For students, by students – New way to Venture Capitalize
Last week, Steve Herrod, Ex-CTO at VMware and Managing Director at General Catalyst, came to our class to talk about cyber security and big data.
Cyber security applied to big data is one of the hottest topics in modern technology right now, and as a software engineer, I need to be aware of these concerns. However, as the Co-Founder of Front Row Ventures, the first student-run Venture capital fund in Canada, when I saw that one of the General Catalyst’s director was coming to our class, I couldn’t help myself thinking more about VC than technology.
For those who are not familiar with what General Catalyst is doing, I understand you’re probably lost right now. Let me explain.
First, you’ll need to understand:
What & who is General Catalyst?
General Catalyst is an American venture capital firm which was founded in 2000. Initially based in the Boston area, they opened offices in New York, San Francisco, and Palo Alto. Their investment thesis is focused on early stage startups, and they invested in a bunch of cool startups like Snapchat, Stripe, and Airbnb, just to name a few. But the reason I’m talking about that VC fund today is not that they have amazing portfolio companies. It’s because of Rough Draft Ventures (RDV), one of their initiative to find the best startups.
Rough Draft Ventures?
Yes, Rough Draft Ventures!!! I told you at the beginning I was excited to see someone from General Catalyst because of my VC Founder experience, this is the reason why. RDV is one of the two most successful student-run venture capital fund in the USA.
Okay, but I hear you think…
“A STUDENT-RUN VC FUND? Student? VC fund? What is that?”
Before I go deeper in that, you’ll need to understand some basic concepts to understand the rest of this post (assuming you have some basic pieces of knowledge of what is a VC). Let me start by student-run VC fund.
What is a student-run venture capital fund?
A student-run VC fund is like a “real” VC fund (like General Catalyst, First Round Ventures or like Sequoia Capital) but directed only by students. The concept of that type of VC is pretty straight forward, students that invest real money solely in student-run start-ups. Like “real” (or “growing-ups”) VCs, student-run VCs have LPs to report to and need to assure a return on investment (ROI) for them. Usually, for student-run VCs, their LP is another VC firm, for example, RDV’s LP is General Catalyst.
Now, I can hear you think again…
“Students that invest REAL money in student startups… WHAT? HOW? WHY?”
Why focusing only on student-run start-ups?
The answer to that is pretty simple.
When you look at all the biggest tech companies in the world, Facebook, Google, Snapchat, Dropbox, Yahoo, and Dell, just to name few, they were all founded by students on a university campus.
University students have the potential to become awesome entrepreneurs. In fact, university years are an entrepreneurial sweet spot: a combination of minimum risk, lots of free time, and open mindedness. Campuses surround and connect you with audacious creative people who confront you to innovation at the grassroots level. As a student, every day, you are pushed outside of your comfort zone where you can take risks at little cost and open your horizons. If entrepreneurs’ primary job is to solve complex issues, as students, you are in a unique position to challenge the status quo.
Okay, but how a student-run VC can work then?
I can understand that for most of you the concept of giving millions of dollars to students to invest in student startups could sound a bit crazy. It’s actually pretty smart.
As a venture capitalist, when you look at all the untapped potential in the universities, and you try to figure out a way to capitalize on that potential, a student-run VC makes so much sense. Nobody is better than a student to find the best student entrepreneurs. They are physically on the campus, they know all the initiatives, and they know who are the most entrepreneurial students on the campus. So this is why they created a new type of VC fund that is directed by students that invest solely in student startups.
So now that you understand what a student-run VC fund is, let’s get back to Rough Draft Ventures
Back to RDV
As you can now understand, RDV is a student-run VC backed by General Catalyst. Since December 2012, they make $25k uncapped convertible notes investments, and the idea behind it is to help college kids “go from idea to products to seed and series A that are real ventures.”
But are they alone to do that?
No, actually 3 months before RDV was officially created, First Round Capital (one of the biggest early stage VC fund in the US) started the Dorm Room Fund, its own student-run VC fund. They are now investing in 4 cities in the US, New York, Boston, Philly and the San Francisco Bay Area.
Moreover, the US is not anymore the only country to have these type of VCs. There’s now the Fresh.Fund, that invests in Israeli student founders. Also, you remember, at the beginning of this blog post, I said I was the Co-Founder of Front Row Ventures (FRV). But what is FRV exactly?
Front Row Ventures
We are the first student-run venture capital fund in Canada. Based in Montreal, we fundraised around 1 million dollars to invest in student start-ups in Canada. We are now a team of 21 students from different backgrounds that are working with game-changer student entrepreneurs and nurture Canada’s next generation of tech leaders.
If you want to learn more about student-run VCs or student-run start-ups from around the globe; Follow us and take a look at our Front Row Ventures’ website, blog, Facebook page, and Twitter page.
References
- Rao, L. (2012). General Catalyst Backs Roughdraft.VC To Fund Student-Run Startups And Ideas In Boston. [online] TechCrunch. Available at: https://techcrunch.com/2012/12/12/general-catalyst-backs-roughdraft-vc-to-fund-student-run-startups-and-ideas-in-boston/ [Accessed 28 Jul. 2017].
- Pando. (2012). For Students, By Students: First Round Capital Announces Dorm Room Fund in Philly . [online] Available at: https://pando.com/2012/09/24/for-students-by-students-first-round-capital-announces-dorm-room-fund-in-philly/ [Accessed 28 Jul. 2017].
- Chapman, L. (2017). NEA Creates Harvard Seed Fund To Back Students’ Big Ideas. [online] WSJ. Available at: https://blogs.wsj.com/digits/2012/01/30/nea-creates-harvard-seed-fund-to-back-students-big-ideas/ [Accessed 28 Jul. 2017].
- Bort, J. (2017). This 25-year-old founded a new kind of VC that’s helped college kids raise over $130 million. [online] Business Insider. Available at: http://www.businessinsider.com/25-year-old-founded-a-new-kind-of-vc-2015-11 [Accessed 28 Jul. 2017].
- The Times of Israel. (2016). Jerusalem student fund for student ventures to kick off. [online] Available at: http://www.timesofisrael.com/jerusalem-student-fund-for-student-ventures-to-kick-off/ [Accessed 28 Jul. 2017].
7 comments on “For students, by students – New way to Venture Capitalize”
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For the past year and a half, I’ve been working as a Product Manager at Volume7, a Montreal-based digital product agency that partners with forward-thinking startups and companies.
I'm also the Co-Founder of Front Row Ventures, Canada’s first student-led venture capital fund. We invest solely in student-run startups, help founders grow successful businesses and nurture the next generation of tech leaders.
Highly involved in Montreal’s startup scene and determined to move mountains, I’m an active member of Notman House’s Young Founders Circle, the city’s most important startup hub.. I’ve also been involved in organizing numerous events including Startup Weekends, and countless hackathons and educational events.
Hey Raphael and thanks for an interesting read!
It’s cool that you’ve written about a quite recent trend in VC-industry, student-run funds. What makes it more interesting, is that you have some firsthand experience from sourcing opportunities and executing the investments, which is why I’d like to hear your views regarding the value added by the students specifically;
I see your point in student investors being the best to know who are the most entrepreneurial guys and gals in the campus, which would mean that the added-value actually comes from better deal sourcing at grassroots level. On the other hand, don’t you think that the most promising startups get exposure to VCs and angels anyway (through incubators, pitching events, etc.)? So do you in reality invest in companies earlier than these entities (making the scope fundamentally different from regular VCs) or invest in companies that didn’t get money from other investors or do the startups actually see more value in you than conventional VCs?
My second question is about the typical (often convertible) investment of a fixed amount to portfolio companies, a policy of many student-led funds. Is it fixed to a certain amount (e.g. 25k) due to contractual (risk) limitations from the LPs or some other reason?
Very interested in hearing your views!
PS. Some students from my school are also running a fund with bets in pretty promising startups, it’s called Wave Ventures. You should check them out if you’re interested.
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Hey Raphael!
Great post about such an interesting subject. While I was reading your post, on the first paragraphs, I have to say it: the idea of a Venture Capital firm being ran by students did sound crazy. But as I continued it made so much sense. A lot of tech companies were founded by college students and I’m sure that some VC don’t want to miss this piece of action anymore.
I’m curious to hear about your opinion on how VC executive students balance their time between studies and such a high pressure job?
Best,
Arthur
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Hi Raphael, Thank you for writing about this topic. I’m certain that the students will find it valuable, especially considering the high ratio of entrepreneurs in our class.
There certainly is a growing trend of large VC firms starting “dorm funds.” What do you think is the advantage of entrepreneurs seeking capital from a student-run VC firm vs large VC firms? Secondly, does the firms geographic location play a significant role?
Thank you for your insight on the topic!
Student-only VCs is an interesting topic, thank you for highlighting. I am curious about the benefits of a VC that is inclusive only of students. This blog touches on a lot of the areas and adds layers of clarity to this conversation. You highlight the benefits of having students in the VC space under the section “Why focusing only on student-run startups?”. To summarize you write that students, in general, are less risk-adverse, have more free time/flexible schedules, and are more open-minded to new ideas then those who have already entered the workforce.
I’m still curios how this trend will be affected by two issues – who classifies as a student, and what is the exit strategy? The definition of “student” is becoming blurred; the internet and rising cost of tuition is causing a phenomenon in education where more and more students are continuing education in less traditional methods. Does a high-school graduate who attends a trade school / takes an internship and enrolls in for-credit college classes count as a student? Or what about college graduates who have 10+ years of work experience, work full-time, and enroll part-time in graduate school (e.g. SCPD), does that person qualify for a student-only VC? If yes, would you still gain the same benefits of having these individuals in a student-only VC? Could someone abuse this definition and enroll in classes with the true intent of only seeking VC funds? If these individuals do not qualify as a student, where do you draw the line? One could draw the line at only individuals who enroll full-time at educational institutions and attend classes on campus. But does this limit the student-run VC talent pool too much?
The second area is what is a student-only VC exit strategy? If students are investing their own money, what do they want in return? If the intent is that the ventures would return a profit then one could argue having an experienced COO would help drive that result faster, more efficiently. Someone that can focus on driving revenue and keeping expenses down while the students are studying for mid-terms. Every Woz needs a Jobs. Another analogy is that every Steve Herrod (CTO) needs a Carl Eschenbach (COO). But maybe the ROI of a student-run VC is not measured by profit; the VC could seek returns only through selling the ventures. But again, these transactions are complex and would require individuals with prior experience to complete and return a profit.
I think the concept of a student-run VC is fantastic in that it seeks to open up the VC community to students; a talent pool that is full of creative ideas, sees the world from a fresh perspective, and will pursue ideas that others perceive as too-risky. This bold spirit can bring forth great results. However, I’m unsure if the best way to include students is by excluding all others. Thank you for starting the conversation.
MSE238A
Thank you for your amazing post. It is very informative and I enjoy reading it a lot. I also have a few questions regarding this new business model. Looking forward to hearing your insight.
1. As a student-run VC, how much value do you think that you would add into your portfolio companies? Some VC provide post-investment management and scale up invested startups. Do you offer any similar service?
2. As a board member at my college’s incubator, I also had experiences in investing in student-run projects. However, I found a number of disadvantages of the student-run investment (I do not imply anything but merely present my observations within my organization.:)
– My colleagues do not have industrial experiences, which is not helpful for evaluation of business proposals.
– Our return of investment is pretty low. I think part of the reason is the lack of pressure from investors who basically gave money as grant. So my question is what is your expected ROI and how do achieve it? What is your LPs’ expected ROI?
3. What is your VC’s incentive system?
Thank you so much for your post. 🙂 I am excited to learn more from you.
Hey Raphael,
Great post, I also echo some similar thoughts to Yanxiu…for me the question is…what is the best way to foster and develop ideas for student led businesses and ventures? I do recognize that student led venture capital is one of the many tools that help the ecosystem. What I would be interested-in would be looking at the success rate of companies that have taken various forms of funding (student led VC, incubators, bursaries, competitions).
On one hand, you have incubators that really put an emphasis on mentor-ship and nurturing a company. On the other end you have things like competitions that offer funding but don’t necessarily provide the full support system that helps a company develop. I like the idea of student led venture capital because it provides a service somewhere in between.
A second question I have is, what is the economic value and what do the returns look like for student run venture capital? I would assume its quite low, highly variable and skewed. I’m assuming that’s its a function of an inability to realize investments.
What I do think a lot of these firms are doing with these types of funds though are building their brand and building early relationships with entrepreneurs and talent. Though their first ventures may not succeed, I’d argue that the experience most of the students will have is invaluable especially at an early age. When they ultimately do decide to launch their second or third venture…you can bet that the first VC firms they will be pitching are guys like General Catalyst who do have student run VC runs.
Last question out of curiosity, what types of terms do you typically offer at your VC fund and have you ever compared the differences between your American peers south of the border?
Cheers,
Johnny
Hey Raphael,
Thank you for your post, I didn’t know about Student VCs before it. I found it extremely interesting because we barely have any “real” VCs in Africa. Do you think jumping straight to student VCs is feasible or does this region still have a long way to go to eventually adopt these innovative practices?
http://avc.com/2016/01/global-venture-capital-distribution/
Thanks,
Hania Khater