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To support local founders, universities should invest in venture capital

By Jesse Schwartz
Published: September 13th, 2017

In a recent post in Venture Beat, VC executive Tim Schigel of Cincinnati-based Refinery Ventures argues that more universities should be applying their large endowments to venture capital funds that support their own start-ups – a move that would both work as a positive diversification strategy and boost campus entrepreneurship.

Schiger cites Yale University as a good model to follow. “Over the past two decades,” he says, “Yale’s investment officers have consistently generated market-beating returns by shifting a large portion of the university’s $25 billion endowment away from traditional stocks and bonds and into alternative investments such as private equity, hedge funds, and venture capital.”

While most endowments invest about 5% in these riskier but higher-return vehicles, “the Yale Model calls for allotments of 25% to 30% to that class of investment,” which Schigel says “has resulted in significantly outsize returns for the school.” While admitting that Yale has more resources than many schools and can invest aggressively in companies like Uber and Airbnb, he maintains that “too many investment officers from smaller universities and foundations are overlooking this opportunity.”

Importantly, he adds, there can be other benefits to venture investing that go beyond financial returns – benefits for a school’s students and its community at large. “For university endowments, no matter how large or small, the impacts worth tracking are financial returns, regional impact, and intellectual property development. How well is the endowment serving the organization itself? How is it benefiting the region where its people live and work?” he poses.

In today’s environment, many universities are keen on serving an economic development role, and investment committees can support that mission – using venture fund investments to “[create] jobs for their region and their alumni, to spin out great companies that employ even more people, and to do the most good for the most people with the resources they have been given.”

Schigel argues that “universities and foundations are uniquely positioned to support these efforts…. Partnering with private equity and venture capital can enable these organizations to drive change in ways that traditional, more conservative investments cannot.”

For such an investment strategy to have the desired impact, however, alignment with the university mission and strategic goals is critical, he says. “For example, partnering with a local venture fund simply because it is local makes no sense if the people running the fund don’t know how to go out and deploy that money in a way that creates the impact that the endowment wants,” he observes.

Schigel cites Perry Teicher, who focuses on social and environmental impact investing at Orrick, Herrington & Sutcliffe LLP, as a strong supporter of aligning endowment investment with university strategic goals such as encourage faculty and student start-ups.

According to Teicher, around 25 universities have created student-led impact funds, requiring that investments align with the schools financial and non-financial objectives.

 “Make no mistake, endowment investment committees have great power because of the dollars they control. When funding sources are uncertain and budgets are in flux, universities have an opportunity to improve the innovation cycle in their regions.” Schigel concludes.

Source: Venture Beat

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