Seeking to boost the state’s innovation economy — and profit from it — the University of California plans to finance spinoff companies with the largest fund of its kind in the nation.
The system’s Board of Regents approved the $250 million fund Wednesday, and the program is set to start operating next year.
Managers of the UC Ventures fund will scrutinize discoveries emerging from the system’s 10 campuses, assisted by an advisory board of outside experts. The fund will provide capital to commercialize the most promising findings.
At the end of fiscal year 2013, the UC system had launched 755 startups — including 195 that still had products on the market. The regents didn’t set any quotas for new spinoffs Wednesday, and they emphasized the importance of having each campus develop strong ties with their local communities to find the best business opportunities.
Industry observers described the concept as daring and potentially rewarding, but also requiring intense discipline and focus to yield positive results.
The allure of a UC fund is that it can tap the university system’s prowess as a technological cornucopia that has transformed economies at the national and international levels.
And with UC San Diego rising as a source of new companies, especially in biotechnology, experts said the San Diego region can expect to see more job creation through the new setup.
Innovations wholly or partly derived from UC research include:
•Recombinant DNA technology (developed with Stanford University) that spawned the biotechnology industry.
•A method of removing salts from various soils in the Central Valley, allowing that area to become the breadbasket of the United States.
•Open-source software, such as UC Berkeley’s version of the UNIX operating system.
In more recent years, innovation at UC San Diego has contributed to the formation of startups, especially in biotechnology. The spinoffs include Aragon Pharmaceuticals, sold in 2013 to Johnson & Johnson for up to $1 billion. This year, a successor company, Seragon Pharmaceuticals, was sold to Genentech — itself a result of UC research, for up to $1.72 billion.
Other higher-education institutions in the U.S., such as Harvard and New York universities, have dedicated funds to nurture spinoffs.
But nothing compares to the scale of the UC fund, said investment watcher Jacob Johnson. He is the founder of Innovosource in Minnetonka, Minn., a company that tracks college-related venture funding.
“I’ve been following these funds for about a decade now, and nothing else comes to mind in terms of being in the ballpark,” Johnson said. “My take is it’s a pretty strong signal from the University of California system that they’re pretty dedicated to university startups, tech transfer and commercialization as a whole.”
A similar, smaller effort was launched by Massachusetts General Hospital and Brigham and Women’s Hospital, said William Rosenberg, executive director of the University of Massachusetts’ Office of Technology Commercialization & Ventures. That program, called the Partners Innovation Fund, was established in 2007 with $35 million.
Mike Krenn, president of the San Diego Venture Group, said he’d like to see local venture partners and technology professionals help the UC fund to make sure San Diego investment opportunities get proper attention.
“I think it’s fantastic that they’re doing this,” Krenn said. “Other universities have done so, so there’s a model out there.”
He and others said the new fund’s managers must maintain concentration on their prime goal — identifying and cultivating a greater number of viable startup companies.
“With any university or government system, there’s always some politics involved,” Krenn said. “To the extent that they can minimize those issues and be efficient and keep their eye on the ball, I think they’ll do well.”
As a cautionary tale, UC Ventures has only to look at the troubled performance of the $300 billion California Public Employees’ Retirement System. On Monday, the pension fund said it was getting out of investments in hedge funds because of poor returns.
CalPERS has also tried its hand at biotech investing. In 2000, the pension fund decided to invest $500 million in biotechnology.
Three years later, CalPERS changed its strategy and started cashing out investments in biotech-specific hedge funds. It decided to broaden its investments to health care in general, because of the risks associated with the long time needed to get biotech drugs from research stage to clinical approval.
In July, Bloomberg News reported that CalPERS had decided to sell its$500 million investment in the private equity firm Health Evolution Partners. The investment is barely keeping pace with costs, Bloomberg said.
CalPERS also invested $200 million in a “fund of funds” run by Health Evolution Partners founder David Brailer. That fund is producing a negative 5.8 percent rate of return, Bloomberg said.
Biotech’s high-risk nature discourages private investment firms, said Johnson of Innovosource.
“A lot of the reasons for these sorts of (spinoff) funds, especially those university-generated, are because capital just doesn’t exist for the more development-rigorous technologies,” Johnson said.
“Biotech is a great example of that. Energy companies, anything in materials, nanotechnology, anything that has a five- to 10-year development is going to be really risky. So having a fund in place should allow them to ‘de-risk’ some of these startup companies.”