How University of Michigan executives resolved their clash over startup investments
(See previous story: University of Michigan plans to invest in its own startup companies, Mary Sue Coleman says)
The University of Michigan’s decision to invest up to $25 million in its own startup companies offers a telling glimpse at how the university is balancing its investment pursuits with a stated desire to boost the economy.
The move also revealed a private debate in which U-M executives clashed over whether the university’s own spinoff companies were worthy of cash.
University of Michigan President Mary Sue Coleman, shown her speaking at an event in February, led the push to get the endowment to invest in U-M startups.
File photo | AnnArbor.com
University of Michigan Executive Vice President and Chief Financial Officer Timothy Slottow was skeptical that U-M startups offered a good investment opportunity for the university's endowment.
It’s an admission that the university has missed out on past investment opportunities that would have helped its own startup companies expand — and earned the university’s endowment big financial returns.
Venture capital provides crucial funds for early-stage technology companies to hire employees, invest in new products, conduct research and expand sales.
In a speech and interview Wednesday, Coleman acknowledged that the prospect of investing in U-M startups initially divided her executive team.
U-M Executive Vice President and Chief Financial Officer Timothy Slottow questioned whether investing in U-M startups would reap financial returns comparable to the endowment’s other venture capital investments.
“I was very enthusiastic. He was quite skeptical,” Coleman told AnnArbor.com with a laugh. “But we did the analysis and the data gave us the confidence that we could go ahead.”
The analysis examined the performance of the university’s startups over the past 30 years — including the 104 spinoff companies launched by the U-M Technology Transfer Office over the last decade. U-M analyzed how the university’s endowment would have performed if it had invested in those startups at an early stage.
Those startups included blockbuster companies like IntraLase, HandyLab, Arbor Networks, HealthMedia and Accuri Cytometers. Collectively, those companies were sold over the last five years for more than $1.5 billion and created hundreds of jobs in the Ann Arbor area.
Local venture capitalists — including now-Gov. Rick Snyder’s venture capital firms, Ann Arbor-based EDF Ventures and Ann Arbor-based Arboretum Ventures — reaped millions from several of those deals.
Even the student-run Wolverine Venture Fund, which is part of the Ross School of Business, got $1 million from a $250,000 investment in IntraLase and $2 million from a $350,000 investment in HandyLab.
In other words, the student venture capitalists made money off of the university’s startups while the university’s endowment stayed idle.
But changing endowment investment strategies is a long process -- because the endowment has a fiduciary duty to achieve the highest return possible for the university.
Coleman said she doesn’t regret having missed out on previous investment opportunities.
“We just weren’t ready. But now we are, and I think we’ve matured as an organization,” she said in an interview. “I hope we have lots and lots of opportunity. That’s what I want.”
For his part, Slottow acknowledged that the university’s financial analysis showed that startups created by faculty members offered a solid investment opportunity for the endowment.
“It turns out she was right again,” he said of Coleman.
For the Ann Arbor venture capital community — which is effectively the headquarters of the Michigan VC industry — U-M’s investment decision reflects a refreshing shift in direction.
For years, investors have been lobbying the university to invest a portion of its endowment directly in local venture capital. The endowment already invests in larger, established VC funds in places like New York, California, Europe and Asia.
Even Snyder himself has long wanted the university to invest in Michigan venture capital — although Coleman said she had not discussed this particular initiative with the governor.
Local investors applauded U-M’s decision to invest in startups through the Michigan Investment in New Technology Startups (MINTS) program.
Chris Rizik, manager of the Ann Arbor-based Renaissance Venture Capital Fund, said U-M’s investments could make a big difference for young startups that are struggling to secure capital to get off the ground.
“We have a lot of companies at that stage,” he said.
Tim Petersen, managing director of Arboretum Ventures, which has reaped millions from its investments in the university’s startup companies, welcomed U-M to the investment community.
“We’ve been fortunate that our returns have been driven not exclusively but in large part by some great U-M spinouts,” he said. “I think they’re just catching on.”
Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.
Comments
A2Susie
Thu, Oct 6, 2011 : 4:45 p.m.
The very best research does not always yield a result that makes a profit. Sometimes the best research shows that something is NOT true. Then the next project, based on the previous work, may yield a result that can turn a profit down the line. But to demand that any institution invest in its own research in order to yield a profit does not make sense.Some research is very risky and only sometimes yields a high reward; the university cannot reject best practices in choosing its investments just to prove a point to some know-nothing who thinks he/she knows anything about institutional investment.
Cash
Thu, Oct 6, 2011 : 4:28 p.m.
If only Mary Sue and her associates were as available for interviewing when AnnArbor.com was supposedly trying to get information about the ex campus police chief "sick leave" and subsequent departure. It seems they are only interviewed when it's a PR opportunity.
Lady Audrey
Thu, Oct 6, 2011 : 4:34 p.m.
Why does this surprise you or anyone for that matter?
hut hut
Thu, Oct 6, 2011 : 3:47 p.m.
The UM is not a business. It is a taxpayer subsidized educational institution. It should serve the interest of it's customers and those who fund it, not the interests of profit driven private businesses who are bound by weak and poorly enforced laws, rules and regulations.
Mike S
Thu, Oct 6, 2011 : 6:43 p.m.
The state subsidy has declined from ~ 60%, in the late 80s, to ~ 25%, and further cuts are likely. (There's a graph here: <a href="http://www.annarbor.com/business-review/state-universities-rely-more-on-tuition-dollars-than-ever-before/?cmpid=RSS_link_business_review">http://www.annarbor.com/business-review/state-universities-rely-more-on-tuition-dollars-than-ever-before/?cmpid=RSS_link_business_review</a> ) Besides, the point of the story is that the University can fund itself by investing in startups instead of ignoring them and missing the opportunity. If people want an ideal, non-profit University, then fund it.
Stephen Landes
Thu, Oct 6, 2011 : 3:20 p.m.
While caution is always advisable it seems to me that if you believe in what you are doing (all the education and research which is the purpose of the University) then you invest in yourself. Investing in start ups created by the University education/research process should be a normal business practice. In other words, if the product of your existence isn't worth investing in then why do you exist?
hut hut
Thu, Oct 6, 2011 : 2:39 p.m.
If the UM stands to profit, then they should pay taxes. There is no guarantee that jobs will be created in Michigan. The jobs and the profits follow the path of least resistance. And the laws and tax structure in the US favors companies that take their business, their jobs, and their profits elsewhere. You want to keep jobs in the US? You want corporations and the UM to pay their fair share? Change the laws and the tax structure to make it illegal to take jobs, profits and businesses out of the USA. Capitalism is like a big poker game. If you want to play, if you want a chance to win the pot, you have to ANTE UP to get in the big game. So, Capitalists, ante up! Pay to play! Pay to win!
Cash
Thu, Oct 6, 2011 : 2:57 p.m.
Excellent!
Kai Petainen
Thu, Oct 6, 2011 : 2:32 p.m.
this is exciting/cool stuff. note -- for those worried about risk/return ... $25 million is a small fraction of the entire endowment.
Lady Audrey
Thu, Oct 6, 2011 : 1:49 p.m.
Everything is not about the nurses strike. I heard a story on Michigan Radio about work done in the Health System has saved over $500M in health care costs because they've improved how trauma patients are being treated at the scene of an accident. People like the nurses who have subsidized health insurance shouldn't complain about a little increase. There are millions of americans (and probably nurses working in private practices who can't afford excellent health insurance coverage) who would love to have your benefits.
hut hut
Thu, Oct 6, 2011 : 2:32 p.m.
Instead of complaining about the health care benefits that some people have and want to make them pay more, (profit for insurance companies) wouldn't it be better if you and everyone else got the same benefits? You should be asking employers and insurance companies why everyone in the wealthiest nation on earth doesn't have access to affordable health care.
xmo
Thu, Oct 6, 2011 : 12:59 p.m.
Its about time that UofM gets smart with its money and invests some of it in companies that will return a high yield and CREATE JOBS in Michigan!
glacialerratic
Thu, Oct 6, 2011 : 6:38 p.m.
Osage Partners, which has a contract with the University, is a private capital operation that seeks to extract return on speculative investments as quickly and efficiently as possible, since they are market-responsive. If this means relocating a firm to another state where managerial, legal, and technical resources are more abundant, so be it. Increasingly, however, the goal of these kinds of venture capital adventures is simply to develop a new piece of intellectual property which itself has value in the marketplace, often without regard to whether a single physical product ever comes out the bay doors of a manufacturing facility. It's a mistake to think that this initiative will create large labor-intensive firms that can have an impact on jobs or the local economy.
Oregon39_Michigan7
Thu, Oct 6, 2011 : 12:44 p.m.
Now we know why the University is asking the hospital nurses to take a pay freeze and pay more for their health insurance! $25 million dollars doesn't just grow on trees! I find it almost hysterical that part of the UM foundation is to create "affordable health care" across the world. Why not focus on affordable health care right here in Ann Arbor for ALL university employees? What is the success rate for these start-up companies? How will the funds be used: an actual business purpose or the more common "business purpose" (new MacBook Pro at home, new SUV, and a Coffee Expense Account).
trespass
Thu, Oct 6, 2011 : 12:08 p.m.
This situation is full of opportunities for conflicts of interest. University faculty who begin start up companies already have to promise not to mix the interests of their companies with their duties as a faculty researcher (e.g. giving inventions that properly belong to the public university to their private companies). That is a very difficult thing to monitor. Now imagine if the University is now a partner in the private business. Investment in the local economy is not a bad thing but it should be done at arms length, such as investing in a local venture capital firm, where the UM administration is hands off in investment decisions. However, direct investment, like what the UM is now proposing is not proper and should at least get the scrutiny of the Attorney General's Office.