How to structure seed funding to minimize financial risk and make funds self-sustaining

Most colleges and universities reserve some central strategic dollars for seed funding—central resources set aside specifically to support select faculty and academic leaders’ ideas for new courses, new programs, or new research.

To ensure they are putting limited central strategic dollars to best use, a handful of institutions are increasingly taking a venture-capitalist approach to seed funds. These institutions isolate and invest in only the projects with the highest ROI potential, then direct returns of successful investments to fund the next set of projects.

Three characteristics distinguish how venture capitalist institutions organize seed funding.

1. Rigorous vetting process

The first characteristic of a venture-capitalist approach is a rigorous vetting process. Institutions can accomplish this, in part, by establishing clear seed funding criteria that incentivize faculty and other stakeholders to self-screen proposals. This filters out weaker proposals, saving time and effort.

The crux of any evaluation will be business case templates that applicants complete. To ensure that business plans are thorough, institutions should provide templates that prompt faculty and other stakeholders to include key business case criteria to support their proposals. Sample business case templates are available in our study, Increasing Central Fungible Dollars.

2. Compelling revenue-sharing agreement

The second characteristic of a successful seed funding program is compelling revenue-sharing agreements. Bemidji State University uses a particularly novel revenue-sharing agreement for all new professional master’s programs. The college keeps 80% of gross revenue, both to incentivize academic sponsors and cover program costs. Bemidji State allocates 14% to a central strategic fund, carves out an additional 4% for their extension unit to market the new program, and reinvests the remaining 2% in a seed fund for new programs.

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This arrangement ensures the institution’s seed fund is self-replenishing. For every successful program, a percentage of revenue is permanently directed back into a seed fund to help launch more new programs.

Revenue Sharing Agreement for New Professional Master's Programs
Bemidji State University
Revenue sharing agreement

3. Sunsetting mechanism

The third and most critical characteristic of a successful seed funding program is a mechanism to sunset unsuccessful initiatives. Not every investment will succeed, so business leaders need the ability to end funding and avoid supporting bad bets in perpetuity. The most straightforward method is to force initiatives to self-fund.

For example, the Pennsylvania State University’s conference center covers all first-year costs for new conferences, providing an important safety net to attract aspirant faculty. In year two, the center covers only 50% of costs. In year three, the conference must cover its own costs or fold. In either case, Penn State’s conference center avoids paying for unprofitable conferences after the third year.

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