A new venture fund jointly established by StartX, the Stanford-affiliated startup incubator, Stanford University and Stanford Hospitals & Clinics, enables Stanford to directly invest in student-founded companies.
The fund, designed for StartX-backed startups, allows shareholders to avoid paying the high fees associated with investing in venture capital funds.
“By investing directly, we are not paying the fees that would normally go to the general partners of a VC partnership,” said Randy Livingston ‘75 MBA ‘79, the University’s vice president for business affairs.
According to John Melas-Kyriazi ‘11 M.S. ‘13, StartX’s chief financial officer, the creation of the fund came after StartX had turned down investors’ requests for the right to invest in StartX companies.
“The reason we said no [earlier] is because we have a strong focus on our value as a nonprofit,” he said.
Historically, this has been one of the differentiating factors between StartX and other incubator programs. StartX did not previously require or offer investments to startups, unlike some older incubator programs in the area.
This traditional value focus is what led to the particular structuring of the fund, according to Melas-Kyriazi.
“We decided to set up a fund that was, instead of a required investment, an opt-in investment,” he added. “We set up the fund in such a founder-friendly way, that almost every founder we have talked to has opted into the fund.”
One of the controversies associated with the fund revolved around the fact that it was a venture capital fund, which would involve Stanford University, among other groups, holding equity in companies.
According to Melas-Kyriazi, the fund was an entirely separate entity.
“Equity goes to an entity called the Stanford-StartX Fund, the members of which are StartX, Stanford University and Stanford hospitals,” Melas-Kyriazi said.
“It’s not that Stanford owns 10 percent of a company when we invest through the fund,” he added.
Livingston agreed, emphasizing that the fund and Stanford will not be making investment decisions.
“We are not trying to make a judgment as to which companies are going to be successful or unsuccessful,” Livingston said.
He explained that through the fund, Stanford is agreeing to invest in any StartX-affiliated venture where other investors have made a commitment. According to Livingston, the equity in which Stanford is investing comes from unrestricted University funding, and the aspirations of a financial return were the same as the other investments that the endowment has made.
“In this case, we are taking a small amount of University funds and are investing in entrepreneurial ventures started by former students,” he said.
Melas-Kyriazi anticipated the fund to own about three to four percent of invested companies, and added that the investment would not require a board seat.
Despite endorsing student-founded startups, the fund would not encourage students to leave their degrees incomplete, according to Livingston.
“We are paying very close attention to the graduation status of these students,” Livingston said. “Our strong preference is for all Stanford students to complete their degrees.”
“We are not endorsing the idea of students dropping out [of Stanford] to start these companies,” he added.