VC Mini-Rant: The Trouble with Commercialization Funds

Unburdening myself, as I apparently am, of things that are on my mind, here is something else: Why does everyone who wants to break into the venture business immediately gravitate toward raising a fund to commercialize university technologies?

Granted, I see the superficial attraction:

  1. There is lots of technology in universities.
  2. We all love the cheery stories about university-based technologies that made it big, i.e., Google
  3. Universities do a crummy job of turning technology into commercial companies.
  4. It doesn’t seemingly require a large fund, so you could get by with a seed-ish fund, which is easier to raise from friends and acquaintances and individuals.

The trouble is, it’s a sucker trap. Here’s why:

  1. University technologies are more nascent than naive investors think, so there is immense scientific risk.
  2. Technology is 5% of the story. Managers are 95%. And most sane managers won’t touch university startups with a pole-vaulting pole. Further, most qualified candidates don’t live anywhere near East Wherever University, Iowa, let alone in Peru, etc.
  3. Far more money is typically required than uninformed investors think, making a seed fund inappropriately-sized.
  4. There is a lot more technology available to be commercialized in any given area than you think, and most of it sucks.

So, next time someone tells you they want to start a new fund focusing on commercializing university technologies, run away. And if they run after you insisting that they already know all the issues with university commercialization funds, slow down, a little, and listen. But be ready to run again.

Related posts:

  1. Mini-Me VC
  2. Colleges Love Hedge Funds (and Venture Funds, and …)
  3. Money:Tech — Hedge Funds are the New Software Companies
  4. Venture Capital: No Second Seed Funds
  5. The Real Trouble with Sovereign Wealth Funds

Comments

  1. mark says:

    you’ve taken too much time off now. you’re making too much sense. at least I’m not starting up in a university in antarctica.

  2. Richard says:

    I would add one more:
    Universities often don’t understand how to get business transactions done and structure things unconventionally, which creates future complications.
    oh and one more…
    Universities place WAY too much value on the idea and not enough on the management needed to develop the product/technology.

  3. Martin Haeberli says:

    Paul,
    I’m a small investor in a first-time fund (vintage 2000, as the bubble collapsed) with an association with Stanford. One of the GPs used to be CIO there; the other founding GP was a longtime VC whose firms, often Stanford spin-outs, the (ex) CIO had been advising. They spun part of their thesis as commercialization focused. On the plus side, they did quite well. On the interesting side, I don’t know how much direct commercialization they ended up doing. But the dealflow and guidance from university-related advisors sure seemed helpful to me in my seat in the bleachers.
    Which is not to say that you’re not right on target; on the other hand, one of my pet peeves is that there are probably some promising technologies that need to be paired with excellent leaders and investors, that could do a great deal of practical good for our country and the world. But it IS tough to do well.
    I have actually seen much more success (from the outside), ad-hoc, with self-funded startups spinning out of universities; some have quietly built very nice businesses.
    see
    http://www.pelletron.com
    and
    http://www.coverity.com
    So maybe a good non-venture “venture” model for individual success by great leaders is to find promising technologies, add the management value, help them bootstrap and execute…
    Best,
    Martin

  4. JB says:

    Ouch.

  5. Paul,
    I agree 100%. But there is a business model for investing in university technology that has succeeded better than early-stage equity — it’s the tech transfer office licensing of IP, which last year made universities way over $1 billion in revenue (more than IBM’s patent licensing revenue during the same period). The tech transfer offices are doing a resonable job, but could do much better by leveraging their resources through strategic partnerships with private equity funds that specialize in patent licensing.
    If you’re interested in hearing more about emerging private equity models for this area, drop me a line.
    Michael

  6. Frymaster says:

    So much here for me. Being in a small market, I wish I could seriously dispute the second part of item 2 in the sucker trap, but I won’t embarrass myself. It’s way true. Talent clusters with talent.
    Still, with RISD (Maeda!) & Brown & URI, there’s enough academic juice to create a nascent design/technology-type cluster here in Providence, RI. But leadership in commercialization and scalability is lacking, locally, so far.
    I wish there were more people like Michael and Martin sniffing around. Our biz leader types are mostly doofy.
    As we say up here, Paul, ya’ wikkit smaat. All y’all are. Thanks for the ejamakashun.

  7. Daniel Haran says:

    “Technology is 5% of the story. Managers are 95%. And most sane managers won’t touch university startups with a pole-vaulting pole.”
    Do you have any actual data to back up that claim? Many startups/grownups are still being run by tech founders.

  8. Daniel — Ordinarily I’d say, “you’re kidding, right?”, but you seem like you’re serious so I’ll take you at face value. Scientific founder CEO exits are simply a fact in the venture business. While some (not most) venture-backed startups are run by their scientific founders, the likelihood of them still being run by the founder falls off significantly as time goes on — and falls off quickly if you raise a large round, are seen as highly scientifically risky, have a lot of VCs around, etc.
    For a practical example, look at big pharma, where, until recently, not a single company was still run by a founder, nor by anyone with a scientific background.
    More here, if you’re interested in an academic view of CEO exits in venture-backed businesses. Note that this study is not of science-based companies, but of Internet cos. The succession rates are higher yet among science companies, where the premium on scientific knowledge is very low after the initial days.

  9. Daniel Haran says:

    Paul — yes, that’s a serious question. Thanks for the reference, it had some interesting insights.
    I do come from an internet background, currently employee #4 at Standout Jobs. Because I eventually want to found a company, knowing where I can add the most value is important. If learning about management means I add 19 times more, then I will.
    It’s “Technology is 5% of the story. Managers are 95%” that I have the most trouble swallowing. Maybe it’s professional pride: I was half the team that built our product. But also because as the paper you linked to says, it smells of ‘rationalized myth’. Why 5% and not 2 or 10%?
    Internet startups may also have very different ways of operating after initial launch. From p163: “Now, the company must worry about marketing the product, building a sales force, supporting the product, and managing the complex finances that come with the onset of incoming revenues.”
    Properly designed internet startups these days do more online marketing – and certainly can’t afford to build the type of sales force you’d see in pharma. Support is generally best handled by developers at the start, so they’ll have an incentive to make the product easier to use. Most important (and mentioned in the paper) is less need for capital.
    All that said, most internet entrepreneurs are a very different breed from the kind of professors that start companies with university technology.