University of Michigan plans to invest in its own startup companies, Mary Sue Coleman says
(This story has been updated several times with additional information.)
The University of Michigan plans to invest up to $25 million from its endowment in its own startup companies.
The move is a win for the Michigan venture capital industry, which has been lobbying the university to fund entrepreneurial companies for years.
U-M President Mary Sue Coleman answers questions from reporters in a previous public appearance.
Melanie Maxwell | AnnArbor.com
For years, local venture capital firms have been asking the university to fund their efforts. U-M didn't do that — but its decision to invest in its own startups benefits local investors because it adds to the pool of capital available to local entrepreneurs.
"Clearly the venture community has been pushing to get the university more engaged for a long time and this is an important step," said venture capitalist Chris Rizik, who directs the Ann Arbor-based Renaissance Venture Capital Fund. "If done right, it can also be a meaningful step."
In her annual address outlining goals for the university, Coleman described the initiative as a smart fiscal move — not a philanthropic endeavor. She said the university’s endowment studied the financial performance of U-M spinoff companies over the past 30 years.
“Their analysis shows that if we had, in fact, invested in these startups, the returns would have been healthy, the returns would have been competitive with our VC portfolio,” she said. “Simply put, University of Michigan startups are a good financial opportunity.”
U-M's endowment was worth $7.8 billion at the end of the 2010-11 fiscal year. That’s up 18.2 percent from $6.6 billion on June 30, 2010.
“Annual earnings were impressive,” Coleman said. “Our investment team is among the strongest in the country and it shows.”
The startup investment initiative comes after a series of major wins for U-M startup companies in recent years. Several Ann Arbor venture capital firms reaped huge returns from those sales.
In 2008, Ann Arbor-based U-M software startup HealthMedia was sold to Johnson & Johnson in a deal believe to be worth around $200 million. In 2009, Pittsfield Township-based U-M medical device startup HandyLab was sold to Becton, Dickinson and Co. for $275 million.
In 2010, U-M information technology startup Arbor Networks was sold to Tektronix Communications. And in early 2011, Scio Township-based medical device startup Accuri Cytometers was sold to BD for $205 million.
"There have been a number of situations where technology spins out of the university and the external world looking at it really doesn’t understand why the university isn’t being more supportive" with capital, Rizik said. "This sort of answers that question. If university now supplies the technology but is also putting some of its endowment into the deal, it sends a great message to the world."
The investment program, which the university is calling Michigan Investment in New Technology Startups (MINTS), will launch immediately.
"We will make funds available for these investments because we believe in the work of our researchers and we believe in delivering strong returns on our endowment," Coleman said.
U-M Executive Vice President and Chief Financial Officer Timothy Slottow described the initiative as a "passive investment program" — meaning the university will automatically invest up to $500,000 in its startup companies after they've reached the milestone of securing outside VC dollars.
Slottow said the university's endowment managers are not positioned to evaluate individual investments — which is why U-M startups must secure outside investment before U-M's automatic dollars are delivered.
"Although we are extremely smart and one of the (best performing) investment offices in the country, we cannot choose the winners of startup companies at such an early stage of development," he said. "These are smaller and earlier companies than our portfolio typically invests in, which adds diversification in our portfolio."
For startup companies, a funding guarantee often gives private investors more confidence to kick in capital.
Rizik said the university's initiative could make a big difference for young startups that are struggling to get capital to get off the ground.
"If the university is putting a half a million dollars into a $20 million investment round, it’s not really impactful," he said. "But if it is in the early stages, where there is more of a shortage of capital — if it’s putting half a million dollars into a million-and-half round — that can be meaningful and can help fill the gap for companies at that stage. We have a lot of companies at that stage."
Startups created by the university have typically licensed intellectual property from the university, which often gets an equity stake or royalty deals in return. U-M's Technology Transfer Office reaps revenues when U-M startups are sold, but the university's equity stake is typically diluted over time as outside investors step in and take on more risk in the startup's development.
The Tech Transfer Office — which is responsible for commercializing intellectual property created by U-M faculty members — spawned 11 startup companies in 2010-11. That was up from 10 in 2009-10 and eight in 2008-09. The office has created 104 startups over the last 11 years.
With the venture capital investment program revealed today, U-M will help create jobs in Michigan, Coleman said, because most U-M startups are based in the state.
In a roundabout way, it's not the first time U-M has invested funds to boost startup companies. The U-M Ross School of Business has three funds, run by students, that invest in startup companies. One of those operations, the Wolverine Venture Fund, reaped $2 million, a six-fold return, from its investment in HandyLab.
Although MINTS is sure to be immediately applauded by some local investors, others will want more — that is, for the university to invest directly in local venture capital firms. U-M's endowment invests millions in private equity and VC operations in operations on the East Coast, West Coast, Europe and Asia.
"From the venture capital community standpoint, this is a first step," Rizik said. "It’s probably not 100 percent what the community would want, but it’s a good first step."
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
Charles Buck
Fri, Oct 14, 2011 : 1:16 a.m.
Google: "Michigan Tech Ventures" for a look at one Michigan university's foray into venture capitalism that ended up with people going to jail. Universities should be very cautious about placing their endowment principal at risk and who they place in charge of approving which proposals get funding. Their endowments are not tax dollars, but they are public funds, and public funds must be invested responsibly.
hmmm...
Thu, Oct 6, 2011 : 11:12 a.m.
My thoughts on the announcement and posted commented... 1. $25M out of $7.8B - this is a drop in the bucket both in terms of value to start-ups and risk to the university 2. I noticed that there was NO requirement that the company remain in MI 3. Only 10 companies incubated - that's shameful given the $1B+ in federal grant money that Uof M receives and the track record of such institutions as Stanford and MIT that we are supposed to be on par with In short this initiative seems to be too little too late and smells of a PR stunt more than anything else. Given the support that UofM receives State & local they should be putting much more into Michigan companies!
msddjohston
Thu, Oct 6, 2011 : 12:23 a.m.
Hello, I'm mighty pleased that the University of Michigan is fully participating within our community to support and encourage business/jobs/FREE ENTERPRISE. Should you good folks establish a small corporation to run the most recient financial promise to Michigan/ Ann Arbor/ and beyond, may I please be the first private citizen to buy one share or so. THANK YOU! A fellow citizen of this most great country of ours, Dawn D. Johnston msddjohnston@hotmail.com
Skyjockey43
Wed, Oct 5, 2011 : 11:48 p.m.
I'm doing research on bifluvial semimacrazoid flooglemiaphorisms in third world countries. I'll be waiting on my check for 25 mil Mary Sue. Oh and to sweeten the deal I'll even throw in a 750k water fountain and a set of Ginsu knives for free! Love, Skyjockey
Steve
Wed, Oct 5, 2011 : 11:45 p.m.
It's my understanding the funds they are going to use are coming from the University endowment. So no tax dollars involved at all. No outside venture capital funds. A decent use of a small chunk of the U endowment that has the potential to fund financial aid for students, hold tuition hikes in check, etc...
Dug Song
Wed, Oct 5, 2011 : 9:49 p.m.
The reality behind this isn't anywhere as rosy as the puffed-up PR for this. The qualifying venture investment for this must be from Osage Partners, a single VC that Tech Transfer has been historically close to (such that some of their licenses actually have a right of first refusal for Osage on any financing a TT company does) - NOT any separate private source, as implied by the article. It's well-intentioned, but the proof will be if anyone actually does such a deal. You can hope this opens up to other investors, but similar matching funds have been available from the state for years - and are exceedingly onerous to deal with. Public money always is, but imagine bureaucratic bankers and committees in the mix and you'll understand why entrepreneurs with any hustle look elsewhere. That said, a lot of these comments are completely short-sighted. The University's higher goal, given that this is not much money, is to help new companies start here. Tech transfer is simply a tax on commercialization. Local venture investment is indeed a gamble on the future - betting on the talent and drive of folks in our state to change the world. @grye: Other states responsibly, and very profitably, participate in this risky, high-growth asset class through their pension funds as limited partners backing private VCs. Michigan should be doing more of this. @Ron: Promising ventures do get funded elsewhere, but most often get moved out of state, where they benefit those communities that actually understand how to support and grow new companies and industries. @dotdash: Taxes aside, if the University succeeds in accelerating the commercialization of tech companies here, we all win.
Dug Song
Sat, Oct 8, 2011 : 2:14 p.m.
@Nicole: Have you talked with Tech Transfer? Any "qualifying" VC, for some unspecified qualifications...
Nicole Casal Moore
Thu, Oct 6, 2011 : 3:32 p.m.
Hi, all. I wrote the press release. It is NOT just Osage. That's why it doesn't say it's just Osage. It IS any qualifying VC firm.
Kai Petainen
Thu, Oct 6, 2011 : 2:53 a.m.
Dug, thanks for the clarification.
say it plain
Wed, Oct 5, 2011 : 11:42 p.m.
Ah, but @glacialerratic, the 'public mission' of universities has long ago been subordinated to the needs and desires of private enterprise really. Certainly big research universities are career-making machines these days. Some are just more blatant about it than others, and the most successful ones have the most efficient ties to the...I hate to sound all conspiratorial about it but heck even Eisenhower felt it happening lol..."military-industrial complex".
glacialerratic
Wed, Oct 5, 2011 : 10:56 p.m.
Ridiculous. The University's higher goal is education, research and service--not being an investment partner for hi-tech, low-tech or any-tech entrepreneurs. Why is U-M opening up a lending window for such speculation? Sounds like private enterprise is usurping the public mission.
Kafkaland
Wed, Oct 5, 2011 : 10:12 p.m.
Interesting... In the Record it says "Qualifying Venture Capital Firm" - I had no idea that Osage Partners are the only ones qualifying. Is the barrier to qualification set artificially so high that they became in essence the prime vendor for VC services to the university, or is it that no other VC firm would touch this kind of deal because with its stake the university could potentially block acquisition by companies who acquire the start-up only for the IP and move it then out of state? Oh, and does anyone know if the successes they tout in the article were actually funded by Osage partners and thus eligible for the UM investment?
Kafkaland
Wed, Oct 5, 2011 : 8:57 p.m.
To everyone who complains about the tax treatment of these investments: First, these start-up companies pay taxes, like any other company, UM involvement or not. So the only issue in question are taxes on teh capital gains if and when UM sells its stake. If you had make an investment in such a company (assuming you qualify as a "sophisticated investor", that is have a net wrth of more than $2.5M; if you have less you're not allowed to play this game), and made a profit on selling your share, you'd pay 15% capital gains taxes - not your regular income taxes. If a hedge fund or venture capital fund did the same, the fund managers who made the deal also pay only 15% on their compensation, even though none of their own money is at stake. They don't have to pay regular income tax, because their compensation is considered "carried interest", not income for work. In case of the university any profit they make on such an investment goes back into activities that are considered for the common good, like financial aid for students, or building more research infrastructure. As long as it is used only for those purposes, it's capital-gains tax free. Is the loss of 15% capital gains taxes on any profits outweighed by (a) all the profit going towards education and research, and (b) the additional tax revenue that is generated by the start-up company paying taxes, employing workers who pay taxes, etc.? I would think so, but annarbor.com readers may of course disagree.
mojo
Wed, Oct 5, 2011 : 8:43 p.m.
The tax issue is a real problem. Corporations would pay huge taxes on those earnings, the U pays basically nothing. Profs and admin live the in the lap of luxury - yet it is "non-profit". Something is not right with that. The U should pay taxes on non-classroom income activities including sports contracts. More and more resources are being absorbed by schools and less and less are flowing to private firms.
Ron Granger
Wed, Oct 5, 2011 : 6:07 p.m.
In other words, Mary Sue Coleman is gambling your state tax dollars on startup companies. What's next, credit default swaps? You can make a lot of money in those! Profit is ample justification, right? The University is already invested via licensing the technology. More exposure is not appropriate or necessary. Promising ventures will get funded, and do not need the University double dipping.
Steve
Fri, Oct 7, 2011 : 10:04 a.m.
Only 10% of University funding comes from tax dollars. Perhaps a 10% equity stake held by the state would be a fair payback.
Kafkaland
Wed, Oct 5, 2011 : 10:21 p.m.
No. The university invests a small fraction of its endowment in start-up companies. No tax or tuition dollars in the endowment - it's funded from gifts to provide a permanent source of income to the university, just in case the state abdicates its responsibility towards the university. Like... now?
mojo
Wed, Oct 5, 2011 : 8:59 p.m.
Perhaps the entire State could just become an entity of the U - that way we could all skip out on taxes.
Kai Petainen
Wed, Oct 5, 2011 : 3:31 p.m.
wow. cool!
treetowncartel
Wed, Oct 5, 2011 : 3:18 p.m.
Academic Institution or a business that should be taxed, you decide. Here is something that might assist you in the analysis, the block M is licensed just the Golden Arch M.
dotdash
Wed, Oct 5, 2011 : 3:10 p.m.
If the university profits from technology it incubates (especially in the old Pfizer buildings), shouldn't it pay property taxes, at least on that parcel?
djacks24
Wed, Oct 5, 2011 : 8:16 p.m.
"The University 'pays' society through the externalities of an educated population and its research." Umm, We pay for an educated population through tuition and taxes. It's research is funded by grants. So its not that the university pays us, it owes us for our investment.
Fordie
Wed, Oct 5, 2011 : 3:55 p.m.
You're confusing the University's non-profit status with non-revenue. The University 'pays' society through the externalities of an educated population and its research. If you look at where the University generates income and charge property taxes for those parcels, Wolverine Tower, Pfizer, the Big House, any building with a classroom and any dorm would all qualify too. I think this is a smart move for the University. I would be curious to know if any other majore research universities have similar programs.
say it plain
Wed, Oct 5, 2011 : 2:52 p.m.
How nice of them lol. They ran the numbers, saw the meh ROIs they've gotten on a lot of stuff, and figured hmm, this makes us look 'good' plus can help our bottom-line, no-brainer! Because the bottom-line, after all, is the bottom line...public institution of higher learning, corporate headquarters, whichever...
grye
Wed, Oct 5, 2011 : 2:51 p.m.
I would like to see the state legislature require the University to create a for-profit company to distribute the funds. The company would then be taxed based upon its earnings. The intent is to use the money to make money. The University would be operating as any business and should be treated as one, paying taxes, etc.
leaguebus
Wed, Oct 5, 2011 : 9:18 p.m.
Taxes or creating jobs in Michigan. Seems like a no brainer for me. New jobs create tax payers, these tax payers pay higher taxes thanks to the Rickster. Snyder cuts taxes for business, they use that money to invest in China, not to create jobs here. Leave the U alone, we are lucky have them, plus they create jobs here, not in China.
leaguebus
Wed, Oct 5, 2011 : 9:09 p.m.
How many jobs were created by these startups? Isn't that enough? The UM is a "public" entity, same as the State of Michigan. it is not a business and if it were running like one, it would be using the newq state tax cuts and building in China and off-shoring jobs.
xmo
Wed, Oct 5, 2011 : 2:32 p.m.
"Putting our money where your mouth is" UofM has so many patents that it is about time they cash in on them. Maybe some of our Union Friends will try this also since they have industry expertise and laid-off workers. It's a great way to get the economy going and reduce unemployment.