These MBA Students Play VC, with Real Money
At Michigan's B-school, picking startups is no gut course
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
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
By Nadav Enbar in New York