The Network Effect: How Alumni-Focused VC Funds Empower Tomorrow’s Entrepreneurs
With our mandate at Houghton Street Ventures to back London School of Economics entrepreneurs, a week doesn’t go by where we get mistaken for a fund backing the university’s spinouts, and we can see why. The UK’s most prominent university-affiliated funds do exactly that, with Oxford Science Enterprises backing spinouts from Oxford University, Cambridge Innovation Capital backing those from Cambridge University and, most recently, Northern Gritstone announcing a £245m fund to support spinouts from the universities of Manchester, Leeds, and Sheffield.
However, the LSE is somewhat different to those institutions; it is one of the world’s top universities for Social Sciences and Management, but as most people are aware, it has no engineering, technology, medicine or life sciences focus within its four academic walls, and as a result, has very little ‘spin-out’ activity. We, therefore, approach the university affiliation from a different direction, inspired by the birthplace of venture capital — the United States.
When asked the question, “Who is the most active Seed investor globally?” which firms come to mind?
I’m sure you’re thinking of the big accelerators like Y Combinator, 500 Startups and Techstars, and you wouldn’t be wrong. But did you think (or even know) about Alumni Ventures Group? AVG, as they are commonly known in the industry, is one of the most active Seed focussed investment firms in the world that many are unlikely to have heard of. Pitchbook ranked them as the third most active venture capital firm in the world in 2021, and when I checked out Crunchbase’s database of investors, as of today, they rank 21st of all time by number of deals (1324) and the 20 VC firms above them were founded years, and sometimes even decades earlier. Excluding VCs who both invest and run accelerator programs, no firm has invested in more startups per year than AVG.
So why haven’t you heard of them?
Well, AVG is a collective of 27 (and growing) alumni-focused funds, raising capital from alumni of the affiliated university and investing in alumni-founded businesses (for example, Yard Ventures for Harvard University and Waterman Ventures for Brown). What powers them is the network. Across their funds, they have a community of 600,000 LPs, subscribers and supporters who help them to source deals, but mainly AVG helps bring something different to the cap table of those they back — an immense network spanning co-investors, potential customers and a peer group of founders across 1,300 portfolio companies. And for their (accredited) investors, they provide access to a valuable asset class that is usually only open to institutions — and one which is diversified and disciplined by its portfolio size and processes.
This model doesn’t exist to that size and scale in the UK (for reasons that would likely warrant another blog post…), but it turns out that the LSE is the perfect place to launch such a fund and is hence the foundation of Houghton Street Ventures. Excited about the prospect of investing in the LSE alumni ecosystem, we built an insights platform (now our sourcing engine) to gather data to support our thesis. What we found shocked us more than anyone (and for anyone who consistently reads our posts, we like to write about it). We are constantly updating our platform with more, and the latest, data, and if you compare our complete findings about LSE venture-backed entrepreneurs to the Pitchbook University Rankings, the LSE places 3rd in the UK and 15th in the world in terms of the number of founders who have received venture capital funding between 2012 and 2022 — not bad for a school with minimal commercialisation of spinout technology, no academic engineering departments and an annual intake half the size of many of their peers.
We draw further confidence from the fact that most of the biggest technology companies in the world were not spun out of universities but were rather founded by insanely smart people — the type of people who were educated at top academic institutions around the world but founded the businesses outside of the four walls of their universities. In fact, out of the top ten publicly traded companies by market capitalisation in the world at the end of March 2023, eight are technology businesses backed by venture capitalists. And only Alphabet (formerly Google) could be considered a “spinout” as Stanford officially owned the patent to their PageRank algorithm, which Google exchanged exclusive rights to in return for Google stock — at the time of their IPO, Stanford held less than 2% of Google’s stock. Microsoft, Meta, Nvidia, LinkedIn, Airbnb, Block, Tesla, Stripe, Canva, Databricks, OpenAI — the list is endless — companies built by relentless and extremely talented individuals who were supported by a network of investors and talent — built in the open after most finished their university education and found huge problems to solve in the real world.
That being said, ensuring UK universities are fostering the right environment to enable academics to commercialise their research successfully is, of course, of utmost importance. Cambridge University is said to have added £23bn to the UK economy as a result of the commercialisation of its research, largely through spinout companies — and delivered £11.70 to the economy for every £1 invested in such activities. We 100% support the recently announced government-led review to make it easier for entrepreneurs to commercialise their world-leading science and technology, and we champion platforms like spinout.fyi, launched by Air Street Capital’s Nathan Benaich, to provide much-needed transparency on spinout deal terms, reducing the information asymmetry that exists today for these founders.
However, we believe there is an opportunity to supplement these efforts with a focus on a lower-hanging (albeit equally as sweet-tasting) fruit — one with far fewer stakeholders and an equally large economic prize. We envision a future with more funds like Houghton Street Ventures backing alumni of other leading universities with an institutional quality, data-driven, community-focused approach. Essentially enabling these hyper-focused investment teams to get access to their alumni founders early in their journey, see all deals before they happen, and leverage the network for both rigorous due diligence and founder support (e.g. introductions to other investors, potential clients, pools of talent and peer groups of entrepreneurs). It is a powerful model we see in action here at Houghton Street Ventures that has enabled us to back the strongest entrepreneurs within our alumni ecosystem, and the potential impact is tremendous — in the LSE ecosystem alone, we have tracked at least $85bn in exit value created by venture-backed alums who founded companies such as Square (now Block), Oaknorth, Audible and HelloFresh.
We see an exciting opportunity to support early-stage UK-nurtured technology, talent and innovation by bringing together and mobilising affinity networks like university alumni, and hopefully, we can help provide inspiration to others to do the same for other networks.
Learn more about us and submit your pitch at houghtonstreet.com, follow us on LinkedIn or read what others have to say about us at Landscape.vc.
