Students Funding Students: A Look at Campus-Based Investment Funds
In the race to find the next young entrepreneurial dynamo, VC firms are increasingly putting students in control of the selection process.
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Venture-capital firms itching to find the next Matt Mullenweg or Mark Zuckerberg have found a creative way to uncover promising student-run startups: They're enlisting the students' peers to identify and fund them.
Investment funds run by and for student entrepreneurs have recently popped up in several cities. The funds provide not only capital but also access to mentoring from peers and VC veterans.
Here's a look at three student-run venture funds:
Rough Draft Ventures
Peter Boyce, a soon-to-be Harvard University grad, cofounded Rough Draft Ventures after seeing student startups stymied by monetary needs. "Not everyone has access to friends and family, and not everyone can drop out to raise a million dollars," he says. "How do you support students who fall in between that?"
Focusing heavily on software, Rough Draft is funded by VC firm General Catalyst Partners. Boyce sees the fund investing in early-stage student entrepreneurs who aren't ready to raise a seed round.
In March, Rough Draft announced its first investment: $20,000 in Balbus Speech, which was founded by Tufts University junior Jack McDermott to create apps for speech therapy. "[Jack is] the prototypical example of the entrepreneur we're trying to fund," says Zachary Hamed, a Harvard junior who co-founded Rough Draft with Boyce. "He has two apps, and he's trying to roll out more."
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Rough Draft invests up to $25,000, Hamed says, and at least one founder must be in college in the greater Boston area.
Dorm Room Fund
VC firm First Round Capital, which has invested in student-driven startups including Birchbox and Warby Parker, launched Dorm Room Fund in Philadelphia last fall and is expanding it to New York City and San Francisco. "We've seen what great things students can build, but raising capital while you're in school is really difficult," says CeCe Cheng, the fund's director. "We want to bring capital and other resources closer to campus and give them that option to test their hypothesis."
Dorm Room Fund's average investment is $20,000. So far, the Philadelphia branch has announced investments in three startups: Firefly, a co-browsing tool founded by three University of Pennsylvania undergrads; Dagne Dover, a handbag and accessories brand led by several soon-to-be alums of Penn's Wharton School and Whamix, an interactive tablet video company co-founded by a Wharton MBA student.
Although the initial investments all have ties to Penn, Derek Kleinow, a founding member of the fund's Philadelphia team and a Wharton MBA student, says the fund is open to student-run startups throughout the greater Philadelphia area as long as at least one company founder is a current student or graduated within the past six months. The investment team itself includes a mix of students from Penn and Drexel University.
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In evaluating applications, Kleinow says, the investment team asks such questions as: "How interesting is the market? Is the potential there to build a big enough business? What kind of actionable things have they done to take their company from an idea to an actual business?"
The Experiment Fund
Harvard has spawned hundreds of successful entrepreneurs, and VC firm New Enterprise Associates hopes to spur on more with The Experiment Fund (XFund for short), which it launched January 2012.
"How can you take these brilliant minds and how can you prevent them from thinking the university will not support their activities?" says Patrick Coats, a Harvard junior who sits on the XFund's investment team. "The XFund is a big statement that we don't want to chase these people away."
Hugo Van Vuuren, who graduated from the Harvard Graduate School of Design, and Patrick Chung, who earned a joint degree from Harvard's law and business schools, are partners in the XFund. Chung says they plan to make four to six investments a year, averaging about $250,000 apiece.
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According to Chung, about 40 percent of applications so far have come from Harvard, about 40 percent from the Massachusetts Institute of Technology, and 20 percent from other Boston-area colleges. XFund has invested in such startups as Rock Health, an incubator for tech startups in healthcare founded by two Harvard Business School grads, and Tivli, a startup that enables college students to watch live TV on their computers.
While Dorm Room Fund and Rough Draft Ventures fund current students, XFund requires that its startups have a full-time team. That would include founders taking a leave of absence or recent grads or currents students devoting their summer to growing their startup.
XFund's investment team also seeks startups that will contribute to the broader community. "It might be producing student employment, producing a piece of knowledge or technology that's going to be beneficial, but there has to be some kind of broader purpose to the business," Chung says.
What's your take on these student-led investment funds? Let us know with a comment.