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University of California Incubators Eager to Scout Startups, Co-Investors for UC Ventures

Xconomy San Francisco — 

Fledgling companies at the 20 or so incubators clustered around UC Berkeley, UCSF, and other University of California campuses are well-placed to benefit from the new $250 million venture fund the university system plans to set up next year. But leaders at the incubators say they also plan to be on the giving side, helping UC Ventures make the best return on its investments in innovative startups with ties to the university.

“We’ll be giving them inside advice on who we think is hot,” says Regis Kelly, director of San Francisco-based QB3, which runs two incubators at UCSF’s Mission Bay campus and one near UC Berkeley. Kelly, an Xconomist, is well-placed to closely observe startups in those programs. “We get to see what they’re like—how hard they’re working.”

Kelly (pictured above) is used to evaluating young companies as potential investments—he’s also a pro bono general partner of the small, privately funded venture firm Mission Bay Capital, whose goals include helping to support QB3 financially if it reaps a profit. Kelly is surrounded by seed-stage investment prospects at Mission Bay, not only at the QB3 incubators but also at similar biotech hatcheries operated by pharmaceutical companies, such as Johnson & Johnson division Janssen Labs, which are eager to be part of the biotech cluster around the UCSF campus. Mission Bay Capital leans toward UC-affiliated startups, but it’s free to back any promising company.

Incubator leaders like Kelly have been quietly meeting in recent months with UC President Janet Napolitano and Jagdeep Singh Bachher, chief investment officer for the UC system, as Napolitano developed plans for UC Ventures. The new venture fund, which was approved in concept by the UC Regents Sept. 18, will draw its initial funding from the $52.1 billion UC pension fund and the university’s $8.2 billion general endowment.

In June, Napolitano lifted a roadblock for the new fund by rescinding a decades-old UC policy that prohibited the university from investing directly in companies founded to commercialize UC research. UC Ventures will be expected to maximize its financial returns, but its secondary goal is to stimulate research, technology development, and entrepreneurship at UC campuses. The fund will invest in companies founded by UC students, professors, and alumni coming from all fields, from biotech and agriculture to energy and information technology.

Jeff Burton, executive director of the incubator SkyDeck Berkeley just outside the UC Berkeley campus, says UC will now be able to share in the financial upside of the startups UC Berkeley supports at Skydeck.

Jeff Burton

Jeff Burton

“It is inevitable, there’s going to be a company come through here that’s going to be a huge winner. It behooves the university to have some stake in that company, even if it’s a small stake,” Burton says.

Skydeck, which started moving startups into its penthouse digs in a downtown Berkeley office tower in January 2012, celebrated an early success in the spring of 2013. One of its resident companies, Ensighta Security, was acquired by fast-growing Milpitas, CA-based cybersecurity firm FireEye, which went public in September of 2013. Ensighta was founded by UC Berkeley computer science professor Dawn Song, and the university had an ownership stake in Ensighta’s intellectual property. Until now, IP rights were the main route by which UC could benefit financially from discoveries on its campuses.

Those 10 campuses, along with five medical centers, and three affiliated national laboratories, have been cranking out inventions and sprouting startups—71 in 2013 alone, according to the UC president’s office. Among the recently successful ones were Aragon, which was acquired by Johnson & Johnson in 2013; Kite Pharma, which completed an IPO in June; and Seragon, which was acquired by Genentech in July.

That rich output is a lure for angel investors and venture capital firms, as well as the University of California’s portfolio investors. But rich venture returns can be hard to realize, even for experienced venture investors, Kelly says. He points to a biting 2012 report by the Kauffman Foundation, which analyzed the outcomes of its investments in nearly 100 venture funds over a 20-year period. The foundation concluded that VC returns hadn’t significantly outperformed the public market since the late 1990s.

“It’s really hard to do this right, and a lot of venture firms have lost money,” Kelly says. University venture funds face special challenges, he says. For example, they can come under political pressure to provide financial backing for companies founded by professors the school wants to retain, Kelly says. “One of the troubles is if you don’t have a firewall,” he says.

Kelly himself, as a general partner at Mission Bay Capital, has faced the discomfort of … Next Page »

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