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Fearless: The Stanford Engineering Venture Fund at twenty-five

A fundraising inspiration launched in 1985 led to a remarkable partnership between the venture capital community and the Stanford School of Engineering.

Fearless: The Stanford Engineering Venture Fund at twenty-five

September 27, 2012

The relationship between the Stanford School of Engineering, Silicon Valley and the venture capital community on Sand Hill Road is the stuff of legend. It is a symbiosis that has produced transformative personalities, products and businesses. The flow of ideas and people out of the labs of Stanford Engineering into the companies that spring up almost like wildflowers in the Valley—generously seeded and watered by venture capital—have produced a remarkable, interdependent and mutually beneficial economic ecosystem.

Nowhere is this ecosystem more apparent than within the Stanford Engineering Venture Fund (SEVF), an investment partnership that pairs Stanford’s irrepressible technical wizardry with the financial might and investment acumen of the top names in venture capital to support the School of Engineering’s world-class innovation engine.

On the 25th anniversary of the SEVF’s founding it is time to take a look back at how a simple idea, borne out of a few what-if conversations, led to such a formidable partnership. It began in the summer of 1984 when Jim Gibbons was named Dean of the Stanford School of Engineering. New to the job, Gibbons did what any new dean would: He assessed the state of the School of Engineering and what he might like to accomplish first.

Opportunity knocks

One opportunity stood out. Endowed professorships, the highest honor Stanford can bestow upon a faculty member and an important source of unrestricted funds to support the School of Engineering, lagged those of peer institutions where endowed chair holders populated roughly 20 percent of their faculties.

Gibbons approached Bill Edwards and Reid Dennis, and then Franklin “Pitch” Johnson—seminal figures in venture capital—about endowing chairs at the school. Gibbons’s plan, however, was even more intriguing. He asked the savvy investors if they would be willing to go a step further and do what they do best—invest their gifts on behalf of Stanford Engineering in Silicon Valley start-ups already under management in their portfolio companies.

The investors were interested, but the Stanford Board of Trustees also had to be convinced that gift funds could be managed separately from the regular endowment. This included a commitment by Gibbons that, until the venture fund matured, the School would backstop the endowment. In return, the Trustees agreed that the Engineering School could keep any upside beyond the original investment. With the Stanford Trustees on board, the plan was complete.

In short order, Gibbons and the initial investors quickly enlisted several other donors and advisors—Bill Bowes, Tom Ford, Burt McMurtry, Don Valentine, Brook Byers and Glenn Mueller— representing the best-known venture capital firms in Silicon Valley. In December 1985, SEVF launched with seed money for seven chairs. An eighth was later added to honor former Stanford Treasurer Rod Adams.

The School of Engineering now had a substantial fund to invest and the best advisory team imaginable was on the road to redefining philanthropy. That strategy remains the envy of universities across the country.

A simple strategy

The investment approach was simple: Focus exclusively on venture capital investments in small amounts, usually $25,000- 50,000 on average. Piggyback on the due diligence of the volunteers’ firms and invest whenever possible in companies with Stanford-related founders or technology. And, last, share information across the committee. Quarterly meetings fostered a team spirit that was unprecedented.

The fund flourished for nine years before the team agreed that they had had a good run and should wind down the existing fund. When it closed in 1995, SEVF had logged an annual return of 30 percent.

The tangible benefits of SEVF to the school were profound: eight endowed professorships, nine endowed fellowships, seed funding for the Stanford Technology Ventures Program (STVP) —a success story in its own right—contributions to three buildings (Gates Computer Science, Mechanical Engineering Research Lab and the Allen Center for Integrated Systems), and several million in matching funds that provided the incentive for an additional 20 graduate fellowships.

The final transfer approved was $6 million to establish SEVF II, a brainchild of Pitch Johnson, which he described as a “baton pass” to a new generation. The advisors from the original SEVF recruited successors from each of their firms to take on the challenge. Don Valentine agreed to lead the transition and ensure continuity of the original vision and mission to the new team. Over the next 16 years, the team would recruit 26 volunteers whose tenure averaged eight years each. Several original volunteers are still going strong in 2012.

SEVF II has continued the legacy of remarkable results with a 36 percent annualized return, impressive even by Silicon Valley standards.

Acumen and timing

Much credit is owed to acumen, but good timing was an occasional ally. The fund began in the heyday of the personal computer revolution when the advisors made shrewd investments in semiconductors, networking and biotechnology. A decade later, the second SEVF fund opened just in time for the Internet wave. In a stroke of fortuitous liquidity, the fund found itself atop a swell of cash through much of the 2000-2002 downturn before Stanford Management Company moved cash back into the Merged Endowment Portfolio and the volunteers rode a new wave as the economy rebounded.

Adhering to the representative firms’ investment strategies, the fund added some later-stage investments, and encouraged more diversification among biotechnology and energy technology companies. Through shifting investment priorities, the emphasis has remained on earning maximum returns for the dean’s highest priorities.

The initiatives SEVF has funded are at the heart of what makes Stanford Engineering a leader in technology creation, technology transfer and engineering education. These include professorships, fellowships, buildings—including the four buildings of the Science and Engineering Quad—an endowment for entrepreneurship and matching funds for endowed fellowships and for endowed chairs. With several million dollars currently invested, and tens-of-millions at the ready for new investments or strategic use by the school, the full benefits of the SEVF II are yet to be realized.

“For more than 25 years, across two funds and serving three deans, SEVF has achieved an incredible degree of continuity, collegiality—in an industry that thrives on confidentiality no less—and no small measure of healthy competitive spirit to achieve stunning results for the School of Engineering,” said Dean Jim Plummer. “The key to this success has been the volunteer advisors and their commitment to Stanford Engineering. They have been fantastic.”

Other universities have tried to duplicate SEVF, seeking the “special sauce” of the Stanford Engineering Venture Fund. Few if any have duplicated its results or the rare freedom it accords the dean.

A special place

“SEVF has made Stanford Engineering relentless in pursuit of big ideas and fearless in its decision-making,” said Plummer. “If we need something—buildings, equipment, resources, people, anything—we can seize the opportunity because of the Stanford Engineering Venture Fund.”

“The SEVF continues to evolve,” said Jim Breyer, current fund chair. “We have welcomed an exciting group of new volunteers to our team, we have rebalanced our portfolio and we continue to see a steady stream of high-impact investments that bode well for the future of the fund. Stanford Engineering is a special place to all of us, whether we are alumni or just neighbors up the road. It is one of the keys to the success of Silicon Valley and it will continue to play a vital role in the technology transfer that fuels innovation and our economy. The SEVF is a way for us to give back to the School and also invest in our own intertwined future.”

After a quarter century of success, a simple truth remains: There is no place quite like Silicon Valley, and nowhere is that truth more evident than in the special ecosystem created by Stanford Engineering and Sand Hill Road in the form of the Stanford Engineering Venture Fund.