Universities can support costly technology projects by teaming up with venture capitalists seeking sound investments, but higher-education officials should beware the potential for investor money to become bogged down in a bulky campus bureaucracy, according to a study released this month.
The University of Southern California’s "Venture Capital – University Interface: Best Practices to Make Maximum Impact" outlines five ways higher-education institutions can attract funding from the investment world while campuses nationwide see budgets stagnate or slashed by state lawmakers.
Eight out of 10 venture capitalist investors "miss the mark when it comes to addressing the question of timing," according to the "University Interface" report. Investors usually add from two to three years when marketing for a university venture because the campus’s red tape creates gridlock, the report said.
The report suggests that colleges and universities should understand what venture capitalists are looking for and what kind of financial returns they expect, increase visibility among investors, support campus-based entrepreneurs, and foster innovation among researchers developing important–and potentially profit-making–technology.
The study was based on 94 interviews of venture capitalists across the United States. The interviews were conducted from November 2007 to February 2008. One investor whose name was not used in the "University Interface" report said even when campus researchers and venture capitalists make a business deal, the string of university decision makers that must approve financial transactions slowed the dealings to a crawl.
"Even though the academic and his co-founder CEO were in agreement on the deadline terms, once it got caught up in the endless cycle of university bureaucracy we literally lost nine months, plus a lot of sweat equity," said the investor, a managing partner at the Life Science Venture Fund, adding that despite the tedious delays, higher-education research and technology is still seen as a solid investment. "But I’ve pushed our limited partners into dealing with universities anyway, because I feel like research lab ideas are really interesting and often worth the hassle."
Examples of investor-university interaction are numerous. At Babson College in Massachusetts last fall, Expansion Capital Partners joined campus researchers in their work to create and distribute environmentally friendly technology. Many venture capitalists provide a few million dollars in seed money for university programs that have campus funding, but need to be supplemented from outside sources. This mitigates risk and attracts investors looking for opportunities in higher education, the study said.
Campus researchers and department heads should also be well-versed in the field they are entering, the report said. For example, if a university researcher is developing medical technology that could be marketed to clinics and hospitals, he or she should be able to demonstrate how and why the product would be appealing to buyers.
"We were surprised to learn that this old stereotype has been put to rest–venture capitalists mostly deal with academic entrepreneurs who are reasonably sophisticated about the markets they propose to enter," the study said. "Still, faculty and students’ relative inexperience at founding, growing, and managing successful companies can impede the smooth execution of a [venture capitalist] deal."
Venture capitalists have invested as much as $25 billion in recent years, a sharp increase from the years after the dot-com bust, when investors saw their millions disappear after raking in profits from burgeoning web sites.
The USC study was written by Krisztina Holly, vice provost for innovation at the university’s Stevens Institute for Innovation, where she helps faculty and staff develop research ideas. Holly is among the foremost experts in her field after heading the Massachusetts Institute of Technology’s Deshpande Center for Technological Innovation, where she oversaw the allocation of $5 million in campus grants and helped start nine companies that raised more than $40 million.
USC "University Interface" study