University of Indiana takes new venture capital tack-Revamped unit won’t fund startups

The University of Illinois is relaunching a slimmed-down
version of Illinois Ventures LLC, a controversial and sorely
needed endeavor that aims to spur new companies from its
vaunted research, without dabbling in venture capital.

By Julie Johnsson- Crains

Rebounding from last year’s embarrassing political debacle,
school officials have now opted for a modest venture that is
focused solely on helping faculty members and students
build companies to market promising technology developed
on the Urbana-Champaign and Chicago campuses.

They’ve ditched plans to create a $20-million seed fund,
backed by public and private investors, that ignited a
firestorm of controversy last summer.

"We’ve redefined our goal as assisting startups, more than
funding startups," says Larry Eppley, a member of the U of I
board of trustees who heads its committee on economic
development.

The two U of I campuses have long been renowned for
their science and engineering, spending nearly $600 million
annually on research. But they lag far behind their peers in
converting faculty inventions into start-up companies — no
small concern in a state struggling to establish a high-tech
presence.

At Palo Alto, Calif.-based Stanford University last year,
inventors issued 109 patents and 137 new licenses,
generating $41 million in income. That dwarfs the tally at
Urbana-Champaign over the past five years: 86 patents and
182 licenses producing $23.2 million in income.

The school’s trustees established Illinois Ventures in 1999 to
shake the school’s ivory tower image by helping professors
accustomed to pure science navigate the commercial world.

But like so many other attempts to jump-start technology
development in Illinois, this effort has been hamstrung by
politics.

Its first incarnation was scrapped amid infighting, when
university trustees balked at hiring former Spyglass Inc.
CEO Douglas Colbeth to run Illinois Ventures and using state
monies to finance a proposed private-equity fund.
Opponents contended the school wasn’t authorized to
invest state funds in a private venture.

U of I board of trustees Chairman Gerald Shea, who
quashed funding for the venture last year, says he wouldn’t
"do anything that is illegal. And the opinion that I had is that
until the state tells me I can do an equity investment, I don’t
think we can do a fund."

Mr. Colbeth, who didn’t return phone calls, would have
administered the fund and shared in its returns. He and
other Illinois Ventures staff resigned last July; the university
vice-president overseeing the debacle was transferred to
another post within the administration.

Filling a gap

Even without a seed fund, Illinois Ventures will fill a "very
substantial gap" by taking raw technologies from the
workbench to the point where they’re ready for investors,
says James Weyhenmeyer, associate vice-president for
economic development and corporate relations and the
interim CEO of Illinois Ventures.

"What this intends to do is tee up the deal for the first
professional money," he adds.

With no apparent political obstacles in sight, Illinois Ventures
is on a roll: It is earmarked to receive $1 million from Gov.
George Ryan’s current budget, while executive search firm
Egon Zehnder International Inc., based in Switzerland, is
screening CEO candidates. The university didn’t use an
outside recruiter when it hired Mr. Colbeth last year, and
doing so this time should ensure an impartial process.

However, some question if the narrow focus and lack of a
dedicated investment fund will undermine the school’s
efforts to create badly needed high-tech startups,
particularly given the current dearth of seed funding in
Illinois.

"It’s a start," says Chicago angel investor Barry Moltz. "It’s
better than not supporting the professors at all. Hopefully, it
will evolve and grow."

Illinois Ventures eventually aims to provide up to $100,000 in
pre-seed funds to some startups. While the source of such
financing has yet to be determined, the university could tap
its patent and copyright income, federal grants or funding
issued through a Chicago-based Illinois Coalition initiative to
foster high-tech growth on university campuses.

Mr. Eppley describes these infusions as "rich-uncle-type
money," rather than a concerted effort to generate
investment returns for the university.

Angel plan

The school will leave any private-equity investing to its
alumni and friends. In the works: forming an angel network
among Illini alumni to provide early-stage investing in
startups coached by Illinois Ventures. The university has a
formidable base of alumni talent, including software
impresario Thomas Siebel and Netscape Communications
Corp. founder Marc Andreessen.

The board of managers for Illinois Ventures, which once
envisioned creating a fund modeled after the University of
Chicago’s successful (and since spun-off) Arch
Development Corp., now say that model isn’t workable.

"We got into difficulties because, to have one CEO who
was both responsible for originating business proposals
and seed funding, gets into inherent conflicts of interest,"
says James Foght, managing director of Deerfield’s Vector
Securities International LLC and chairman of the venture’s
board of managers. "You could see this would always be
an issue."

©2002 by Crain Communications Inc.

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