A year ago, entrepreneur Fred Bayoff was working out of his home basement when he got a call from a business-school student at his alma mater, the University of Michigan. The 40-year-old Bayoff, whose Ann Arbor (Mich.) company, Centromine Inc., runs a Web-based data-management system used by mental-health-care providers, was taken aback when the student wanted to discuss investing school funds in his venture, which was then about a year old.

Still skeptical, Bayoff agreed to meet the student investor and some cohorts. "I was a little bit tongue-in-cheek," he recalls. He became a believer soon enough: That peculiar phone call yielded $100,000 from the University of Michigan Business School's Wolverine Venture Fund. The B-school's vote of confidence in the little company helped attract funds from two angel investors. (Bayoff had already gotten funding from an Ann Arbor venture-capital firm, Enterprise Development Fund.) The school connection also attracted MBA students to Centromine as summer interns and, ultimately, full-time employees. The cumulative effect: He now has nine large hospitals as clients -- up from three before the Wolverine investment -- and projected revenues of $2.3 million by yearend, compared with $1 million before Wolverine. He's talking to investors about another round of financing in June.

The Wolverine fund is the brainchild of Karen Bantel, its director and a strategy professor at Michigan's business school. She has been pushing entrepreneurship since she arrived there three years ago. One of her priorities was to teach students the thinking behind venture-capital investing, something she found impossible to convey in the classroom. Starting with $500,000 in alumni donations, she formed the fund in September, 1997, with students seeking, screening, and negotiating the investments, for independent-study credit. The fund now has $2 million available to invest, with a ceiling of $100,000 for each round of investment and a $200,000 maximum per company.

The process has been slow: So far, Wolverine has invested only $200,000 -- in two companies. Fourteen students have participated over the fund's 18-month life. All of them have experience with young companies, some as entrepreneurs themselves. One reason for the lag: They only work on the fund during the academic year.

The students serve on an eight-member board, evaluating business plans, partnering with local VC firms, and haggling over term sheets. The student VCs see the experience from two perspectives: They come to understand the minds  of the VC and the entrepreneur receiving the investment. "Because we all have an interest in running startups at some point, it's good to see what works and what doesn't," says Wolverine fund alumnus Paul Altman.

Michigan's VC fund is the outgrowth of a larger business-school movement to teach entrepreneurial skills and inject more hands-on experience into the process. Indeed, Michigan isn't the only business school to invest in small companies. Columbia University and Babson College also have funds -- but they are faculty-run and focus on aiding promising student startups. What makes Wolverine different is that students, with the guidance of an advisory board of faculty, entrepreneurs, and professional VCs, do the investing and specialize in local ventures outside the B-school fold. The advisory board assumes fiduciary responsibility, observes the company presentations, and gives final approval for each deal.

Wolverine's criteria are fairly open-ended. It seeks local companies with a high potential for growth, but doesn't require that a company's product be fully developed. It also prefers that at least one member of the company be affiliated in some way with the university. Bayoff, for example, was an alumnus. So far, the fund has invested in two ventures -- Centromine and Intralase Corp., which makes lasers for ophthalmic surgery. A third deal with a New York-based Internet company is imminent, says Bantel.

Clients say they've been impressed with the neophyte VCs. "What struck me most was that they were trying to do it as though they were a real VC firm," says Centromine's Bayoff. "Students went through our product and asked 1,001 questions surrounding market potential, the viability of the Internet, and our competitors."

It has been a revelation for the students. "My experience in the fund has demonstrated to me just how important people are to the business. Their credibility and competence is almost more important than their business projections," says Altman.

John Cunningham, one of the first fund board members, agrees: "This is a game where relationships are paramount. You can't learn that without playing a role in the formation of a company."

It remains to be seen whether the Wolverine fund will turn out many VCs or improve its graduates' skills at getting venture money after graduation. It has certainly increased the school's visibility in the field. Since its inception, fund participants have worked alongside six local VC firms to locate worthwhile startups and have even been co-investors. Mary Lincoln Campbell, a general partner with the local Enterprise Development Fund and member of the Wolverine fund's advisory board, let students review unfunded business plans and make recommendations about potentially good, but overlooked, candidates. The relationship with the B-school encouraged her firm to hire two of its MBAs recently.

As the fund gains legitimacy, it has drawn more student interest and applications for capital. This past year, Bantel received 40 applications for just four student board spots. The fund reviewed roughly 40 business plans. Bantel is cautious: It's all very well for the students to have a worthwhile learning experience, but the fund still has to have a good rate of return over three to five years -- and the VC bar is high. Typically, venture capitalists expect an annual rate of return of between 25% and 35% in exchange for gambling on such high-risk investments and pushing them to produce. And they have plenty that don't quite cut it for every extraordinary success.

Other B-schools are watching the Wolverine Venture Fund closely. "What [Michigan] is doing is very exciting," says Murray Low, an associate professor and entrepreneurship program director at Columbia Business School. "Their fund presents a different way of teaching entrepreneurial concepts, but the jury is still out." The acid test for the Wolverine Venture Fund's student investors will be a year or so down the road -- when their proteges go public.

By Nadav Enbar in New York
nadav_enbar@businessweek.com

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