The University of California has announced a $25oM venture fund drawn from its endowment, which UC proposes to invest in new companies in the “UC ecosystem.” Chris Newfield has an insightful comment on UC Ventures at Remaking the University. I’m posting a comment here. I expect to add more, but this is a start.
PitchBook, which tracks the VC industry performance, shows what UC Ventures faces. It’s not the money in that makes money, but the money at “exit”–that is, when others buy out the investment, presumably for greater value than that investment.
According to PitchBook, the median time to exit is about 4 years for acquisitions, and over 7 for IPOs and private equity buyouts. The amount of capital raised prior to exit is $11M for acquisitions, $19.7M for buyouts, and $76.5M for IPOs. To play in the VC market, UC Ventures is going to have to put down some substantial money. $250M does not look at all that impressive, spread over ten campuses and how many years?
It gets worse when one looks at the sorts of companies that university research produces. Nearly half of all exits are software, accounting for about 70% of the total realized value of exits in 2012. Other areas with significant activity are commercial services and media–both areas that do not show up with any frequency on university technology menus. No, university startups and technology transfer programs are built with a fixation on biotech and pharma, for strange historical reasons and a persistent happy lack of reasoning. No matter, what about exits? Biotech and pharma represent 3% of exits by acquisition, 21% by IPO, and 2% by buyout. What does this mean? Well, it means that most biotech exits need a median of 7 years and $75M dollars.
That $250M does not look big at all, if UC Ventures chases medical inventions at UCLA (for NewCo–why play with personal money when UC will throw endowment funds your way) and UCSF (which has an incubator and wants to play with the companies in it, no doubt).
Now here’s the thing. If UC’s claim is that the VC market underserves the fine startup companies being shelled out by the tech transfer programs, then UC Ventures will have to *lead* the investments in those UC companies. If UC Ventures does what the University of Washington’s hackish W Fund did, it will *follow* the VC crowd with “me-too” funding. For UW, that meant that the W Fund operated not as a lead investor for an underserved market (the market wasn’t underserved anyway because the Washington Research Foundation with $150M+ owned the W Fund and has a mission to invest in UW companies), but rather as a public subsidy to private investors. That is, if UC Ventures does not lead deals, and own them, then it is just an elaborate private subsidy for what the VC market *would invest in anyway*. We will have to see if UC Ventures’s “Team” has the balls to lead multiple $5M+ Series A rounds, or whether it slinks along among the other VC firms looking at UC “ecosystem” startups. Making 50 $5M investments leaves 50 startups short half the median capital they need to get to an exit. Given that some of that $250M will go to paying the “Team” to do the investing, 50 companies is a stretch. As a point of reference, Oxford Nanopore, a company that has UC connections (but is based in the UK), has raised $211M in 7 rounds over 9 years.
Let’s say UC Ventures funds 30 startups. If it is running like other VC firms, and gets lucky, maybe 6 of these startups (typical 2 in 10 figures for a VC portfolio) will get to an exit in five years. If the present ratios of investment to return hold–4.7 in 2012–then UC Ventures can expect to earn $225M for investing $250M. And that’s assuming that other VCs co-invest in later rounds, and UC Ventures’s investment isn’t diluted in those subsequent rounds. For UC Ventures to go positive, it will have to get to an IPO with the help of other VC firms and private equity funds, or get really lucky.
Certainly UC Ventures will have to invest in software, media, and commercial services companies to get even to these figures. If UC Ventures invests in biomedical (which is likely, given the insider influence around boondoggles such as UCLA’s Newco), UC Ventures risks providing a “non-therapeutic dose” of capital–enough to put on a show of prolonging failure (the antithesis of VC virtues)–but not enough to get a company into the range of exits typical of biotech startups. To get there, the VC market will have to take over. UC Ventures does not have the money or the experience to be the sole investor at those sorts of dollar amounts.
The indicators are, UC Ventures is off to Vegas to play the slots. If it hits a jackpot, then it was (of course) a brilliant plan. If not, why, look at all the sincerity and social purpose in helping faculty try to change the world (and trying to become friggin’ rich doing it).