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Venture search funds floated as way to tap endowments, attract start-up talent

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Tech transfer leaders know the frustration of having valuable, innovative research that could be translated into a potentially valuable start-up if only the right entrepreneur expressed interest and could secure necessary funding. Even more frustrating is knowing that most schools have tens of millions in their endowments invested in companies and financial instruments that don’t have any impact on helping their own start-ups get off the ground and create potentially high rates of return.

Of course, endowment investment committees are understandably risk-averse, and the potential for conflicts of interest and favoritism also serve as barriers for direct investments in university start-ups. But those barriers could be overcome — and university endowments could become a critical source of start-up funding — using a “venture search fund” model proposed by a Cincinnati-based venture capitalist. It involves searching for experienced entrepreneurs and using university endowments to invest in independent venture funds that back a diverse portfolio of those founders and their companies.

The venture search fund concept addresses some of the most common commercialization challenges universities face, says Tim Schigel, partner with Refinery Ventures in Cincinnati, OH. Schigel endorses a venture search model in which the university works with a VC firm to fund promising entrepreneurs — entrepreneurs you hope will commercialize your own IP.

The idea is based on the search fund model developed in the 1980s for acquiring and managing mature businesses, Schigel notes. In this model, there is a “jockey,” a “trainer,” and a “horse,” he explains. The jockey is the one who searches for existing businesses that are good targets for acquisition, and the jockey manages the business once it is acquired. The trainer is the investor who provides capital and mentors the jockey, and the horse is the company acquired by the search fund.

To apply the model to university tech transfer, the endowment would invest in a venture search fund, which supplies experienced entrepreneurs who act as jockeys to explore business concepts through technology licensed from universities. However, the jockey would not be limited to research generated by any one university.

In fact, Schigel is readying just such a fund for a launch sometime next year, called Founders in Residence (FIRE), which has an advisory board with university representation. He has released few other details beyond the general construct of a venture search model he envisions, which would operate as part of Refinery.

“We are still in the planning stages,” he says. “I’m encouraging universities to be involved regardless of whether the endowment participates. However, Refinery’s ultimate capacity will be increased with investment from endowments.”

Less risk than direct investment

In the venture search model, university endowments would have access to high-growth commercialization opportunities, and the risk inherent in early-stage investments would be mitigated by partnering with experienced venture capital firms, Schigel asserts.

Typically risk-averse university endowments can utilize the venture search fund as a safer approach to supporting campus commercialization efforts, he adds. Based on a variety of studies the rate of return could be expected to be in the 30% range, which may outperform many of an endowment’s typical investments while also supporting the school’s entrepreneurship and economic development initiatives.

He finds that the venture search fund idea appeals most to tech transfer leaders with a background in business or economic development and who may be new to tech transfer, often in the role of vice president of innovation. It’s greatest attraction may be as a pipeline for start-up leadership.

“The biggest challenge at a lot of schools is entrepreneurial leadership. They have good IP and some have entrepreneur-in-residence programs, usually with senior industry folks who are there to mentor and not necessarily to act as entrepreneurs,” he says. “They’re not always attracting the right profile for an entrepreneur leader. It’s usually someone who is between gigs and has just left a large corporate environment, not necessarily someone who has come through an entrepreneurial path.”

If those executives do find a project they want to commercialize, they usually hit a wall when it comes to funding the project, Schigel says. Investing in a venture search fund can be a more productive path, he says, even though there is no guarantee that the fund will bring entrepreneurs to the university. The venture search fund does, however, encourage promising entrepreneurs and gives the university a good chance to make money whether it invests in that school’s research or not.

“A lot of these entrepreneurs come out of the schools that have a search fund track teaching MBA students how to do due diligence and find the right companies to invest in,” Schigel explains. “They go out and find investors who either just believe in the VC system or they believe in this particular jockey, the entrepreneur. They invest in the entrepreneur a little bit up front to fund the search [for a company], and then when there is a company to buy, they invest more. Most of their money is not really at risk until that second step.”

Looking for the next Lebron James

The FIRE venture search fund for universities would use the same two-stage funding model but search out promising entrepreneurs as opposed to companies, who would then form start-ups around promising research, Schigel says.

“The first stage is searching for the entrepreneur and finalizing the business plan. That is the first low-cost stage,” he says. “The second stage is funding the company, putting the initial seed capital in.”

At that point the capital formation can follow, based on the credibility of the entrepreneur and the search fund, Schigel says. He has been talking to universities about the idea and says many tech transfer leaders see the appeal in finding the right entrepreneur for promising IP.

“Many universities are focused on economic development, how to grow their local communities and contribute to the economic success of their home areas. And a lot of the efforts they undertake have all the right conditions for success — the incubators, the accelerators, the seed funds — but it’s not enough for them to really take off,” Schigel says. “They have the right conditions, but they don’t have Lebron James, and you win championships with Lebron James. The question then becomes what are you doing to recruit Lebron James?”

Networking opportunities

But what is the benefit of investing in such a fund if there is no guarantee that the next big entrepreneur will utilize your own research? It’s all about networking, Schigel says. Even without using a venture search fund, tech transfer often depends on connections with alumni and local business leaders to lead investors and entrepreneurs to research opportunities, and Schigel says a venture search fund would foster that kind of referral system.

“Everyone likes to talk about how impressive their alumni base is, and right now there are graduates of your university lying all around Silicon Valley, thinking about starting their next company. But they’re not calling you,” Schigel says. “They’re going where the money is, and that’s a venture search fund like this. Let the money recruit them, not the university.”

The venture search fund is a good fit with the University of Kentucky’s focus in recent years on matching research with experienced entrepreneurs who have a good chance of success, says Ian McClure, director of the Office of Technology Commercialization and a member of the FIRE advisory board. Other schools represented on the advisory board are Carnegie Mellon, Notre Dame, Case Western, Ohio State, University of Cincinnati, University of Nevada, and Stanford.

UK recently studied all its affiliated start-ups and found that the failures often were attributed not to anything lacking in the technology, but rather in the lack of experienced leadership.

“They got to some inflection point where grant money or other funding was exhausted and could not be obtained any further, and in order to move forward under faculty leadership they had to decide whether to take entrepreneurial leave or just let this project go,” McClure says. “Once they stop working on just the technology, you have to give it 100% of your time just to run the business. We were spending money and resources on the IP and getting them to a point where they were just going to die because they didn’t have experienced management that could focus 100% of their time on private fund management and company growth.”

Leadership key to success

McClure’s team is concentrating now on replacing faculty founder-managers with experienced entrepreneurs early in the process, working with 24 other universities to create a joint entrepreneurial network that uses an online platform to more intentionally match experienced entrepreneurs with university spinouts. That platform will launch later this year.

“Even with a tool like that you have to think about purposeful and intentional recruitment of specifically experienced entrepreneurs, those with hypergrowth experience who have actually taken in more than $10 million in capital and grown a company to 25 employees in a short period of time. We’ll also look for regulatory experience,” he says. “That kind of experience is not always readily available within the bubble of the university ecosystem. We’re in favor of more intentionally matching our research with people who have done it before so they can start from a higher trajectory early in the process.”

Though the school has not yet invested in FIRE, the concept fits well within that focus on recruiting experienced start-up talent. A venture search fund would help universities like UK, which typically are not the first resource that comes to mind when entrepreneurs are looking for research to commercialize, McClure says. Joining with a network of 25 regionally focused universities, for example, would create an entity that is harder to overlook and which has a depth of resources that will draw the attention of entrepreneurs, he says.

“You can start to create network effects that benefit all of us. We can tap into the networks of these other universities to identify these experienced entrepreneurs and potentially recruit them to take over CEO and other management roles of our start-ups,” he says. “This is different than an entrepreneur-in-residence program, not just bringing in smart people who can advise our start-ups. This is about recruiting entrepreneurs to come actually take over the business.”

Assessing the ROI

Like UK, the University of Notre Dame is considering an investment in a venture search fund, and Associate Vice President for Innovation James E. Thompson at Notre Dame’s Idea Center says the decision will come down to the potential ROI. Thompson also is on the FIRE board.

The concept of searching for an experienced entrepreneur matches what Notre Dame is trying to do in other ways, Thompson says. The school has had entrepreneurs-in-residence, but found little success with that approach.

“We found individuals who really were just looking for a job. The difference between that and a venture search fund is finding the right person who really wants to be an entrepreneur, who can advance the technology, de-risk it for investors, and then commercialize the technology and take it market,” Thompson says. “I think this approach has a pretty good chance of success, but we’ll have to see.”

Notre Dame is fully on board with the concept of finding experienced entrepreneurs even if that means more of a monetary investment than the usual approach, but the decision about the venture search fund will come down to deciding whether the potential gain is worth the cost. Thompson is looking at a possible grant to cover the cost, as well as some other options.

Participating in the venture search fund would cost a few hundred thousand dollars, Thompson says. That investment would cover the cost of finding an entrepreneur and funding his or her services for a year.

“The big question is whether they will be able to identify and attract the right person, and get them to my university. Bringing in the right entrepreneur would be the main focus for us, even though there is the potential revenue from investing in the fund,” Thompson says.

Contact Schigel at 513-238-7896 or tim@refinery.com; McClure at 859-323-1054 or ian.mcclure@uky.edu; and Thompson 574-631-1041 or jthomp22@nd.edu.


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