The young and the restless

The University of Michigan’s Wolverine Venture Fund is incubating the next generation of venture capitalists, and it has ‘about the same rate of return as most professional funds’. By David Rapp.

The candidates that apply for a spot on the Wolverine Fund team at the University of Michigan’s Zell Lurie Institute for Entrepreneurial Studies are generally only in their mid- to late twenties, but they’re an illustrious group. Many already have degrees in other fields—MDs and PhDs abound—and some already have real-world experience on Wall Street or in private equity firms. Sixty to 80 of the best and brightest apply each year, but only eight or nine make the cut.

The Wolverine Venture Fund was the first ever student-directed university venture fund when it was launched nine years ago, and in that time it has made 15 to 20 investments, nine of which are currently active. The students basically have the same role as the junior partner at a venture firm: they do due diligence on potential deals, and make recommendations to the fund’s advisory board and fund manager, who decide, based on the student’s research, whether to pull the trigger on an investment.

The fund typically provides seed and first-stage funding rounds of about $50,000 to $200,000, in partnership with other, non-university venture funds and angel investors—many of whom are alumni of the University of Michigan. Some of the companies the fund has invested in, too, are spinouts from the university, which spends some $800 million on basic research.

There have been some positive liquidation events—the October 2004 IPO of its portfolio company IntraLase netted the fund more than $1 million—and others less than positive, but the fund has “about the same rate of return as most professional funds,” says Tom Kinnear, the fund’s managing director. All the returns are plowed back into the fund, which also receives funding from outside donors to the university. And the members of the advisory board itself usually have a past relationship with the school, which makes the fund an all-around family affair.

And these advisors are no dilettantes. “The typical profile is usually one of our alums who is a successful entrepreneur or is currently a venture capitalist,” says Kinnear. “For example, there is a venture fund in town called EDF Ventures, very successful, about the biggest one in the state of Michigan. Mary Campbell, who’s the managing partner there is on the advisory board. Tim Mayleben is on the advisory board. He was one of the senior executives in a company called Esperion Therapeutics; they sold to Pfizer for $1.3 billion a year ago. There’s a venture fund in California called In-Q-Tel, Will Johnson’s on there—he’s an alum, and we invited him back to part of the advisory group because he’s involved with venture fund and he cares a lot about the school. Tim Petersen, who used to work here, he’s involved with a venture fund here [Arboretum Ventures], and he’s an advisor.”

The chance to work with such heavy hitters is a substantial part of the fund’s appeal for young applicants. “And [the students] have the job of convincing the advisors, who will then raise other questions,” explains Kinnear. “So there’s very much a simulation of what happens in a real venture firm, back and forth.” The environment is an effective, yet relatively insulated, training ground which provides fodder for the next year’s students.

One of the fund’s most recent investments is a case in point. HandyLab, an Ann Arbor-based medical diagnostic technology company started by two University of Michigan PhDs, was a follow-on investment from previous years. “This year’s students, last year’s, the year before’s—because we’ve been investing now over a period of four or five years—they thought they had made enough progress at this point that we should continue,” says Kinnear. The company had raised $11.6 million in private equity funding over the last five months, from well-known venture funds including Pfizer Strategic Investments. “So we participated with our pro-rata share in that and that was pretty straightforward. We always save some money for follow-on investments.”

Another recent investment, NanoBio, a company focused on antibacterial and antifungal technology, was the target of a small bridge investment, but within five months of the Wolverine funding, NanoBio struck gold with $30 million from a venture fund in New York. “And now we participate with our convertible,” says Kinnear. “Our typical deal, if it’s not an A, B or C round, is to take convertible debt with interest and warrants. So we are participating based upon the interest we accumulated and the warrants we earned.”

A third recent investment is with Rhevision Technology, a lens technology company. The fund invested in the company in combination with a Michigan-based venture fund, and one in California. “The one in California is our alum, the one here has an alum of ours in it,” says Kinnear. “The diligence was the same, except we also had the venture funds that were going to invest come and talk to our students about what they were doing. The students vote, the advisors have their vote, and we all talk it out to decide whether we are going to go ahead or not.”

The fund is now looking into medical instrument companies to invest in—and likely looking for prospective students with medical or engineering degrees. Kinnear believes that students that apply simply want to be a part of the inner workings of a real-life venture fund. “They don’t get a lot of course credit, but they learn a ton,” says Kinnear. And they learn, it would seem, by a tried and true method: they learn by doing.