Professors Get Their Shares

Professors of entrepreneurship often invest in their students' start-ups. Here are some of the guidelines they follow, their methods of investing, and the returns they receive.

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When Tommy Woycik enrolled in Alan Carsrud's advanced business-writing class at UCLA's Anderson School, in 1994, the senior lecturer took a special interest in the student. Woycik, who had a degree in computer engineering, had a plan for a networked security system to protect computer equipment from theft. Not only that, he and two friends had already developed a product and formed a corporation, CMS Technologies, to make it.

In class Carsrud helped Woycik refine his business plan--transforming it from something amateurish into something very professional, Woycik says. The 51-year-old chairman of UCLA's Venture Development Program also urged Woycik and his team to hit the competition circuit. Carsrud coached them and traveled with them to contests, helping the group win first place at UCLA's event, second place at the University of Oregon's, and an honorable mention at the Super Bowl of the competitions--the University of Texas at Austin's International Moot Corp. contest.

CMS Technologies was off and running by the time Woycik graduated, in June 1995. The next month, the company launched its product, and its customer list soon included the University of Michigan (where Woycik had earned his engineering degree), Princeton University, and General Motors Corp. And Carsrud's enthusiasm for Woycik and his prospects continued. Carsrud joined the board of CMS Technologies and pocketed about $3,000 worth of stock for his director's duties. Woycik says Carsrud repeatedly offered to invest cash in the company, but Woycik declined, explaining that he didn't want to take advantage of the professor's friendship.

This past January the Ann Arbor-based company was on track to receive $1 million in venture-capital money, and Carsrud and the other early shareholders are part of a select group offered a chance to buy more stock. (Asked if he would buy more, Carsrud said he hadn't decided.) Thirty-year-old Woycik, who has since left the company's management but who remains a director and a shareholder, says Carsrud's help was invaluable in getting the business to this stage. He notes that the first page of CMS's business plan shows a color photo of Carsrud and the three founders holding their International Moot Corp. trophy.

As business schools and graduate programs in other disciplines crank out increasing numbers of entrepreneurs, more professors are facing opportunities to get in on the ground floor of students' companies. That is especially true for faculty members who have already built up substantial wealth from business careers outside the academic world. Carsrud, a former People Express Airlines executive, estimates that he has invested in a dozen former students' companies and received stock for sitting on the boards of 10 more. He says that none has yet cracked a home run, pointing out that many are in the biotech field, where it takes many years to show a profit. But he stresses that his aim is to help students, not make money.

Carsrud is not the only professor at UCLA to put money behind former students. Professor William Cockrum has backed some, too, as have business-school faculty members at Harvard, Stanford, Cornell, and the University of Colorado, just to name a few. In some cases the professors hooked up with promising entrepreneurs who weren't in their classes but who found their way to the professors through the academic network.

A spectacular example is George Kozmetsky, a former dean of the College and Graduate School of Business at the University of Texas at Austin, who was introduced to Michael Dell of Dell Computer by a fellow professor, Ray Smilor. In the mid-1980s Dell had been speaking as a guest lecturer to M.B.A. students at the University of Texas when he asked to meet Kozmetsky, according to Smilor, who was then a business professor at the school and is now an executive at the Ewing Marion Kauffman Foundation, in Kansas City. Today 80-year-old Kozmetsky is Dell's second-largest individual shareholder (behind Michael Dell), owning a stake valued at about $50 million.

Stories like that may bring tears to the eyes of philosophy and comparative-lit professors, who may already resent how their business-school colleagues boast some of the sweetest deals on campus. Not only do the B-school professors often pull down juicier salaries, but they can pad that income with ultralucrative consulting gigs. And now they have even more opportunities to hop an inside track and back ventures started by their most promising students.

Personal investments can be a sensitive topic, and several professors interviewed for this article declined to talk about their financial stakes in businesses started by former students. Although those investments don't seem to have created a serious problem--in fact, no controversy over them appears to have attracted publicity, if there has been any controversy at all--the issue of whether professors should view their students as potential investments will likely loom larger on campuses in the future. At the moment, none of the schools contacted--including Harvard, Stanford, UCLA, and the University of Texas at Austin--have directly addressed it. While some bar investments that occur while a student is still in a professor's class, none have any rules that apply after that point. But schools may be hesitant to interfere more, preferring to keep entrepreneurial professors, students, and alumni happy.

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