There are a lot of smart people in universities. Some may even be geniuses. Many of them are certainly good at inventing technologies that will change our lives.
But for the most part, universities aren’t particularly adept at extracting the full measure of profit from all those innovations. While university technology transfer offices routinely license the intellectual property developed on campus, the schools themselves often aren’t very nimble at retaining large stakes in the start-ups that exploit that property.
Investing in start-ups is the business of venture capitalists, some of whom have come up with a new formula for profits. It goes roughly like this: Give a few V.C.’s access to the technology deals. Let them raise some capital and invest it shrewdly. The V.C.’s become rich. And if the deals are done correctly, the schools share handsomely in the riches. As an incidental but significant benefit, it’s at least possible that venture capitalists, working with universities, could help create manufacturing jobs in the United States.
Is this vision realistic? Marc Singer hopes that it is. A managing partner at Osage Ventures, based in Philadelphia, he has done quite well over the last 17 years financing technology start-ups like Diapers.com, an online baby-care products retailer, and Redfin, an innovative online real estate broker.
But Mr. Singer and his partners, Louis Berneman and Robert S. Adelson, say they have found a new opportunity. They say that while technology transfer offices at universities do a good job of licensing start-up companies, the schools often waive the right to invest in subsequent financing rounds, perhaps because it may be hard to assess the investments’ risks and rewards in a timely way. In any case, the universities’ original share in these fledgling enterprises is diluted — and the schools’ profits, if and when they arrive, are a small fraction of what they could have been.
For example, Caliper Life Sciences, a company that sells research tools for microfluidics and lab automation, spun out of research at the University of Pennsylvania. The school initially owned more than 10 percent of the company, but declined to participate in later financing rounds. As a result, its equity was diluted to approximately 1 percent. The company went public and is now worth about $330 million, so even that slim share is valuable. But the university could have owned much more.
So the three venture capitalists raised $100 million and set up the new Osage University Partners fund. Research universities like Penn, the California Institute of Technology, Duke, the University of California, Berkeley, and Columbia assign their investment rights to it, and hold sizable ownership stakes in the fund.
The fund avoids consumer Internet plays, if only because those are rarely what the universities’ researchers produce. Instead, they invest in areas like material science, battery technology, therapeutics and energy.
One investment is in Avid Radiopharmaceuticals, which makes diagnostic tools for recognizing Alzheimer’s disease. It was acquired by Eli Lilly late last year. Then there is Gevo, which makes a chemical that, when blended with water, creates a fuel that the company believes will cost half as much as oil.
“These are companies that require a meaningful amount of capital,” Mr. Singer said — sometimes up to hundreds of millions of dollars.
They may also require a significant amount of labor, because their projects generally lead to manufacturing, Mr. Singer said. By contrast, many of America’s leading Internet companies have transformed daily life, but they haven’t produced many jobs. Netflix, the online movie service, for example, employs about 2,000 people, and Zynga, the maker of casual games like FarmVille, employs 1,500.
Yet the employment rolls of a manufacturing company with the same stock market value as an Internet company are typically much larger. Zynga, though privately traded, has an estimated value of $10 billion, based on its most recent round of financing. Sara Lee is also worth about $10 billion but employs more than 33,000 people.
Ford Motor, which is valued at about $50 billion, or as much as Facebook — again, based on its most recent round of private financing — employs almost 200,000 people making cars, or 100 times more people than Facebook has hired.
But a tech start-up company that makes stretchable electronic circuits that open up new design possibilities for electronic devices — like MC10, another of the university-financed companies, could ultimately generate sizable employment.
Lest anyone think that they are engaging in some form of altruism, Mr. Adelson says he and his partners have analyzed these projects as businessmen. “It is totally centered around the profit motive,” he said.
“One of the questions we had to ask ourselves is whether this is the area we’d want to invest in,” he said. “Would there be the returns?”
THEY built an index of start-ups from 50 top-flight universities that had licensed their technology to those start-ups but had not invested in them. What they discovered startled the V.C.’s. There was a very respectable 33 percent rate of return — though, granted, there were no wild, out-of-the-park home runs like a Facebook or a Zynga.
(Actually, in terms of V.C. record-keeping, those are more like out-of-the-park-and-into-the-next-county home runs.)
They also found that there were few strikeouts. In fact, about 40 percent of the investments had a positive return.
A result, they say, is that if universities have a bigger stake in companies, they will make more money and can finance other start-ups. And many can fulfill a mandate to create local jobs. “The tech transfer community has become increasingly oriented toward job creation,” Mr. Adelson says. “In a lot of ways, we are part of a larger puzzle that universities are trying to solve.”