U-M in Ann Arbor Creates Investment Fund for Early-stage Capital for University Startups, Increases Endowment by $500M

U-M Tech Transfer of the University of Michigan in Ann Arbor, which commercializes U-M research discoveries and innovations, will create the Accelerate Blue Fund to provide seed capital to nascent U-M startup companies.
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University of Michigan
U-M Tech Transfer is creating the Accelerate Blue Fund to provide seed capital to U-M startups. // File photo

U-M Tech Transfer of the University of Michigan in Ann Arbor, which commercializes U-M research discoveries and innovations, will create the Accelerate Blue Fund to provide seed capital to nascent U-M startup companies.

The board of regents approved the creation of the fund on Oct. 17.

“There are enormous benefits to the university and our region in accelerating the growth of U-M startup companies and maintaining a vibrant startup ecosystem,” says Kelly Sexton, associate vice president for research-technology transfer and innovation partnerships at U-M. “Students and faculty are attracted to universities that facilitate innovation and entrepreneurship at all levels, and we believe the Accelerate Blue Fund will extend the progress U-M has already made in this area.”

She also says a nonprofit, philanthropic fund is ideal for this type of investment because early-stage startup investing requires patient capital and risk tolerance.

The fund will initially be funded with $250,000 in donations, and a fundraising effort is being launched to raise at least $20 million. The fund will begin accepting startup investment applications after it has raised $2 million. Donations have already been made.

The fund is modeled on the Michigan Biomedical Venture Fund, which the regents established in 2016 to support U-M startup companies with a biomedical or health care focus. The new fund fills a gap for seed capita for startups whose products have early market validation, a strong value proposition, a feasible commercial path, at least one founder focused on the venture, and a good change at follow-on funding or exit within two years of securing seed capital.

A fund manager working under the direction of Sexton will supervise the fund. It will be guided by an investment advisory board chaired by Chris Rizik, alumnus of U-M Law and CEO of Renaissance Venture Capital.

U-M Tech Transfer recently reported a record 22 startup companies were launched at the university in fiscal year 2019.

In related news, the value of U-M’s endowment rose to $12.4 billion, about $500 million more than a year ago. This is the same year that the school’s Victors for Michigan fundraising campaign came to a close.

Erik Lundberg, chief investment officer, says the investment return for the university’s long-term investment portfolio, which is mostly made up by the endowment, was 6.4 percent in the 2019 fiscal year, which ended on June 30.

With a 20-year annualized return of 9.2 percent, U-M ranks in the top decile for long-term investment performance among university endowments, where the median annualized return in 6.3 percent. Lundberg says this long-term performance was sufficient to sustain and grow the endowment in real terms, net of spending.

Endowment distributions, or the money university units and affiliated organizations get to spend, totaled $368 million in fiscal year 2019, up from $346 million the previous year. Endowment distributions totaled $4.7 billion over the past two decades.

The university’s endowment is made up of more than 11,700 separate endowment funds that provide support for specific purposes. About $2.4 billion, or 20 percent of the endowment, is dedicated for use by Michigan Medicine and other clinical activities. Another $2.6 billion, or 22 percent, goes to scholarships and fellowships.

“The positive relative performance of the long-term portfolio compared to the median endowment suggests that the investment office has added more than $3 billion since it was established in fiscal year 2000,” says Lundberg, who has led the office since then.

Many endowment gifts are from the university’s Victors for Michigan fundraising campaign, which wrapped up Dec. 31, 2018. It raised about $5.28 billion from more than 398,000 donors. U-M became the first public university to raise $5 billion in a single campaign.

The board of regents also approved an updated model portfolio for the university’s long-term portfolio, which provides investment allocation ranges for each individual asset class.

The model portfolio for the year ahead would be composed of 25 percent equities, 18 percent absolute return, 12 percent fixed income, 25 percent private equity and venture capital, 10 percent real estate, 8 percent natural resources, and 2 percent cash. Within each category is an acceptable range to allow for modest shifts throughout the year. The board can also adjust the ranges as new investment opportunities arise.

The university’s endowment distribution policy and long-term investment strategy provide a steady flow of money each year for operations. This long-term approach is designed to protect and grow the endowment in real terms.

The endowment is ranked ninth largest among all U.S. universities and third among public universities. On a per-student basis, U-M’s endowment has been ranked 94th.

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