Stanford VCs Are Looking for the Next Snapchat

(Bloomberg) -- As a student at Stanford University, Evan Spiegel often hung around the offices of StartX, the school's entrepreneurial hub. Spiegel, who was working on a photo-sharing app called Picaboo, would seek advice from people affiliated with the incubator. In return, he volunteered part-time in 2011, helping design some early marketing materials for StartX.

Spiegel's side project eventually became Snapchat, whose parent company Snap Inc. held an initial public offering last week valuing the business at $24 billion. It made the 26-year old and a lot of other people very wealthy. Stanford wasn't one of them. In those days, StartX didn't have a fund for making investments.

Joseph Huang is trying to avoid making that mistake again. Huang, a Stanford alum who sold his mapping startup WifiSlam to Apple in 2013, was appointed head of StartX on Wednesday. Stanford, along with the university's health care group, said it will fund companies that emerge from StartX for at least the next three years.

The commitment builds on the $110 million the two Stanford institutions invested over the last three years in graduates of StartX, a nonprofit affiliated with the school. They expect to put in about the same amount over the next few years, depending on market conditions, Huang said.

Many colleges have similar venture funds that invest in campus-affiliated companies. In 2013, Yale University announced a $2.5 million fund for startups created at the school. The University of California Board of Regents approved a $250 million fund in 2014 for companies emerging from its campuses. And last year, the University of Chicago said it was setting aside $25 million to invest in startups connected to the university, and the Massachusetts Institute of Technology said it was raising $150 million for a venture fund to back local companies.

While investing directly in startups hasn't always been the norm, American universities have been a major source of funding for venture capital firms for decades. About a third of U.S. universities invest in VCs, according to the National Association of College and University Business Officers, a trade group. Stanford invests in venture funds through its endowment.

Stanford is in a unique position as a Silicon Valley fixture. Past students helped create some of the world's most successful tech companies, including Hewlett-Packard and PayPal. Google's founders devised their original search engine while studying as Ph.D. students there. The school got an early stake in the company through a licensing program in which Stanford holds patents in some technology developed on its campus. It sold the shares in 2004 and 2005 for a gain of $336 million.

StartX was created in 2011 to provide students with their own version of Y Combinator, a prominent business incubator in the Valley. The venture fund followed in 2013. Stanford invests in the StartX Fund through the school's budget rather than its endowment, Huang said.

About 1,000 founders have gone through the StartX program, and the fund has made 340 investments. Graduates can tap StartX's coffers as long as they can find outside investors and meet other requirements. One investment was Periscope, the live video startup Twitter Inc. bought in 2015.

But none has yet reached anywhere close to the bar set by Snapchat. Huang isn't dwelling on the missed chance, though. “Can't change that,” he said. “There will be other opportunities.”

To contact the author of this story: Sarah McBride in San Francisco at smcbride24@bloomberg.net.

To contact the editor responsible for this story: Mark Milian at mmilian@bloomberg.net.