Should Universities Start Venture Capital Funds?

ii. Large corporations may be interested. They too, are looking for early access to novel technologies, both as an investment and from an internal perspective.

iii. Public authorities can play a role of catalyst. The authorities can either set up a separate VC fund, and/or co-fund private initiatives. Schemes whereby public authorities add to the capital raised by a private VC funds can be interesting. As the private investors have skin in the game, they will act with care. The additional funds allow VCs to invest larger amounts and take additional risks.

In some cases, authorities may require that the fund focuses on specific aspects;

academic spin-offs can be such a focus.

iv. Academic institutions may invest some of their own resources.

v. Wealthy individuals, trusts and endowments can also be a source of capital.

Governance

Governance of the Fund is another key challenge. Who decides what, and how are these decisions made? Often, a separate organ makes the final investment decisions: the Investment Committee. Its task is to decide independently on investment proposals.

One of the important questions is in how far the General and/or Limited Partners are involved in decision making. The Investment Committee can be composed of the General Partners, who then decide among them. But often independent people, often industry veterans and sector specialists, are asked to sit on this Investment Committee; large Limited Partners may also have a representative on this Committee. In some instances, General Partners are not involved in the final decision making. Also, the degree to which co-funding public authorities wish to be involved in the decisions making differs strongly: some may request a seat on the Board of Directors and/or the Investment Committee, others trust the decisions of the Partners.

University-specific or Interuniversity VC funds?

UVC funds can either focus on projects of a single university (UVC) or of a group of universities: a so-called Inter-University Venture Capital (IUVC) Funds. The advantage of IUVC Funds is that the deal flow -the number of projects that are submitted for consideration- is substantially larger compared to UVCs. This allows for specialized General Partners, who are knowledgeable in certain industries. On the other hand, compared to UVC funds, the intimacy of contacts between investors and entrepreneurs is less. Note that this also has a positive side, as the assessment may be more objective.

The choice between university-specific, interuniversity and generic funds boils down to trade-off is between proximity to the entrepreneurs, presence of specialized sectoral expertise and size of initiative. Both models can work.

6.4.3 The challenges of setting up an (I)UVC Fund

As indicated above UVCs can be managed by KTTI staff. Dedicated resources may be needed for such project, but involvement of many members of KTTI is required (business, legal, organizational…). UVC funds may allocate the investment decision making to the Board of Directors or set up an independent Investment Committee.

IUVCs are almost always managed by professional investors; an Investment Committee may again take the final decisions on the investment proposal.

Irrespective of the organizational form: (I)UVC or generic funds, a number of requirements must be met:

• An experienced team: Making value judgements on untested products from an untested team in an untested market is hard. Prior experience in the VC industry is a great plus.

• Sufficient sectoral expertise: VC Funds need to have an understanding of the sectors in which they invest. As universities have a large diversity of potential projects, the VC Fund needs be able to answer to a wide range of requests. Note that in some cases sectorally focused UVC Funds can develop around a top-level research center.

• Sufficient deal flow: if the VC Fund cannot attract sufficient projects it cannot justify attracting dedicated resources.

• Independence: GPs must be able to take business-only decisions. Organizational politics must be kept at arm’s length.

• Sufficient Funding: the VC fund must have access to enough capital to function on a large enough scale.

• Co-investors: as a rule, a VC never invests alone in a project. The availability of colleague-VCs in the ecosystem allows for risk spreading. If this is not the case the (I)UVC need sufficient capital to fund projects on their own.

One of the greatest challenges of (I)UVC funds is to effectively be willing take more risks than traditional VC funds. If (I)UVC funds use the same investment criteria and coves the same domains as regular VC funds, then their value is limited. The Investment Committee must be aware of the objectives of the (I)UVC and act accordingly. It must especially be open to a large field of application domains and to early stage projects.

6.4.4 Pro’s and cons of UVC Funds vs. IUVC Funds

Pro’s and cons depend very much on the governance structure of the Fund. The degree to which KTTI staff is involved in the management and decision making of the VC fund determines the degree to which both actors are aligned.

Relying heavily on KTTI for VC Fund management has a number of implications:

• KTTI must have a high degree of authority in deciding which projects to support.

• This is also the greatest weakness: another potential field of conflict between Researchers and KTTI arises. Besides IP valuation KTTI also controls access to VCs. The governance structure must be well thought through, and in case of refusal to invest in the project research groups must have the opportunity to reach out directly to external investors.

6.4.5 The limitations of (I)UVC funds

(I)UVC funds fulfill an important role in funding university start-ups, especially in the initial stages. Nevertheless, even they have an upper limit to their investment capacity. In case of very successful start-up later stage financing needs may exceed the ability of the (I)UVC fund.

This should not limit the freedom of initiative of the entrepreneurs.

6.4.6 The VUB experience

The VUB is currently at its third (I)UVC Fund. The first fund, Brussels Imagination, Innovation and Incubation Fund (BI3) was a VUB-only fund, while QBic I and II are IUVCs, regrouping the majority of Flemish universities and a number of other (research-related) institutions (such as hospitals).

VUB’s purpose with BI3 was to invest in startups related to the VUB in an early stage, when other investors were not interested to take the risk. The aim of QBic I’s was to finance the

invests in companies which use the research of University of Ghent, University of Antwerp, VUB, University of Liège and the research centers VITO and IMEC.

Funding

BI3 raised €6 Million, more than 90% of which came from major banks and insurance companies; the remainder came from the university and a public investment fund.

QBic I raised € 40,7 million and Qbic II € 58,9 million. Here too, a number of banks and insurance companies, as well as public investment vehicles were involved.

Governance

For BI3 The Board of Directors was the central decision-making organism, while VUB TechTransfer was the operational arm of the organization. VUB TechTransfer managed the contacts with the spin-offs (-in preparation), formulated investment proposals and represented BI3 in the Board of Directors of the spin-offs. No separate Investment Committee was installed.

QBIC installed an Investment committee with heavyweights from Venture Capital and industry (especially life sciences and electronics).

In Qbic II the Investment Committee consists of the three General Partners, three independent experts, one representative of the Shareholders Advisory Board and one representative of the Strategic Committee, the committee that controls the link of the projects to universities.

Results

BI3 recently closed down. The Fund invested in 8 spin-offs of the Vrije Universiteit Brussel, one of them being Collibra, the first Belgian unicorn. Thanks mainly to this project the fund generated a positive return. The two other funds are still underway.

Questions

1. What are according to you in your country the most important obstacles and opportunities for setting up VC/UVC/IUVC funds?

2. Assess the opportunity of starting an IUVC Fund between the universities in your country:

3. List universities and research institutions which could be part of the initiative 4. For each university and research institution: list known potential investment

projects over a 5-year period.

5. Discuss the spread of the projects over different economic sectors; assess the type of specialists do you will need on-board in the IUVC

6. List possible funding sources for the VC fund:

7. Public Authorities, Banks, Pension Funds, Insurance Companies, Corporations, Alumni, donations…

8. Identify network contacts

6.5 Funding opportunities for KTT in Vietnam