Blackboard pioneers

As recently as the late 1970s, academia looked to the corporate world for grants, not investments. Scientists at the most prestigious universities would scoff at commercialization projects, assuming that the pursuit of profits would compromise the quality of inquiry. And in all fairness, business wasn’t lining up to tempt academics away from their noble aims. The gap between far-flung theories and the marketplace seemed far too large to bridge at that point.
The bridge between academia and industry first began construction in the US with the passing of few pieces of legislation—a series of amendments to the Bayh-Dole patent protection act, coupled the Stevenson Wydler Act. The cumulative result of these bills was that universities and laboratories were allowed to reap commercial profits from federally funded projects for the first time. During the same period, government support for research costs dwindled, with a Wall Street Journal article from 1992 noting that the government was subsidizing 58.7 percent of university research costs at the time, down from 66 percent in 1976.
These trends endowed universities with both the motivation and a growing necessity to pursue commercialization projects. And so began the founding of the first wave of technology transfer offices dedicated to finding ways to monetize the intellectual property at the university.
These nascent efforts were trial and error affairs, but over time, they gained traction and eventually moved from licensing and patent agreements to start-ups build around the discoveries within their labs. The success of these startup companies inspired more aggressive financing initiatives that eventually morphed into venture capital funds, founded with the university as anchor investor.
These unique venture capital firms confronted a number of challenges unique to institutions that straddle the academic and business worlds. The origins and structures of these firms may vary, but every successful one developed a firm grasp of both the nature of academia and the demands of the market.

Small budget
ARCH Ventures was one of the earliest to accomplish this balance. It grew out of the research programs at the University of Chicago and Argonne National Laboratory, a lab managed by the university since its first incarnation as part of the Manhattan project during WW II. The cumulative value research grants supporting these programs was roughly a half billion dollars in the mid-80s, and as fortune would have it, the responsibility for supervising both the laboratory and university fell to one man, a man that realized the opportunity offered by the recently passed legislation.
Dr. Walter Massey was that man, and as a nuclear physicist, his credentials among scientists were well established.
Yet he also proved a savvy political operative, creating consensus among faculty, lab staff trustees, laboratory governors and the president of the university. The real coup was winning over the dean of the business school, who allowed that the resulting organization, the Argonne National Laboratory/The University of Chicago Development Corporation (ARCH) to be domiciled in the business school.
By this time there were plenty of tech transfer offices devoted to patents and licensing, but ARCH was groundbreaking for its priority of building companies around the discoveries of the university labs. Keith Crandall, a cofounder of ARCH Ventures, was only a grad student at this time but jumped at the chance to join the effort, despite the humble compensation available at the start.
“We had an operating budget of $360,000, which included everyone’s salaries,” Keith recalls. Lack of resources or experience didn’t stop ARCH from accelerating quickly, as grad students hounded professional venture capitalists for tips, and cobbled together support from a menagerie of financial LPs including seed investors, State Farm, and
of course, the University of Chicago endowment.
It took ARCH launching just 12 businesses before they realized the value of professional management teams for the start-ups. The group went after the talent by pricing them at market value, not at the level commensurate with scientists’ views of what constituted a fair wage. Academia viewed executives almost as a bureaucratic necessity, but ARCH devoted 25 percent of their profits to compensation packages, which drew top flight executives to steer the start-up ships.
By 1992, ARCH spun out as ARCH Venture Partners, an independent venture capital firm, with an enviable track record in hand. Today, the firm manages six funds totaling over $1 billion in capital, with the latest fund closing at $350 million without the University of Chicago as an LP.

Buzz beyond Baylor
BCMT was a contemporary of ARCH, with its inception in 1983 to commercialize discoveries of the labs at the Baylor College of Medicine in Houston. It was empowered to move past the usual patent and licensing arrangements to launch start-ups around the college’s technologies as well. From 1987 until 2000, BCMT launched 38 different start-ups with a track record stellar enough to warrant the university reverting licensing duties to a dedicated tech transfer office, and granting them $20 million for investments in addition to its operating budget.
Maintaining its strong performance led to the formation of BCMT’s first limited partnership agreement in 2003, with the Baylor College of Medicine as an anchor investor, and its operating budget playing the role of the management fee. The portfolio consisted of the current slate of start-ups, and Baylor offered some additional funds for follow-on financing. In the same year, BCMT also appointed a new president, Alfred “Buzz” Brown, with a mandate to expand investment activity beyond Baylor, and his first step was the creation of the debut limited partnership, and his second was the creation of a second fund, independent of Baylor with outside investors.
Of that current fundraising drive, Baylor remains anchor investor with a $20 million commitment, but LPs have been responsive to their case that comes with enviable track record decades in the making. That’s not to say BCMT’s origins don’t come with baggage. “We have to make it clear that our sole purpose is a return on investment, and this isn’t a novel grant program for the Baylor College of Medicine,” explains Brown.
Many tech transfer programs have a broader agenda that includes the utilization of technologies by taxpayers as benefit from federally funded labs. Says Brown: “We have to make it clear that the current fund has left that agenda behind.”
ARCH and BCMT were rare instances of the successful transition from these early tech transfer efforts to VC activities. The first wave of such experiments didn’t always lead to expanded mandates, or external investment. The experience at John Hopkins University offers a stark enough cautionary tale for many tech transfer officers to think twice before dressing up like VCs.

Hopkins’ false start
In 1988, John Hopkins University created a separate corporation called Dome Inc., along with a development arm called Triad Investors Corp., with the explicit goal of creating businesses around technologies developed in the university labs. A $20 million fundraising target was set, and expected to be met by a combination of the university and external investors.
Unfortunately, a mere $5 million was raised, with $3 million from the university. The sluggish fundraising was attributed to LPs nervous about rookie management running an untested venture model, according to the new book, Mind Into Matter: ARCH Transforms Science Into Sustainable Enterprise. Furthermore, the firm’s spendthrift ways resulted in impressive offices, and $2 million of debt. The university responded by trimming ambitions and structuring Triad Investors into a more classic tech transfer office with licensing eventually generating a profit. However, the risks of such forays were made quiet evident with the high-profile implosion.
The other factor that slowed the adoption of VC techniques was Johns Hopkins’ cultural aversion to commercializing research. Many within the university labs shied away from the trend, concerned that market demands would dictate research direction, diluting the intellectual rigor of their work. If the university labs became another variety of corporate R&D, who would be left to pursue advances in knowledge with no easily discerned commercial application? Yale University’s first tech transfer effort was in 1982, and aptly named the Office of Cooperative Research (OCR). It was designed to foster better “interaction” with the private sector, a deliberately vague mandate that would respect the primacy of research over returns. The duties of the OCR included oversight for patenting and licensing activities, university inventions, and contractual relationships between faculty and industry.
Yale’s path to establishing an affiliated venture capital firm differed from that of the University of Chicago or the Baylor College of Medicine in that the drive came from the university’s endowment, not the tech transfer office. David Swensen and Dean Takahashi at Yale’s endowment office began exploring ways to upgrade the tech transfer office, bringing aboard Gregory E. Gardiner, Ph.D. to apply a more modern, and therefore, more aggressive approach.
Since the early 1990s, the Yale endowment office was examining the possibility of a venture capital avenue for commercialization. The dialogue resulted in an anchor investment in Elm Street Ventures, a venture capital firm founded locally in New Haven, Connecticut, to address the lack of local VC in the area. Rob Bettigole, a managing partner at the firm, explained that the endowment was looking for an “independent, local” presence. Many of the firm’s founders have a long history with the university, with Greg Gardiner now serving as a partner at Elm. Yale’s commitment to the Elm Street was made in 2004, and the final close of the debut vehicle was November 2006. “Yale’s investment gave us credibility,” explains Bettigole, “But we had to convince them the university was not our sole pipeline, that we were looking at opportunities within the region as a whole. We’re not distributing grants, but making investments. The partners’ history with the university demonstrates our ability to work with this community. That means more than access to deals, but a constructive dialogue to discover the commercial viability of a given technology.”
Elm Street’s creation provides one model of keeping close ties to a university, while staying at arms’ length from the aims of an academic lab.

Imperial efforts
In the UK, the development of university-based venture capital firms in some ways mirrors the one in the US, with some distinct differences. It was in the mid-, not early-1980s that Margaret Thatcher signed legislation that loosened
restrictions on researchers from owning the intellectual property of their work and profiting from that IP.
That was the first step in fostering commercialization at universities, and then in 1997, with the advent of Tony Blair assuming reins as prime minister, the government made monetizing the intellectual property at the country’s prestigious universities a priority through the creation of the Higher Education Innovation Fund (HEIF).
The HEIF would make modest grants on projects that encourage partnerships between higher education and the business community, but more than the financial support was the resulting culture shift, with the fund’s formation shedding light on the potential of commercialization initiatives. Universities began exploring their options if they hadn’t already, and those with embryonic programs began accelerating them. The program linked to Imperial College London has been unusually far sighted in that acceleration.
Imperial Innovations began as a wholly owned tech transfer office in 1987, with the standard mandate of patent and licensing agreements. In 1997, they moved to offer assistance as a business incubator for the university’s intellectual property. The firm would help draw up business plans, addressing fundamentals such as budgeting and management and offering space for the enterprise to begin working out of, all of which fostered the transition from seed funding to stand alone entity.
Over time, Imperial Innovations began to stretch into the next phase of the commercialization process, operating as an investment arm in much the same fashion as the typical VC firm. Imperial’s CEO Susan Searle explains, “We found that we were adding value in the first 18 months, but missing the returns on our investment by not maintaining a stake after that.”
While still partnering with other funds these days, Imperial Innovations typically keeps a 20 to 30 percent stake in enterprises spun out of the university.
As part of her efforts to transition Imperial into a fully fledged venture capital firm, Searle recruited staff from the VC world, including a senior investment manager from 3i. The advisory board includes executives from a wide range of industries, though its core competencies remain health care, and opportunities in the energy and environmental sectors.
Imperial was wholly owned by the university until 2005, when they formed their first partnership. Then in July 2006, they went public on the AIM of the London Stock Exchange, raising £26million for future investments, both in Imperial College and other sources. The university still owns 59 percent of the company, with two seats of the seven person board. The tech pipeline from Imperial College London remains a key advantage but the new structure is devoted to expanding the deal sources by applying their experience earned within the university.
The balancing act these firms all face is the fact that academics and the VC community have very different aims, if similar concerns. Academia would naturally enjoy the windfall of a new technology taking off in the market, and venture capitalists are no doubt concerned that the science behind a product is solid. But concerns aren’t the same as priorities, and establishing clear boundaries between the venture capitalist and the university lab respects the identities of both. Among those who first recognized the potential of a partnership between business and universities, the successes weren’t striving for a Frankenstein blend of both, but a process that allows both to do what they do best.