NEWS

Capital Lessons

Student government tries venture investment and discovers that a good start-up is hard to find.

March/April 2009

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Capital Lessons

Photo: L.A. Cicero

Something ventured, something learned. That appears to be the bottom line to an intrepid but knotty experiment by Stanford’s student government in joining the ranks of venture capitalists. No windfall is in sight from the first investment—just a rich object lesson in what it takes to incubate a business.

The pivotal individual is Matt McLaughlin,’08, the chief executive of Stanford Student Enterprises (a branch of the ASSU) and its fledgling VC arm, SSE Ventures. After advice from experts who included Stanford computer science professor and angel investor Rajeev Motwani, McLaughlin settled on making a modest $10,000 investment in diffbot, a dot-com company created by two recent Stanford graduate students.

Leith Abdulla, who received an MS in electrical engineering in 2007, and Mike Tung, who earned an MS in computer science in 2005, founded diffbot in an effort to improve the way online users can track new material that appears on their favorite Internet sites. A free account at www.diffbot.com provides an inbox that can compile a list of updates, such as new headlines or blurbs of news, from whatever web page addresses a user specifies.

For Abdulla and Tung, the relationship with SSE Ventures opened the door to making contacts with the venture capital community, starting with McLaughlin’s advisory partners: Motwani, the Founders Fund of San Francisco and Charles River Ventures, which has offices in Menlo Park and Waltham, Mass. “Everything so far definitely benefited us,” says Tung.

In that sense, SSE Ventures fulfilled its self-proclaimed “ultimate aim”—connecting student entrepreneurs with the VC world. But for McLaughlin, who’s also the financial manager for ASSU, the rest of the mission has presented steeper challenges than he originally anticipated. Ideally, SSE Ventures would like to put money into multiple student-proposed endeavors each year—perhaps even to the point of reaching six figures in total investments—but only diffbot has been deemed worthy of cash so far.

“We get 60 to 70 applications per funding cycle, which is actually a small number compared to what a major VC firm would look at,” McLaughlin explains. “But then we feel this intense pressure to fund something anyway. I think one of the things I’ve learned is the value of saying no.”

Abdulla and Tung are on a learning curve themselves, both as businessmen and as technology developers. They’re particularly attentive to feedback from the people who have tried diffbot because, as Abdulla noted by e-mail, if anyone has trouble using the service, “the solution usually lies within us, and not the user.”

Watching diffbot evolve has driven home a lesson that’s reshaping how SSE Ventures will operate, says McLaughlin.

“We’re looking for great ideas,” he says, “but we’re also becoming more patient.”

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