between venture funds run by colleges and regular venture capital funds is in whom they invest. College venture funds generally restrict themselves to companies that are affiliated with them in some way. Usually, that means the company's management must include alumni, current students or professors. Companies based in a college-affiliated business incubator also usually are eligible.

In addition to wanting the principals to be affiliated with the school, college venture funds often want to keep closer tabs on their investments and act more hands-on than traditional venture capitalists. Finally, if the company's product is derived from college research, the college-based venture fund may hold royalties or patents on the product -- so check out royalty and patent issues before you agree to any investment.

Other than that, they look at investments much like any other venture capitalist -- they're in it for the money. Most are heavily focused on financing Internet-based or high-technology firms. Biotech is another sector that receives a lot of campus money. Companies seeking investment must have a product or service that with a potential for a big return on investment in order to capitalize on college venture funds.

A high-tech example
ID Technologies Corporation received $333,333 from Centennial Venture Partners, the venture capital fund of North Carolina State, according to company president and CEO Phil Johnston. The company, located in the college's business incubator, is developing fingerprint ID technologies for credit cards, automobile entry systems, documents and other items. The firm qualified for financing from Centennial because its CEO is an engineering professor there and another founder is an alumnus.

Johnston, who has been involved in 10 other companies, says the basic difference between working with Centennial Venture Partners and a traditional VC firm is this: "There's a lot more support built in. We have all of North Carolina State as a resource and it's a helluva resource," he says.

For example, ID Technologies has received legal advice and engineering assistance from the college. In the case of ID Technologies and North Carolina State's venture fund, it's a straight venture investment with the company and its founders holding all patents on the technology, Johnston notes.

The size of investments and their structuring varies by fund. Centennial, which was originally capitalized at $10 million, is one of the larger funds. It has invested in 10 startups to date and is in its second round of financing (raising additional money so it can back other startups). Contrast that to the Babson College Seed Capital Fund. Its venture pool is much smaller ($275,000) and its average investment size is between $10,000 and $20,000.

Tips for tapping the funds
To tap big money on campus, first see what college-backed venture funds your firm is eligible for. Don't just check in with your alma mater, but ask around at all the colleges that your company may have links with. Good places to inquire about possible college venture funds are the school's chancellor's office, any entrepreneurial centers based at the college, the business school of the university or any business incubators that are associated with the college.

If you don't have affiliations with a promising campus fund, consider growing some. You may be able to link up with a professor or alum.

According to the managers of such funds and the companies that they have invested in, their investment requirements are similar to other venture capitalists. Says Babson's O'Halloran: "We look at the viability of the venture, the strength of the opportunity, and whether the executive team can execute."

Jenny C. McCune is a contributing editor based in Montana
To comment on this story, please e-mail the Bankrate.com editors

-- Posted: March 31, 2000