Fledgling companies at the 20 or so incubators clustered around UC Berkeley, UCSF, and other University of California campuses are well-placed to benefit from the new $250 million venture fund the university system plans to set up next year. But leaders at the incubators say they also plan to be on the giving side, helping UC Ventures make the best return on its investments in innovative startups with ties to the university.
“We’ll be giving them inside advice on who we think is hot,” says Regis Kelly, director of San Francisco-based QB3, which runs two incubators at UCSF’s Mission Bay campus and one near UC Berkeley. Kelly, an Xconomist, is well-placed to closely observe startups in those programs. “We get to see what they’re like—how hard they’re working.”
Kelly (pictured above) is used to evaluating young companies as potential investments—he’s also a pro bono general partner of the small, privately funded venture firm Mission Bay Capital, whose goals include helping to support QB3 financially if it reaps a profit. Kelly is surrounded by seed-stage investment prospects at Mission Bay, not only at the QB3 incubators but also at similar biotech hatcheries operated by pharmaceutical companies, such as Johnson & Johnson division Janssen Labs, which are eager to be part of the biotech cluster around the UCSF campus. Mission Bay Capital leans toward UC-affiliated startups, but it’s free to back any promising company.
Incubator leaders like Kelly have been quietly meeting in recent months with UC President Janet Napolitano and Jagdeep Singh Bachher, chief investment officer for the UC system, as Napolitano developed plans for UC Ventures. The new venture fund, which was approved in concept by the UC Regents Sept. 18, will draw its initial funding from the $52.1 billion UC pension fund and the university’s $8.2 billion general endowment.
In June, Napolitano lifted a roadblock for the new fund by rescinding a decades-old UC policy that prohibited the university from investing directly in companies founded to commercialize UC research. UC Ventures will be expected to maximize its financial returns, but its secondary goal is to stimulate research, technology development, and entrepreneurship at UC campuses. The fund will invest in companies founded by UC students, professors, and alumni coming from all fields, from biotech and agriculture to energy and information technology.
Jeff Burton, executive director of the incubator SkyDeck Berkeley just outside the UC Berkeley campus, says UC will now be able to share in the financial upside of the startups UC Berkeley supports at Skydeck.
“It is inevitable, there’s going to be a company come through here that’s going to be a huge winner. It behooves the university to have some stake in that company, even if it’s a small stake,” Burton says.
Skydeck, which started moving startups into its penthouse digs in a downtown Berkeley office tower in January 2012, celebrated an early success in the spring of 2013. One of its resident companies, Ensighta Security, was acquired by fast-growing Milpitas, CA-based cybersecurity firm FireEye, which went public in September of 2013. Ensighta was founded by UC Berkeley computer science professor Dawn Song, and the university had an ownership stake in Ensighta’s intellectual property. Until now, IP rights were the main route by which UC could benefit financially from discoveries on its campuses.
Those 10 campuses, along with five medical centers, and three affiliated national laboratories, have been cranking out inventions and sprouting startups—71 in 2013 alone, according to the UC president’s office. Among the recently successful ones were Aragon, which was acquired by Johnson & Johnson in 2013; Kite Pharma, which completed an IPO in June; and Seragon, which was acquired by Genentech in July.
That rich output is a lure for angel investors and venture capital firms, as well as the University of California’s portfolio investors. But rich venture returns can be hard to realize, even for experienced venture investors, Kelly says. He points to a biting 2012 report by the Kauffman Foundation, which analyzed the outcomes of its investments in nearly 100 venture funds over a 20-year period. The foundation concluded that VC returns hadn’t significantly outperformed the public market since the late 1990s.
“It’s really hard to do this right, and a lot of venture firms have lost money,” Kelly says. University venture funds face special challenges, he says. For example, they can come under political pressure to provide financial backing for companies founded by professors the school wants to retain, Kelly says. “One of the troubles is if you don’t have a firewall,” he says.
Kelly himself, as a general partner at Mission Bay Capital, has faced the discomfort ofturning down some of his own colleagues’ companies for funding.
Napolitano and Bachher, UC’s chief investment officer, have been visiting with venture investors, incubator chiefs, and other experts to learn about best practices in the field, including conflict of interest policies. UC Ventures will be run by an independent team of investment professionals; their names have yet to be announced. Third parties such as institutional investors will be allowed to put capital into the fund, but UC will retain a supermajority interest. Ultimately, the fund will be under the supervision of Bachher’s office.
Skydeck’s Burton, who has been meeting with Bachher, says he’s looking forward to gauging the interests of the team hired to make investment decisions for UC Ventures. He wants to start grooming some of his startups to pitch to them. Skydeck provides office space and advisory services to its startups. But unlike many incubators, Skydeck doesn’t supply seed funding or take an equity stake in its companies. Instead, it actively cultivates angel investors and venture firms that might invest in the young companies. The typical seed funding round is in the range of $750,000 to $2 million.
Burton is eager to share his global investor contacts with UC Ventures. For example, UC Berkeley alumni might like to contribute to the fund, especially if it sets aside some of the money for UC Berkeley startups, he says. “I hope they’ll consider allocating certain amounts from that $250 million to different entities, to the different campuses,” Burton says.
Investors from other nations, intrigued by the technological output of UC, might also contribute millions to the fund, he says. “It could come from a venture fund in London,” Burton says.
Kelly says he and Mission Bay Capital co-manager Douglas Crawford introduced Napolitano to one of the most prominent members of their small venture fund’s investment advisory committee: Brook Byers, a senior partner at the Silicon Valley venture firm Kleiner, Perkins, Caufield & Byers. Byers has continued to advise Napolitano, he says.
Those advisory relationships have worked well for Mission Bay Capital and its portfolio companies, Kelly says. He and Crawford choose eight startups a year to pitch for funding, which gives the founders face time with Byers and the rest of Mission Bay Capital’s VC-studded advisory committee. The VCs sometimes consider investing along with Mission Bay Capital. More often, the venture firms invite Mission Bay Capital to make a small investment in other companies the VCs have decided to back, Kelly says. Mission Bay Capital has committed about $11 million from its first fund to 15 companies, and is preparing to raise a second fund of about $25 million. Its first investment was made in 2010, and Kelly says it’s too early to gauge the fund’s return on investment.
Mission Bay Capital, which typically invests from half to three-quarters of a million dollars in a startup, may become a feeder fund to UC Ventures, Kelly speculates. He reckons that the $250 million fund will make larger investments, and in later stage companies, than does Mission Bay Capital.
“We’ll be in the seed funding space and they’ll be beyond us,” Kelly says.
Whatever strategy UC Ventures chooses, Burton says, its backing is likely to catalyze more investment in startups that have their origins in the University of California.
“The investor community has a herd instinct. If somebody invests, other people will invest too. It’s a leading indicator that the company is worth putting money into.”