The Wolverine Venture Fund (WVF) is a student-directed venture investment fund that makes convertible debt and equity investments in early-stage and growth-stage companies.
The students on the WVF are advised and mentored by an Advisory Board (AB) whose members are appointed by the Regents of the University of Michigan. Members of the AB are experienced entrepreneurs or venture capitalists. One member of the AB is appointed by the Regents of the University of Michigan to serve as Alumni Fund Manager (AFM). The AFM has the final approval of all investments made by the WVF. The students who participate in the WVF are also guided by a faculty member from the Ross School of Business (RSB) as part of a class in the practice of venture capital (Entrepreneurial Studies 701).
The WVF is supported by the University of Michigan’s central accounting office and custodian bank to manage and reconcile all transactions consistent with the University’s standard investment and accounting policies.
Typically in investment deals, the WVF invests as part of a syndicate of venture capital firms or, to a lesser extent, with significant angel investors. The most common investment occurs in the first lettered preferred equity round, i.e.: Series A Preferred. The WVF may make addition investments in subsequent rounds of funding (Series B, C, etc.) in a company in which it has an initial investment. The maximum that may be invested in any one company is ten percent of the value of the assets in the WVF.
To a lesser extent, the WVF makes investments in the convertible debt round of funding that occurs prior to the Preferred A round. This is often done to assure that the WVF has the right to participate in the lettered equity rounds of financing that follow, if the WVF deems it to be appropriate to do so.
For both types of investment instruments, the WVF struggles not to be squeezed out of potential investments by larger investors (not allowed to actually make an approved investment in a company).
Access to Quality Potential Investment Deals:
It is critical that the WVF have high quality potential investment deals to consider and have access to potential deals where the WVF has friendly co-investors in order to help prevent the WVF from being squeezed out of deals.
This is difficult for the WVF because: 1) the WVF is a small fund and thus cannot take the lead position on any investment round; 2) the WVF typically does not have enough capital to invest in deals to be able to gain access to high quality deals on its own; and 3) the students have limited time within their studies to work on deals; they cannot be spending an inordinate amount of time screening poor quality potential deals. Thus, the WVF relies on supportive venture capital funds and angel investors as the main sources of high quality potential deals to consider.
Sources of Potential Deals:
The WVF receives potential investment deals from the following sources:
- From unsolicited submission of business plans via mail, email, and Internet at the WVF website. This source rarely identifies high quality potential deals.
- From the Office of Technology Transfer at the University of Michigan. This source occasionally identifies high quality deals relevant to the WVF. These deals often come with some member of the University of Michigan faculty having some ownership of the company under consideration via intellectual property rights and/or her/his investment in the firm prior to the WVF considering an investment.
- From angel investment groups or individual angel investors. These angel groups and individuals are an important source of the more early-stage potential investments and especially the convertible debt based potential deals. These groups and individuals may include AB members acting as individuals and University of Michigan faculty members among their membership. These latter persons may have prior investments in a company under consider for investment by the WVF.
- From deals sourced by student members of the WVF. This rarely occurs and when it does it rarely yields a high potential deal to consider.
- From Venture Capital Funds who are friendly to the University of Michigan, and especially to the WVF. These venture capital funds usually have University of Michigan alumni/alumnae among their partnerships. A significant number of these potential deals come from members of the AB who are partners in venture capital funds.
It is critical that the WVF have access to high quality potential deals from all these sources and especially from numbers 2, 3, and 5 immediately above. Without high quality deal flow where the WVF is less likely to be squeezed out, the WVF could not create the learning value for student member of the WVF and basically could not function.
As a result of these sources of deals for the WVF, it is possible that a potential conflict of interest, real or perceived, may arise.
Conflict of Interest:
It is important that in the sourcing and funding of deals that no conflict of interests occur among the members of the AB or faculty members who guide the WVF students. A conflict of interest is defined as having all of the following elements jointly:
When a WVF investment is made in a firm where an advisor’s venture capital fund has a prior investment or is considering a new investment, or when a University of Michigan faculty member involved with the WVF has a prior investment interest in a firm that is being considered for investment; and
When the AB member or faculty member involved with the WVF does not reveal the conflict to the AB, to the faculty member assigned to the WVF, and to the Dean’s office at the RSB; and
When the advisor or faculty member involved with the WVF does not recuse her/himself from any deliberation or decision related to that potential investment.
Rules Preventing Conflict of Interest:
- The advisor or faculty member involved with the WVF impacted by number 1 immediately above must reveal this situation to the AB and to the faculty member assigned to the WVF, and will recuse herself/himself from any deliberations and decisions related to the potential investment.
- When a University of Michigan faculty member involved with the WVF has a prior position in a firm being considered for investment, the faculty member will reveal this situation to the AB and to a representative of the Dean’s Office of the Ross School of Business, and will recuse herself/himself from any deliberations and decisions related to the potential investment.
- A University of Michigan faculty member involved with the WVF will not make any investment in a firm being considered for WVF investment in which he/she does not have an investment position prior to the WVF first considering it for potential investment.
- When the WVF students source a potential investment deal, information about the potential syndication of this deal to other investors will be made available openly to all venture funds and angel groups. It will never be made available only to members of the AB.
Dated: June 5, 2009