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.

Market-side:
The Googles and Yahoos (and increasingly the Microsofts) of the technology industry are making faster, quicker acquistions. This is no market consolidation – the industry’s growing differently from the bubble-days. This time round, there are larger, established players in this fast-growing market who’re competing aggressively against each other to expand into newer areas, with newer business models targetting a different niche of users.

I mentioned that the market is growing very fast – that means that valuations of startups are changing just as quickly. That’s another reason why an acquirer will want to swoop in faster than it would have in more stable circumstances. There is less risk involved in such fast aquistions since the market has matured (in comparison to the pre-bubble days), the user base is there, the business models are there, the technology infrastructure (storage, connectivity and bandwidth) is in place, so software as a service is a tried-and-trusted model in many ways.

What does this mean for the VC?
It means that the 10x and above returns that he/she was used to, are drying up. To be able to bootstrap itself and generate a cashflow that will see it through break-even, the amount of capital that a startup needs today is far lower than the bubble days. We’re talking of in the $10-15 million range as opposed to $50 million. At the same time, as I pointed out in the preceeding paragraph, the acquisition-based exits have valuations which are smaller (since the acquisitions themselves happen faster).

VCs want larger exit-time valuations (for their traditionally very high returns). Now these are increasingly getting squeezed by the GYM variety of companies (Google, Yahoo, MS). In fact, we’re reaching a stage where the public listing-style exit route is almost exctinct.

So both input and exit figures have botten smaller, and to be able to get 10x returns and maintain volumes, VCs will need to get more deals done. That calls for multiple small funds , each tightly focussed on a technology area. For instance, one for VoIP solutions. This will call for VCs to get smarter, identify ideas and firms quicker and smarter than before. Technical insight is more valuable than ever before .

As an aside, Ed points out the difference in the acquisition strategies of Google and Yahoo:

Google’s expertise seems to be buying engineers, many times before a product is even launched.  Yahoo, on the other hand, prefers to buy companies that have some nice user base, maybe no revenue model yet, but also before a VC round.