MIT Raising $150M Venture Fund to Rev “The Engine,” a New Incubator

MIT is investing $25 million in a potentially $150 million venture capital fund and opening a 26,000-square-foot startup space on the edge of its campus.

The two investments will jumpstart a broad entrepreneurship initiative, dubbed The Engine, that will provide resources to startups whose technologies typically take lots of time and capital to develop—think biotech, robotics, advanced manufacturing, medical devices, and energy.

MIT is already one of the more prolific startup engines on the planet, and in recent years the Institute has bolstered its campus resources for entrepreneurs, adding mentoring services, shared workspaces, grant programs, and more. It has also made efforts to better connect the various (some might say fragmented) campus student groups, programs, and centers for entrepreneurship.

But there are still plenty of promising ideas that get “stranded in the lab” because getting to market will take more money and time than most venture capitalists are willing to invest, said MIT President Rafael Reif.

“This is more than a matter of disappointed individuals, because many of them are working on solutions to humanity’s most important problems,” Reif said Wednesday evening at an event announcing The Engine. “So, if they cannot get their ideas to market, society loses as well.”

If things go as planned, that’s where The Engine will come in. Its fund will provide “patient capital” that emphasizes impact over a quick financial return, Reif said. MIT said the fund will take smaller equity stakes than typical VC funds. The exact parameters are being worked out, and could vary with each deal, MIT Provost Martin Schmidt told Xconomy. (More on the fund in a minute.)

The Engine will also offer access to affordable office and lab space, specialty equipment, shared legal and business services, and connections to mentors and potential business partners. Connections to those resources will be facilitated through an online marketplace called the Engine Room.

The plan is for The Engine to support 60 startups per year, each of which will participate in The Engine’s incubator for up to 12 months. The main space will be 26,000 square feet at The Engine’s headquarters at 501 Massachusetts Ave. in Cambridge, MA. The space is being renovated and is expected to open in the spring, Schmidt said.

In addition, MIT plans to make other offices and labs available to the program’s startups, for a total of more than 200,000 square feet. The other locations could be a mix of MIT-owned buildings, as well as spaces offered by partner companies and organizations in Kendall Square and the surrounding area.

“Our expectation is to really radically expand” the available space, Schmidt said.

The venture fund, meanwhile, is a big move for MIT. Other universities around the country have launched their own venture funds in recent years—see Stanford University, NYU, the University of North Carolina at Chapel Hill, Purdue University, and the University of California system. The University of California’s fund is especially notable for its size—it has committed $250 million to the effort.

But MIT hadn’t gone that route. A few months before she retired in June, former MIT Technology Licensing Office director Lita Nelsen told Xconomy she felt the Institute simply hasn’t needed to form a VC fund on campus because the school has no trouble getting “decent companies” funded. She raised concerns about conflicts of interest, clearly defining the mission of such a fund, and setting realistic expectations.

Nelsen also presented a hypothetical scenario in which MIT spinouts that didn’t receive an investment from a university venture fund might have trouble raising money later from outside VC firms. “There’s a negative-select bias there for what we don’t invest in,” she said at the time. “So, better to [create] a level playing field for anybody who wants to play.”

Schmidt said the structure of The Engine’s fund should help it avoid many of the concerns raised by Nelsen. The Engine will be set up as an entity separate from MIT, and a professional fund manager from outside the Institute will be hired to run the fund, Schmidt said. “The selection [of companies] and management of the fund will be done by individuals that are not MIT people,” he said.

And unlike the university-affiliated venture funds mentioned above, The Engine won’t exclusively invest in startups with ties to MIT.

It will “be quite natural” for The Engine to back MIT spinouts, simply because of the physical proximity to campus and because the types of companies it will target are in the “sweet spot of what comes out of MIT,” Schmidt said. But the initiative is “intended to be open, and the managers will … choose companies to invest in that are aligned with the mission of The Engine, independent of where they come from,” he added.

MIT will be a limited partner in the fund—meaning it’s an investor in the fund—and it’s out raising money from other undisclosed entities to fill out the rest of the $150 million target. In that respect, this isn’t something completely new for MIT because its endowment already invests as a limited partner in outside VC funds, Schmidt said. (The $25 million for The Engine’s fund is coming from MIT “working capital,” not the endowment, he added.)

It’s still early for the program, of course, and there are details and issues that must be worked out, such as whether or not it will invest in student-led startups, Schmidt said. “What if a student is six months from graduating but wants to start a company with a faculty member? We’re going to have to be agile in how we think about that.”

Schmidt said he thinks The Engine is something MIT has been building toward “for a long time.”

“The venture capital model has worked well for a class of startups, but not all the startups coming out of MIT,” he said. “This is to deal with the fact that at some level, we would sort of hand a diploma to somebody and then wish them well. What we see is, for these types of startups, we should play a role in helping them on the outside.”

Trending on Xconomy