contribute $500,000 to a fundraising round that nets $10 million. If the school doesn’t contribute, its share of the equity will be diluted.
Some schools had begun to drop investment participation rights from the deals they made with startups, because they didn’t have the means to take advantage of them, Harrington says.
“The vast majority of universities don’t have accessible capital, or the management skills to assess which companies to back,” says Harrington. “The endowments are not in the business of making direct investments in startups.”
Through its agreements with research centers, Osage University Partners has the option to invest in about 1,800 companies that it tracks through a proprietary database. The venture fund partners get to know the technology transfer officials at each partner university, meet with the management teams of their spinout companies, and also follow the latest discoveries of innovative faculty members.
So far, Osage has selected 23 companies to add to its portfolio. Osage does not lead investment rounds, but joins syndicates made up of “top tier’’ venture firms raising new funds for a promising company. Osage prefers to make initial investment of about $2 million, and plans to spend an additional $2 million to $3 million investing in follow-on rounds for the companies that are doing well, Harrington says.
Soderstrom says the participation rights gained by Osage University Partners give the firm access to deals that might otherwise be closed to it as a VC firm without a long track record.
“They get to play in a game they wouldn’t otherwise be part of,” Soderstrom says.
Theoretically, the members of a VC syndicate might want to exclude Osage to preserve their share of a fundraising round, he says.
“If they have a really hot deal they wouldn’t get to take as much,” Soderstrom says. But in the discussions Soderstrom is aware of, most venture partners have accepted Osage’s participation after its arrangement with the universities has been explained, he says. Any potential conflicts may be lessened by the fact that Osage usually invests $2 million or less, while the other VC firms are more likely to put in $4 to $6 million each for a capital raise of about $15 million, Soderstrom says.
Harrington says Osage aims to be a “frictionless,” passive partner within a VC syndicate. It doesn’t try to influence the deal terms, or ask for seats on the company board.
Once established as a member of a VC syndicate, the venture firm is often able to invest more than the maximum it’s entitled to contribute under the university rights it has acquired, Harrington says.
“It’s the rare company that couldn’t use a little extra capital,” he says. Osage has participated in syndicates that included firms such as Clarus Ventures of Cambridge, MA; Alta Partners of San Francisco; and Sofinnova Ventures of Menlo Park, CA.
Life sciences firms make up 55 percent of Osage’s portfolio companies, while 45 percent are technology companies, including health care IT. Among the life sciences companies are Atterocor in Ann Arbor, MI; Immune Design in Seattle; Cleave Biosciences in Burlingame, CA; and Receptos in San Diego.
“We have a growing center of gravity on the West Coast,” Harrington says. Osage may launch its second fund by 2014 or 2015, when it would probably open a West Coast office, he says. The unit now has seven investment executives and is looking to hire one more.
Osage University Partners is also becoming a sort of catalyst for productive contacts among startups, university science programs, and venture firms, Harrington says. For example, when a company is looking for an expert in a particular scientific field or a new technology to license, Osage can quickly query its partner universities and check its database.
“We think we’ve become a valued player in the intersection of the university and VC ecosystem,” Harrington says.
