For decades, venture capital firms followed a standard playbook: target promising startups as they hit their stride and invest up to $10 million or so for a series A round. But the rules were changing in 2009, when Sequoia Capital helped raise $2 million for use by Y Combinator, a seed funder gaining a high-profile reputation for making small $20,000 bets on startups such as Dropbox and Scribd, both of which were conceived of by college kids.
To identify other promising investments, VCs began paying attention to the earliest point in the tech life cycle: the moment when company founders were still developing ideas in dorm rooms.
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The rest of Silicon Valley's Sand Hill Road, the preferred address for top venture firms, has followed suit. By 2011, Xfund, a collaboration between New Enterprise Associates, Accel Partners and Breyer Capital, launched a $100 million fund and set up two offices, one on Brattle Street in Cambridge, Massachusetts (home to MIT and Harvard) and the other in Menlo Park, California, down the street from Stanford's campus. "It's a kind of embedded situation that is unique," says Patrick Chung, co-founder and general partner at Xfund.
Xfund has to compete with two other Stanford-focused funds: StartX, an accelerator directly affiliated with the university, and Dorm Room Fund, which has outposts in four cities, including the Bay area. Students run the latter fund and it's backed by First Round Capital, a San Francisco VC which has funded Uber, Gigya and TaskRabbit.
Whereas most VCs prefer founders with engineering or computer science degrees, Xfund partner Chung seeks out liberal arts majors, often from Harvard.
Building an innovative product often doesn't come down to technical chops, he argues, but the ability to perform cross-discipline thinking. "There is a whole class of entrepreneurs who are being ignored," Chung says. Harvard startups have comprised about 25 percent of Xfund's investments, with 20 percent coming from MIT, 10 percent from Stanford and another 7 percent from University of California, Berkeley.
At Lightspeed Venture Partners, another Sand Hill Road firm, the partners founded a summer fellowship program in 2007 that grants nascent student-run companies up to $50,000 to work on their product in Silicon Valley for three months. Lightspeed manages $3 billion and its recent successes include Snapchat, Nest and GrubHub. Pinterest is the best known product to come out of Lightspeed's summer fellowship. Stanford provides the program more entrepreneurs than any other school, and Lightspeed associate partner David Dubick says that's due to his firm's across-the-street proximity to Stanford's campus, as well as word-of-mouth marketing that gives the fellowship program more visibility on campuses where alumni already exist. Last summer's program included student teams from Stanford, MIT, UCLA and the University of Illinois.
It's not necessarily true that the students at Stanford make better entrepreneurs, says Dubick. "But investors latch onto patterns that have worked in the past." Sometimes, Dubick notes, the best entrepreneurs come from out-of-the-way schools "where not everybody is mining the waters."
In that spirit, one of Lightspeed's newer portfolio companies, Handshake, comes from graduates of Michigan Tech, a school so far north that it's a nine-hour drive from Detroit. The career services startup helps businesses find and hire talented university students, and after drawing $3.5 million in seed funding, has more than 60 university clients and 20,000 employers on board.
For other VCs, regional preferences play a role. St. Louis's Cultivation Capital, which manages $105 million, watches Midwest schools where big West Coast investors have blind spots. Cultivation looks to Washington University in St. Louis for life sciences startups. One of Cultivation's partners is a senior lecturer at Wash U, and the firm's full-time recruiter also works on the school's placement staff, helping Cultivation pick up early leads.
Brian Matthews, managing partner for Cultivation's tech funds, stays tight with the University of Illinois at Urbana-Champaign, a place whose alumni have produced hits such as Netscape, PayPal, Yelp and YouTube. Matthews or his principals talk to engineering professors or staff in the commercialization office at least once a month. He also speaks regularly with two venture funds based at UIUC.
In San Diego, far down the coast from Sand Hill Road, Avalon Ventures scouts the University of California San Diego for life sciences companies and development. The firm, which has $750 million under management, has completed three deals with UCSD companies in the past several years, with two exits, one of them an IPO. "It's about having those relationships with faculty and the tech transfer offices," says Jay Lichter, Avalon's managing director. "But you have to do more than stop by once a month, it's about your reputation at the school. When you say you're going to do a deal, you have to follow through and do the deal."
Sequoia has gone even farther, bringing on "student ambassadors" at 8 to 10 campuses across the country. These tech and entrepreneurially focused students let Sequoia know when interesting startups take root on campus-and they also make recommendations on the kinds of activities Sequoia should participate in to build a name at the school. Says Sequoia partner Bryan Schreier: "We try to do just a few things on campus, but we want them to really count."