Want to Outperform in VC? Don’t Invest in Alumni.

As university endowments scour the venture landscape for direct deals, avoiding companies founded by alumni could result in better returns. 

New research shows that direct investments in university-affiliated startups can result in far fewer successful exits, including initial public offerings and acquisitions, compared to backing independent ventures.  

This comes at a particularly dynamic time in the venture investing market. Direct investing by university endowments has picked up as asset owners look to cut down on fees and manage investments internally. Meanwhile, direct venture investments played a big part in driving 2020’s outperformance for these investors.  

For smaller endowments, tapping into top-tier venture deals isn’t easy due to the hotly competitive nature of the market. An edge — like being a founder’s alma mater — can make a huge difference in accessing deals. 

But that edge may not be worth it, according to new research published in March by Maximilian Kremer, Ann‐Kristin Achleitner, and Reiner Braun, academics at Technische Universität München’s Center for Entrepreneurial and Financial Studies 

The data they collected shows that portfolio companies affiliated with a university are less likely to go public or be sold at a valuation higher than one times the total capital raised. In fact, only six percent of university-affiliated companies went public, with 15 percent achieving a successful exit.   

Researchers found that 15 percent of unaffiliated portfolio companies went public, and 30 percent were sold for a valuation higher than one times total capital raised.  

These findings run counter to an analysis published by a group of MBA students at Stanford University in August 2021. The group of MBAs found that if Stanford Management Company blindly invested $125,000 in every MBA alumni-founded, venture-backed company’s institutional seed round, it could have generated an extra $1.3 billion return — or a 16x multiple — for the school’s endowment over the past ten years.   

“This proposition seems promising at first sight,” according to the paper from Technische Universität München, as companies like DoorDash, Nubank, and Clubhouse were all founded by alums. 

But on further examination, it doesn’t hold up. The only predictors for best-performing direct VC investments at universities were prior performance and proximity to venture ecosystems including the San Francisco Bay Area, Los Angeles, the Boston and Cambridge area, New York City, and London.  

“Universities situated within these ecosystems likely have better access to a broader and more consistent deal flow,” according to the research.   

The researchers used data from the DowJones VentureSource database (which is now part of CB Insights) and collected names of any investors that were identifiable as a university. They coupled this information with hand-collected data on these companies’ founders, using LinkedIn, news, and web searches to verify their university affiliation.   

They only considered founders who had been a student or held a faculty position at the university before or during the investment round closing date. In total, they analyzed 602 companies. Of those companies, 434, or 61 percent, had a founder affiliated with the university.   

The university-affiliated founders that raised capital from their alma maters tended to be healthcare or information technology company heads. Those not affiliated with universities were typically in sectors such as financial services and consumer. 

Despite their less-than-stellar performance, these university-affiliated founders don’t have more trouble raising money.   

According to the researchers, this disconnect could be the result of conflicts of interest. “Collaborations based on a shared background or personal characteristics have been shown to cloud the judgment and decision-making in the economic development of venture-backed companies,” the paper said.   

Another possibility? A university may not just be motivated by returns. “Furthering the entrepreneurial culture, reputation, or societal impact of a university may equally play a role in their consideration,” the paper said. 

“These motivations could result in a less focused approach to company growth, profitability, and eventual exit outcomes,” the paper said