A handful of colleges and universities are directly investing in start-ups as part of a new strategy to boost their endowments.



NEW YORK (TheStreet) -- As non-traditional start-up investors like hedge fund managers and celebrities pour funding into fledgling Internet companies with hopes of finding the next Facebook or LinkedIn(:LNKD), another player has joined the fray: universities.

Last week, Duke University joined top-tier venture firms General Catalyst Partners and Kleiner Perkins Caufield & Byers as part of a $20 million investment round for Plum District, a daily deals site for moms.

It's common for colleges and universities to take equity stakes in ventures that license technology built using camups labs and resources. But it's a small yet growing trend for these institutions to bet their own resources on emerging companies for financial gain, acting essentially as a venture firm.

In October, the University of Michigan announced an initiative to invest directly in companies created by faculty and students. The university intends to contribute up to $500,000 per start-up, with a plan of investing up to $25 million within the next several years.

"Simply put, University of Michigan start-ups are a good financial opportunity," university president Mary Sue Coleman said at the time. "And the historical data have convinced us now to invest a small portion of the endowment in start-ups from all three campuses."

Michigan determined that if it had invested in start-ups commissioned by the university throughout the last 20 years, the returns would have performed well, said Rafael Castilla, director of investment risk management at Michigan.

Castilla said that while start-up investing will comprise just a small portion of Michigan's $7.8 billion endowment, it will lead to a modest diversification of the university's portfolio.

Other universities which have invested directly in start-ups include the University of Rochester and the University of Texas.

"Universities have taken more ownership over startups and that's increasingly another tool in our toolbox versus direct licensing to industry," said Bryan Allinson, executive director for technology commercialization at the University of Texas.

Universities are broadly looking at companies in areas like drug development, medical devices, semiconductors and clean technology, said Marc Singer, a managing partner at Osage University Partners, which works with universities to invest in start-ups.

While universities haven't begun making direct investments in start-ups until recently, they've been investing in these types of companies indirectly for years through venture capital funds.

Many universities -- and particularly large research institutions with endowments over $1 billion -- are following the so called Yale-model, in which they've shifted their endowment money away from traditional investments like stocks and bonds into higher yielding assets like private equity, hedge funds and real estate.

And despite the economic downturn, universities haven't changed their strategy and still continue to invest in riskier assets.

Private equity -- which comprises venture capital and other illiquid assets -- grew to 24% of all alternative asset classes in 2010, up from 18% in 2008, according to the National Association of College and University Business Officers.

Besides boosting their endowments, universities may be looking at start-ups for a host of other reasons, including local economic development and the ability to generate patent and licensing income, said John Nelson, managing director of Moody's higher education and not-for-profit rating teams.

"Research universities see less robust revenue growth in the future and lower endowment rates," he said. "Start-up investments is one way to grow revenue and fulfill their non-for-profit mission."

It may be too soon to tell if direct investing in start-ups will become mainstream for universities. Some top-ranked research institutions like the Massachusetts Institute of Technology have shied away from the practice, citing the university's lack of venture capital expertise.

"Venture is a very labor intensive and difficult asset class for most to directly invest in," said John Griswold, executive director of the Commonfund Institute, an investment firm for colleges, universities and secondary schools. "There's lots and lots of small pieces at work and a limitation in terms of manpower."

Universities that participate in direct investments will most likely stick to start-ups founded by members of their community so they can maintain an edge rather than looking at companies where they have no affiliation.

"Directly investing in groups that you know really well such as students and alums are the next frontier," said Ken Redd, director of research and policy analysis at NACUBO. "Institutions with the ability to do this may look at start-ups where they know the party reasonable well and may think they have an inside advantage the larger market might not have."

--Written by Olivia Oran and Chris Ciaccia in New York.



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