MIT’s Venture Fund Gains Support, But Raises Questions from VCs

[Updated 11/6/16, 8:37 pm. See below.] Krishna Gupta was still an undergraduate student at MIT when he started his early-stage venture capital firm Romulus Capital in 2008. Seeking mentorship, he says he sent e-mails to professors around campus with the subject line “MIT venture fund.”

MIT administrators weren’t thrilled. Gupta says he was contacted by Rafael Reif, MIT’s provost at the time, who told him it was unacceptable for Gupta to use the MIT name in association with his venture fund.

“The concern back then was that MIT as an educational institute shouldn’t be seen as affiliating itself with a venture fund, and that its name should not be used by an independent entity such [as] Romulus,” Gupta says. “While I was a brash, young entrepreneur at the time and didn’t want to hear that, in hindsight, Rafael was right.”

But last week, there was Reif—now MIT’s president—announcing that MIT is raising a $150 million venture capital fund as part of a new startup initiative dubbed The Engine.

It is a big move for MIT, which for years has invested endowment money in outside venture capital funds, but had yet to launch one itself. It’s unclear why MIT chose to do so now, but some investors speculate that administrators might’ve been feeling pressure watching peer colleges and universities form venture funds, such as the University of California system.

MIT is chipping in $25 million as a limited partner in the fund, and it’s currently out raising money from other backers to reach the $150 million target. The $25 million is coming from MIT “working capital,” not the endowment, Provost Martin Schmidt has said. The Engine is being set up as an entity separate from MIT, and a professional fund manager from outside the Institute will be hired to run the fund.

The Engine—which will be based in a building on the outskirts of MIT’s campus in Cambridge, MA—won’t exclusively invest in companies with ties to MIT, officials say. But Schmidt has said it will be “quite natural” for the fund to back MIT spinouts because of the types of companies The Engine will target and its proximity to campus.

The initiative aims to support startups working in biotech, robotics, energy, and other complex technologies that take more time and money than most venture capitalists are willing to invest, especially at an early stage. It will provide young firms with funding, as well as access to affordable office and lab space, specialty equipment, shared legal and business services, and connections to mentors and potential business partners. The plan is for The Engine to support 60 startups per year, with each participating in an incubator program for up to 12 months.

Gupta thinks increased access to labs and workspace, mentors, and business connections will be a “phenomenal” boon for startups. He also agrees with the premise that Reif and other MIT administrators have laid out for The Engine.

“I come across a lot of companies all the time at MIT that right now our fund can’t invest in because it doesn’t fit a certain timeline [or] it doesn’t fit a certain risk-return threshold,” Gupta says. “In that sense, there is a need for more patient capital.”

But, he continues, “I’m not sure MIT’s role is to try to step in and figure that out.”

Krishna Gupta, Romulus CapitalThe issues that Reif raised with Gupta back when he was a student e-mailing people about an MIT venture fund “come into play now,” Gupta (pictured left) says. Venture investing is risky, and most startup bets lose money. If the fund isn’t successful, it could tarnish MIT’s reputation and credibility, Gupta says.

“Should MIT, as a university, really be putting its brand behind a venture fund?” Gupta asks. And if The Engine “is really an arms-length relationship where MIT is only investing in the fund, then why is it being promoted by the Institute?”

Nevertheless, the consensus among Gupta and other venture capitalists interviewed by Xconomy is that The Engine overall is a positive development that will provide useful resources to startups and could help the Boston area retain talent and promising companies.

“I hope they do this well because I think it’ll spur a lot more entrepreneurial activity,” says Natanel Barookhian, an MIT alumnus and founder of TechU Angels, which has invested in startups with ties to MIT. “Anything to strengthen the Boston tech ecosystem, in my eyes, is a very positive thing—and keep startups from moving to San Francisco.”

Rudina Seseri, a founder and managing partner of Boston-based Glasswing Ventures, is “excited by the broader role” that MIT is taking on with The Engine.

“Supporting 60 startups annually at that critical incubation stage, when they need to focus on ideation, experimentation, and testing—with the resources MIT is extending—is the right thing to do,” Seseri says in an e-mail message.

One of the open questions, Seseri says, is how much The Engine will seek out the expertise of local venture capital firms and work with them. [An earlier version of this paragraph misstated the status of conversations between MIT and another local venture capital firm regarding The Engine.]

Overall, local venture capitalists don’t sound too worried about competition from The Engine’s fund.

“I think VCs concerned this will eat their cake—I’m not particularly concerned about that,” Gupta says. “I think there will be a lot of room for collaboration.”

Still, if you talk to the startup and VC community, there are plenty of questions about The Engine. Among them:

1. Who else would invest in the fund, and what sorts of financial returns can they realistically expect? In some ways, MIT is structuring the fund similarly to other types of venture funds. But the stated mission—funding hard science and emphasizing impact over returns—might not appeal to some traditional venture-fund backers.

2. Will The Engine outline a clear plan for splitting investments between MIT spinouts and those with no ties to the Institute? “We’d be curious to see how the ‘open’ investment process will take shape,” Glasswing’s Seseri says. “It seems natural to place more emphasis on MIT-backed startups.”

3. How will The Engine ward off potential “negative selection bias” or “signaling” issues? MIT-related startups that don’t get investments from The Engine might have trouble raising money from other venture funds that wonder why the Institute’s not interested in its own teams. MIT’s Schmidt has said the fund’s structure should help alleviate those concerns, since the selection of companies and management of the fund will be handled by “individuals that are not MIT people.” (It might also turn out that the fund invests in very different niches from most early-stage VCs.)

Michael Skok, co-founder and investing partner at Underscore.VC, says there will be challenges for The Engine. But he thinks it’s up to stakeholders in the tech community to support the effort and help MIT and its partners overcome any obstacles.

MIT is “sticking their neck out to do something worthwhile to bridge a gap here,” Skok says. “They have to be celebrated for that.”

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