These on-campus VCs are keeping the student startup dream alive

Startups have been identified as a key source of growth for the UK economy, adding the innovative and dynamic lifeblood that so many established companies are lacking.

In 2016, the startup scene generated more than £196 billion (US$247 billion) for the economy. They disrupt industries, combat unemployment, and can bring new life to otherwise disenfranchised communities.

There’s no doubt that a thriving and active startup economy is worth preserving.

So why then are so many of them struggling?

The post-Brexit referendum climate has been particularly harsh on the startup movement.

Of the remarkable 660,000 new companies registered in the UK every year, 60 percent of those new businesses will go-under within three years, and 20 percent will close their doors within just 12 months.

Graduate hurdles

Given the economic, social and personal costs attached to this high rate of failure, it’s no wonder only 4.7 percent of university graduates launch their own business after graduating.

The statistic is surprisingly low given the influx of entrepreneur-friendly initiatives on many university campuses these days. Business modules for students on all variety of courses have been on the increase. Extracurricular activities including boot camps, inspirational speakers, workshops, and business plan competitions have all been on the rise.

But there are still barriers for many recent graduates and students that others are less likely to face – most prominently, finance.

Not only have graduates just spent a small fortune on their student fees making them more risk-averse, but traditional financing routes are often inaccessible to them.

According to Dr Robert Phillips, Senior Lecturer at the Masood Enterprise Centre and Alliance Manchester Business School, entrepreneurs are unlikely to secure an equity investment from a traditional venture capitalist (VC) before the idea is de-risked significantly.

Securing a loan can also be difficult as very few student startups would cover what Phillips calls the “5 Cs of credit” – a framework used by many traditional lenders to evaluate potential borrowers.

These include: “the character of the borrower, predicted capacity of the business to pay back the instalments, capital invested by the borrower, collateral available in case of default and conditions of the industry and economy.”

On-campus capital

That’s where a new wave student-friendly VC companies come into play, offering a viable alternative to get an idea off the ground.

On-campus companies offer the students the funding they need with fewer hoops to jump through. Often set-up and supported by former students themselves, they come from a more sympathetic standpoint and are more open to recognising the potential of their peers when perhaps more traditional funders wouldn’t.

Of course, it’s not all altruistic. UK on-campus VC, Campus Capital, still take a minority equity stake in the company in return for their investment. The amount of equity depends on how much the startup is raising and at what stage they are at, but Campus Capital promise it will always be below 25 percent.

While Campus Capital is open to all, other on-campus VCs have taken a more directed approach.

Arrow Capital, a student-led venture fund led by UC Berkeley students, offers early-stage investments only to startups related to the university itself.

The company, started by MBA student Matthew Bond, has friends in high places. Arrow’s parent company is Bow Capital, a VC fund set up in collaboration between the University of California and Vivek Ranadivé.

If you don’t know the name Vivek Ranadivé, you’ll almost certainly have heard of his business ventures. He is the founder of the software company TIBCO Software and the current owner of the Sacramento Kings, a US professional basketball team.

Arrow promises to “empower the next generation of world class Berkeley startups through a combination of funding and mentorship, and by facilitating long term strategic partnerships.”

As many universities are learning, fostering student entrepreneurship goes beyond the occasional workshop. The VC ventures are there to provide the financial backing that supports the universities efforts to guide those students with the entrepreneurial spirit and a great idea.

For those graduates struggling to get their startup off the ground, the answer may lay closer to home than they think.