Stanford University Is Going To Invest In Student Startups Like A VC Firm

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Stanford University is going to start directly investing in students’ companies. Stanford is also giving a $3.6 million grant to StartX, a non-profit startup accelerator for Stanford-affiliated entrepreneurs.

StartX founder and CEO Cameron Teitelman tells me Stanford will only invest in StartX companies and alumni companies.

University spokesperson Lisa Lapin tells me Stanford’s investment fund will have an uncapped size. Vice President for Business Affairs Randy Livingston and his office will oversee the school’s investments, and Stanford will not take a lead role in funding rounds.

Stanford Hospital and Clinics will be investing in companies alongside Stanford in the Stanford-StartX Fund; it is the first time the University or the Hospital will have a dedicated fund to invest in Stanford startups.

StartX, which was founded in the summer of 2009 as a student initiative, has three classes of companies per year, and takes no equity from the companies. The accelerator is financially and legally independent from the University. It will receive a $1.2 million grant annually over the next three years from Stanford. StartX companies must have at least one founder with a Stanford affiliation. The majority of StartX companies have a founder who is currently or was previously an undergraduate or graduate student at the school.

Before this, the four year-old program had received $1.65 million in funding from Kauffman Foundation, Microsoft, Blackstone Foundation, Cisco, Intuit, Greylock Ventures, and AOL, so $1.2 million annually is a substantial increase. StartX’s Alexa Lee said the money will go toward adding more full-time staff to support StartX companies and may go toward expanding the program to accommodate more companies.

Teitelman says the program is opt-in for StartX portfolio companies, and that the fund will only invest in companies that have raised over $500,000 with a minimum percentage of the capital coming from VCs and/or professional angel investors. For initial investments, that percentage threshold is 30%. The fund will then keep investing in future rounds where it is permitted. The fund has no cap in terms of total dollar amount it can spend or total companies it can invest in.

This is obviously great news for StartX, a very young program that seems to be quickly improving. The accelerator’s biggest challenge is that Stanford entrepreneurs have so many other opportunities, on campus and off. With dozens of classes dedicated to entrepreneurship every quarter and an alumni network that connects students to billions in venture capital and some of the brightest mind in the tech industry, some of the most ambitious entrepreneurs will eschew StartX for anything from Y Combinator to simply raising $80 million on their own.

Nonetheless, StartX seems to be gaining more traction and prestige on campus. It saw seven alumni company acquisitions in 2013, including Luma selling to Instagram, Apple buying WifiSlam, and Yahoo nabbing Loki Studios.

Stanford University’s strategy, both financially and as an academic institution, is much murkier.

Right off the bat, I don’t understand why students would want Stanford’s money over other VC firms. Equity is a precious thing to give up, and VC firms’ offer the advice and mentorship of partners with immense experience in addition to their capital. Stanford professors already give their expert advice and mentorship to students for free (well, for the cost of tuition).

I also don’t really understand what Stanford gains from this. It’s not like the school is hurting for cash–last year, it became the first school to raise over $1 billion in a year.

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Stanford’s Office of Technology Licensing has been a strategic advantage for attracting talented students (especially graduate ones) and has made over a billion dollars for the school. Here’s how it works: any invention made with a significant amount of Stanford resources is owned by Stanford, not the inventor. Stanford then patents the invention and sells its rights (sometimes exclusively back to the inventors). The most famous example of this, of course, is the patent for Google’s PageRank algorithm.

Plenty of Stanford grads have formed massive tech companies without ever having their IP owned by the Office of Technology Licensing. If Stanford could invest early in those companies, it could rake in even more money.

But at what price?

The school, dubbed “Get Rich U” by The New Yorker’s Ken Auletta, is above all else, an academic institution. But the same academic institution helped build Silicon Valley, starting with Hewlett Packard in the 1930s and the Stanford Industrial Park in the 1950s.

That tension between academia and industry was highlighted this past spring when a number of students dropped out of school to start Clinkle, a mobile payments startup that counts numerous Stanford professors as investors. The New Yorker’s Nicholas Thompson, a Stanford alumnus, questioned, “Is Stanford still a university?” in a piece titled “The End of Stanford?” in reaction to Clinkle.

Now, the University will be investing in the companies students form. The University’s professors may also invest in students’ companies, while trying to teach and advise them. And many of these students will take time off from school to launch startups. It’s a tough line for Stanford to walk, as the school’s leaders want to embrace a hallmark spirit of innovation and empower students to take advantage of all the opportunities that the tech world provides to them. The primary mission of the University is still to educate students, and it has always done that in a unique, close-to-industry fashion.

Update: Teitelman responded to me with some interesting counter points, and agreed to let me publish them. He writes:

“We’ve had an extremely positive response from our companies and the VC community about the Stanford-StartX Fund. StartX companies are eager to take the money as it’s coming on friendly terms, and fast (so they can focus on product, not fundraising). They know that the returns will benefit Stanford, Stanford Hospital & Clinics, and StartX, and that’s also appealing to them.

At StartX we have an incredibly extensive network of mentors, VCs, and experts that all of our alum companies can access.  We are partnered with Stanford and we have very detailed information and access to most of the valley and beyond.  This has proven to be a huge asset to our founders.”

Disclosure: I’m still a student at Stanford. AOL, which owns TechCrunch, supports StartX in various ways, including financially.

Note: After publishing, I clarified the terms of how companies will obtain funding and how startups must have been in StartX to receive funding. Apologies for the error.

Images via and Forbes.