Universities and Venture Funds

Institutions of Higher Education in the USA really do seem to “get” Private Equity. Over the past two weeks, I’ve come across two examples of just how well Universities are leveraging private equity. Both these examples are with different ends in mind.

The University Venture Fund :

This one impressed me just with the design of its web site, but the concept is simply mind-blowing. Consider this - there are plenty of student-run venture funds in Universities across the US - most being funded by donations or the school’s own endowments. The University of Utah’s different. It remains the only (as of the time of this writing) student-run venture fund to raise money publicly. What makes things more dramatic is that these funds are invested in startups, and middle-stage firms, rather than publicly traded stocks. According to Businesswire, “students research live VC projects, and make investment choices”. The fund functions just the way a professional fund would be expected to - investors expect the kinds of return on their money that top-notch funds would offer, and in the same time-frame.

And by the looks of it, this initiative’s proving to be quite a success - in January last year, it raised $5 million in funding (including from heavyweights like UBS Bank and Morgan Stanley Bank). I think this beats all other methods of “teaching” entrepreneurship hands down. As the dean of the University’s school of business says, “Entrepreneurship is difficult (I’d say impossible - Rahul) to teach in a classroom, so a venture capital fund like UVF is an exceptional forum to help bridge the gap between classroom and real-life business,”. I’m sure the University’s built deep relationships with both the venture cap firms that mentor and advise students, as well as investors themselves.

The incentives are right in place, and it’s a win-win situation for all entities involved. The students get the learning (not to be confused with education) of a lifetime, the University’s earning a nice IRR, the venture caps are getting the best minds to advise them on their investments, and are getting future top-notch employees on a platter, and finally, the investors are getting market-rate, or better, rate-of-returns.

College Hedge Funds [via Paul Kedrosky ]:
Purdue University’s investing its endowments, again, in private equity and venture capital. While it isn’t clear whether or not students are involved here, but here money isn’t being raised publicly - these are the endowments and donations the U receives. The Chronicle has a detailed piece on this trend, taking Purdue as an example (registration required for article). As Paul summarizes, Purdue’s gone from 0% (1999) to 22% (2005) and aims at 39% (2011). Also interesting is the comment on Paul’s post. Investments in PE/VC funds attract “the best managerial talent far into the future, and the pay for performance model gives incentive to keep assets under management at a workable level.” In contrast, “the mutual fund asset-gathering strategy…. grow the pile as big as you can and collect a fixed fee… invites timidity, groupthink, and elephantiasis”.

It’s about time that the “entrepreneurship clubs” at our IIMs and the ISB move out of their shell, move beyond organizing business plan competitions and seminars, and get their hands dirty on work that requires real committment and provides real learning and networking.

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Universities and Venture Funds

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