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University angel networks joining forces to boost start-up funding

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“. . . And Duke passes the ball to UNC, who in turn passes it to NC State . . .” You’d never hear those words during the broadcast of an athletic event, and yet universities well-known for their athletic rivalries have proven once again that “competition” is a tricky word when it comes to commercialization of research. These three North Carolina universities, along with NC Central, are the initial members in the Triangle Venture Alliance, a cooperative association of their angel networks that may be the first of its kind.

While Duke already has an established entity called the Duke Angel Network, the other universities are currently in the process of creating networks of their own. When all are up and running they will operate cooperatively, sharing investment opportunities, due diligence feedback, and ultimately co-investing.

Why would these schools collaborate with “rival” institutions, whose start-ups might ultimately become competitors or attract funds that might otherwise have gone to them? “Because this is not a zero sum game,” explains Kelly B. Sexton, PhD, director of the NC State University’s Office of Technology Transfer. “The Triangle Venture Alliance will be bringing more investment capital to the start-up scene, and a rising tide will help raise all of our ships. Hopefully investors who make money will come back and write more and larger checks.”

Setting the stage

The Duke Angel Network, which was launched in June 2015, clearly set the stage for the alliance by establishing a proven model. According to Eric Toone, vice provost and director of the Duke Innovation & Entrepreneurship Initiative, the Duke Angel Network has over 70 alumni angel investors and has already seen a total of more than $1 million invested in seven companies.

Toone, who had been at Duke for more than 25 years as a chemistry professor and entrepreneur, came back to start the Innovation & Entrepreneurship Initiative in 2013. With a long-term goal of boosting regional economic activity, he realized that funding would be key for any efforts, “I had a variety of things in mind, but the first was an affinity angel group for Duke,” he recalls.

However, he did not like any of the models he studied. “In particular, almost all of them were not based inside the university,” he observes. “If they were lucky they’d get to use their name and logos.

“A lot of the attributes of this particular model are different and unique — and we think very valuable,” he continues. “A variety of people who built it live right inside the university; it’s run by Duke employees, and it uses students from the business and law graduate schools to help do diligence on the deals.”

The dues paying members (they pay $1,000 per year to see the website) are SEC-accredited investors and also have a connection to Duke, Toone explains, adding that the law students get class credit for their work. Finally, it is the angels — not the university or the TTO — who decide whether a start-up merits financial support.

Actually, this is not the first time the four universities have worked together. “Previously we had received a grant from the Blackstone Charitable Foundation in New York to develop the Blackstone Entrepreneurs Network — a specialty program to identify high potential ideas,” notes Judith Cone, vice chancellor for commercialization & economic development for UNC Chapel Hill. “We activated 15 serial entrepreneurs in the region for collective mentoring to move high potential universities [and start-ups] together,” she reports.

Getting on board

Having this history of cooperation certainly helped Toone gain support for the angel funding alliance — as did the success of the Duke Angel Network. “One of the things that is really clever [about the model] is that a lot of universities get into investment space, but the problem is that at a university it’s hard to shield the decision-making process from influences like key faculty,” Sexton explains. “Here we follow investment decisions made by alumni, who vote with their checkbooks. Essentially it’s crowdsourcing — which I think will be the key to success. Also, you will not have hurt feelings among faculty because it’s not the university saying ‘We take a pass on your start-up,’ it’s the marketplace. And you don’t have to have a sidecar investment fund.”

“Eric saw a notice about government (U.S. Economic Development Administration) seed funding,” recalls Cone. “He said he’d like to submit a bid, we said great, and we got $250,000. They created the Duke Angel Network and he said ‘This is working, why not have all of us do it?’ We three put our heads together and said if we’re using public funds we should do this in sequence with each other. We want to look similar, especially UNC and NC State, so it’s important to do it harmoniously.”

Creating a network

How are the participating universities going about creating their networks? “We are going through an initial internal review of the Carolina Angel Network,” says Don Rose, PhD, director of Kickstart Venture Services, which supports faculty start-ups spinning out of UNC. “We will have an association with the university at some level; a number of people have expressed interest but we have not solicited membership yet, and we have to determine the fee.”

The pool, however, is sizable. “We have a database of alumni, parents, and friends,” Cone shares. “We have 300,000 living alums, and a subset of those are accredited investors. Many of those we’ve been socializing with on a local basis, and we have some early adopters who are very actively involved with us and are already active angels.”

Rose anticipates a launch this summer. “We’re working to get founding members, then we’ll go live with our website and probably collect deals over the summer,” he says. “Next will come applications, then the screening process. Our goal is to have the first investment certainly by the end of the year.”

“We call ours the Wolfpack Network,” Sexton says of NC State’s arm of the collaboration. “We’ve created a steering committee . . . [and] we then created a proposal which involves hiring a Managing Director and funding for four years,” covering salary support for a full-time person and part-time administrative support. After that time period, she says, “we expect we’ll be self-sustaining through membership fees.”

The proposal was approved by the university, and membership recruitment was started in mid-April. In addition, the first informational session was held in mid-April as well. “These [sessions] are designed for alumni and supporters; we ask them to support us and to bring a friend,” Sexton explains.

She hopes to have the full-time manager hired and to launch this fall. “This brought together all the pieces of the entrepreneurial ecosystem on campus,” Sexton asserts. “It also brought us together with UNC and Duke in a major way. We talk almost weekly as we try to build our plan, and we trade notes with UNC because public and private universities are different.”

Early sign of success

Toone says he has already seen an example of how the growing cooperation between the universities can spell success for the alliance. “A little while ago we looked at a deal presented to the Duke Angel Network,” he recalls. The company planned to express rubber from sunflowers. This was important, he notes, because trees, the traditional source of rubber, are particularly susceptible to disease and infestation, and a huge crisis was being predicted for the rubber industry. “They had cloned the [rubber-making] genes into sunflower and presented to us,” says Toone. “There are lots of people at Duke who understand molecular and plant biology, but agricultural economics? We did not have that expertise, but they sure have it down the road at State. So, we were able to incorporate students from State into the diligence.”

He notes that the EDA grant has helped give TVA’s networks the ability to share back-office support and teams of students to conduct due diligence.

“This is a tremendous example of ways in which the schools can share their expertise — and there will be co-investing opportunities as well.” Toone continues: “As we go forward, when Duke looks at an opportunity we will make some percentage of some deals available; we will definitely set it up so others can co-invest.”

North Carolina Biotechnology Center, he adds, has said it would be interested in co-investment deals, and “we have a bunch of people who want to syndicate with us.”

“We will all be using the same software, ProSeeder,” adds Rose. “Like AngelSoft, it allows members to look at all the deals. What’s nice about having it all in the same platform is if we get a deal that, say, NC State can’t complete if $300,000 is required because they can only raise $250,000, they can simply flip a switch and ask others, or open it up to the entire network. Second, you’ll find that many alumni graduate from more than one university. So a Carolina graduate with an MBA from Duke would be eligible for access to both of their angel networks.”

And speaking of those alumni, Toone says the potential is quite impressive. “When you go to the development offices of the schools and ask how many of their alumni would be accredited investors and add up the three schools you get 250,000 to 300,000,” he notes. “If we could get one half of 1%, that would be 1,400-1,500 people.”

Going forward, will the schools have the option of investing either individually through their funds or through the alliance, or will all such future investments have to come through the alliance? “I don’t think we’ve gotten that far yet,” says Toone. “What the focus is on now is standing up the networks at State and Carolina.”

Sharing valuable lessons

Having “pioneered” this new concept in angel networking, Duke is well positioned to share important lessons with its new partners — and it has been more than happy to do so. “When we set this model up the one thing that kept me up at night was finding enough high quality deals; I never worried about getting angels,” says Toone. “But we’ve been blown away not just by the quantity but by the high-quality deals.”

Toone expects the experience to be similar at the other universities. “There may be special concerns at state schools, like finding the right people, but we’ll work real closely with them,” he says.

He’s also not worried about the rivalry issue. “This is not a committed capital model; individual angels make individual decisions on an individual basis. When you’re not in a committed capital model, all those things go out the window.”

Rose is very appreciative of the input he has received from Duke. “The head of the Duke Angel Network has related to us the need for much earlier screening of the deals and filling in some of the blanks before going to the members,” he says. “There is an internal evaluation of a deal first; they do a little bit more than a light due diligence and screening. Quality needs to be high to keep members engaged and interested in the network.”

Sexton agrees with Rose. “The thing Duke has repeatedly conveyed to us that is so important is the quality of diligence — putting good start-ups into the funnel,” she says, adding that having business or law students lead the diligence efforts is a significant plus. “You need to have someone who understands the business world and can ensure consistency in the review of these companies,” Sexton explains. Timeliness, she adds, is also critical. “Investors don’t care when spring break is, or when finals are,” she says. “They and the start-up are on a timeline, and the university has to make sure they do the same. For really good deals we’re going to have to move quickly. That’s something Duke has really seen from their network.”

Confidence is strong

The new members of the TVA are optimistic about their prospects for success. “I see synergies about the aggregation of talent and resources towards companies that will primarily be in our region,” says Cone. “Most of our alumni do stay in the region, and I think that’s true of NC State as well. I think our networks will really identify more regional firms, and the benefit is getting resources to close the funding gaps. We also have a group of accredited investors to look at, and the student teams to do due diligence.”

Sexton anticipates several benefits as well. “We have so many talented serial entrepreneurs and angel investors excited about the university who want to be associated in some way with the entrepreneurial ecosystem, and this gives them a way to get involved,” she asserts. “Yes, I want to see more start-up investment, but where I see this really working is they not only invest but become advisors and mentors. For example, a start-up may go into the network and not get funded, but an angel may get involved and help them become successful. The leverage of some of the goodwill of these people is bound to help start-ups.”

Sexton also believes the TVA model “can really be replicated at any university with a strong alumni base — particularly those who are experienced investors.”

Toone “absolutely” agrees. “I can tell you we have had people call us from a number of universities, both in the U.S. and Canada,” he reports. “Some of them are interested in joining what we’ve already done, while others are interested in learning more about the model so they can set up their own version.”

“We certainly have had some interest from other schools in our state, so we may expand beyond the Triangle,” adds Rose. “There is a trend I see among angel investors — angel alliances where you see a power pool not only in due diligence but also in finances. What we’ve put together is certainly part of a growing national trend.”

Contact Cone at 919-962-3743 or Judith.cone@unc.edu; Rose at donrose@unc.edu; Sexton at 919-515-7199 or kbsexton@ncsu.edu; and Toone at 919-681-3484 or eric.toone@duke.edu.


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