(Reuters) - 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.