Universities in Hong Kong and on the Chinese mainland have become venture capital players, adding teeth to their investments and driving the commercialization of technology and innovation breakthroughs. Li Xiaoyun reports from Hong Kong.

Blackstone - the world's largest alternative asset manager - was grappling with a surge in redemption demands in its real-estate income trust in the fourth quarter of 2022 as investors fretted about the global economic outlook. The turmoil took a heavy toll on the asset management giant's share price, sending it into a nosedive of nearly 20 percent in December that year to its lowest level since April 2021.

However, the company's fortunes took a turn for the better early last year when UC Investments, which manages the University of California's investment portfolio of $169 billion, vowed to sink $4 billion into the trust. It drove Blackstone's share price up more than 6 percent to $82.40 in the two trading days following the decision.

UC Investments' move reflects a growing trend among the world's top tertiary education institutions of not only being active in scientific research, but also playing the role of an investor, often generating returns that exceed the market average. University-managed investments generally comprise retirement, endowment, and cash assets.

In the 2023-24 fiscal year, UC Investments' endowment pool saw an investment return of 8.2 percent, while that of Harvard University, managed by Harvard Management Co, recorded an average annual return of about 11 percent. The revenue from investments contributed more than one-third of Harvard University's annual operating budget.

Universities as VC investors

Blackstone got the ball rolling. Eyeing the potential for financial gain and enhanced social impact, universities in the Hong Kong Special Administrative Region and on the Chinese mainland have also diversified their roles as venture capital players. These institution-backed funds focus mainly on innovation and technology projects started by university professors, students or alumni.

The University of Hong Kong recently made an ambitious foray into the field by investing 70 million yuan ($9.8 million) in a mainland fund rather than a specific project. Industry insiders say the move is to expand the university's investment reach beyond the campus.

Distinct from universities' traditional approach of investing directly in promising projects, they function as limited partners that provide funding to venture capital managed by general partners who select appropriate investment projects. Industry insiders say such a model can enhance the professionalism and objectivity of universities' investment decisions. It also directs more social capital to initial projects with university endorsements, facilitating the commercialization of technology breakthroughs, and invigorating Hong Kong's innovation and technology ecosystem.

The Hong Kong University of Science and Technology said in April it would spend HK$500 million ($64 million) on setting up a Redbird Innovation Fund. In collaboration with investment partners, the fund is expected to be gradually increased to HK$2 billion.

HKUST will function as a pipeline linking startups and investors, but the decision on what to invest in will be made by general partners, explains Kim Shin Cheul, the university's associate vice-president for research and development (knowledge transfer). "We will leave the decision making to market experts who know investment business better than we do."

Funding crunch

Universities are generally motivated by internal and external factors when dipping their toes into the venture capital business. Internally, the burgeoning startup ecosystem within universities is fueling a growing demand for capital. HKUST had more than 1,800 active startups as of June, while the City University of Hong Kong has surpassed its goal of incubating 300 startups within three years.

Externally, profit-driven venture capital funds are increasingly reluctant to risk investing in projects in their infancy as they typically lack a product prototype or a fully fledged team. Government support, while crucial, often falls short of meeting the funding needs of startups.

The HKSAR government launched its Technology Start-up Support Scheme for Universities in 2014, providing financial aid for budding enterprises at six local institutions of higher learning. The program accelerated in the 2023-24 fiscal year with each university now eligible for up to HK$16 million in funding annually. Each startup can receive up to HK$1.5 million yearly for a maximum of three years.

Taking things a step further, the government started the Research, Academic and Industry Sectors One-plus Scheme in October last year to promote the commercialization of research outcomes. The program will provide funding of not more than HK$100 million to at least 100 university-cultivated research teams with the potential to become startups.

Despite the efforts, such financial assistance is a far cry from what startups need, especially those engaging in sectors with a long R&D cycle and large capital consumption.

Take the life sciences sector, to which the government is giving priority, for instance. The average research and development cost of developing a drug by the world's 20 largest pharmaceutical companies remains staggeringly high at $2.3 billion, suggesting that startups in this industry require access to a diverse range of funding sources beyond just government financing.

Under the current economic climate, private investors are becoming more cautious. According to a report by audit services provider KPMG, global venture capital investments declined by more than one-third on a yearly basis in 2023, with the number of deals dropping from 51,894 to 37,808. KMPG blamed geopolitical tensions, high interest rates, inflation and a sluggish initial public offering market for the downturn.

Ivan Shum, founding chairman of Angel Investment Foundation, notes that venture capital funds are losing enthusiasm for long-term investments. "Instead of nurturing companies all the way to an IPO, investors are increasingly eager to see quick returns on their investment."

Quest for tech transfer

However, universities view it in a different way. "While most startups fail, the experience gained by young entrepreneurs is invaluable, thus accelerating their growth in the future," says Michael Yang Mengsu, senior vice-president (innovation and enterprise) at CityU.

Under pressure internally and externally, the emergence of university-backed funds can take on even greater significance, Shum notes, saying he believes that universities' involvement can attract more co-investors, diversify risks and inject fresh energy into the dampened venture capital market.

Samson Tam Wai-ho, a partner of Hong Kong Inno Angel Fund, agrees, pointing out that tech startups are capital-intensive and often yield returns over a long period. Thus, they need sustained and steady financial support.

Fudan University in Shanghai adopted the same concept when it initiated its innovation and technology fund in December last year. The fund, jointly launched by the university, the Shanghai municipal government, State-owned enterprises and market institutions, is aimed at leveraging Fudan's strengths in various disciplines to guide private investment towards projects that can transform cutting-edge technologies into real-world applications.

Shanghai Deputy Mayor Liu Duo said he hopes the fund will prioritize backing high-risk and early-stage, but high-value projects with hard technologies. This approach aligns with the National Development and Reform Commission's definition of hard technology, which covers artificial intelligence, biotechnology, information technology, new materials, and intelligent manufacturing.

The HKUST's Redbird Innovation Fund also targets these spheres. Kim says they're in line with the university's research strategy and are relevant to current social challenges like aging and climate change.

Samson Tam, who represented the information technology sector in Hong Kong's Legislative Council, sees the universities' move into venture capital as a sign of the city's status in the 3.0 phase of technology commercialization. This phase, he says, is characterized by a collaborative approach, bringing together academia, industries and investors in getting new startups off the ground, based on university-nurtured technologies.

He contrasts this with the earlier 1.0 phase, where universities focused on developing technologies and patenting them, hoping to sell those patents to interested companies. However, many patents have remained unclaimed, Tam notes, citing the example of a nuclear power patent, which would struggle to find a suitable application in Hong Kong's limited market.

The 2.0 phase saw a shift toward a more demand-driven model, with companies taking the lead and universities conducting research based on their needs. The government stepped in as a facilitator, linking companies with universities' research. During this period, the government established five research centers specializing in areas such as logistics, advanced materials, and telecommunications, two of which are run by local universities. Industry experts hold mixed views on the effectiveness of these institutions promoting technology transfer, saying the research might be disconnected from market demand.

But, as nonprofessional investors, universities' role as limited partners in the 3.0 era isn't free of challenges, such as in identifying investment partners and nurturing entrepreneurial professionals.

'Building an ecosystem'

Kim says finding appropriate general partners is one of the make-or-break factors since universities invest in hard tech for the long haul, meaning their partnerships with general partners can last up to a decade. The Redbird Innovation Fund is seeking general partners, with the selection process expected to be completed later this year.

Tam, himself an investor, agrees that finding the right general partner is crucial for universities. "Investing is about building an ecosystem," he says, urging universities to choose partners with a strong "ecosystem" in Hong Kong.

In his view, the "ecosystem" refers to a network of connections and resources, both upstream and downstream, and general partners should know how to help startups link up with other venture capital funds, gain access to local incubators like Cyberport and Science Park, and expand to markets outside Hong Kong where the industry they've chosen is thriving.

For instance, an automotive parts company could benefit from expanding to Guangzhou, capital of Guangdong province, which has been China's top car producer for the past five years, while an internet firm might find success in Hangzhou, Zhejiang province - a hub of the nation's tech giants - and Web3 companies could explore opportunities in Singapore.

Tam believes a healthy entrepreneurial ecosystem also requires professionals who are not just research powerhouses, but also adept at transforming their discoveries into products, and scaling those products to sustainable businesses.

To bridge the gap, CityU created a Master of Science in Venture Creation program, which plans to enroll 30 students this year. The program strives to equip students with the skills needed to start successful ventures through courses like financial and management accounting, people analytics, and social media marketing. Students can graduate with a business plan or a startup project, potentially receiving funding from the university to further develop their ideas, says Yang.

HKUST has introduced a similar program to cultivate a new generation of entrepreneurs who are well-versed in technology commercialization and business governance through collaboration with various schools.

Although Hong Kong is blessed with the financial prowess to develop into a fertile ground for venture capital, becoming a limited partner in the field is still a new experience for the local academia. Seasoned investors see the potential while warning of the hurdles ahead.