Wednesday, July 28, 2010

The astonishing story of BU and Seragen

When reading a very interesting 2008 article on college endowments from the Journal of Economic Perspectives, I came across this nugget about Boston University's disastrous investment history:
The perils faced by schools unfamiliar with alternative investments can be illustrated by the experience of Boston University. The school’s administration established its own venture capital subsidiary; in contrast, most leading universities have done the bulk of their alternative investing through outside partnerships, rather than trying to undertake these activities directly. The fund invested in Seragen, a privately held biotechnology company founded in 1979 by scientists affiliated with Boston University.

The result of this investment can be described based on Seragen’s filings with the U.S. Securities and Exchange Commission. As part of the school’s initial investment in 1987, it bought out the stakes of a number of independent venture capital investors, who had apparently concluded after a number of financing rounds that the firm’s prospects were unattractive. Between 1987 and 1997, the school, investing alongside university officials and trustees, provided at least $107 million dollars to the private firm. (By way of comparison, the school’s entire endowment in the fiscal year in which it initiated this investment was $142 million.) While the company succeeded in completing an initial public offering, it encountered a series of disappointments with its products. By late 1997, the University’s equity stake was worth only about $4 million. (emphasis mine)
That's right: Boston University threw an enormous fraction of its endowment at a single biotech startup, and lost almost all of it. This didn't kill BU—still a prestigious university with a prime location—but it did set the university back enormously.

How did the university make such an ill-fated decision in the first place? As a 1998 New York Times article explains, president John Silber (a "brilliant" former philosophy professor) decided that the startup—based on research by BU scientists—had a wildly successful future ahead of it, and pressured the university into investing massive amounts of venture capital through its endowment.

You might ask why John Silber—as opposed to, say, actual venture capitalists with actual experience in the biotech industry—considered himself qualified to make this decision. This question apparently never occurred to him. Nor did the prudence of investing a large fraction of a prominent educational institution's money into a single company in perhaps the riskiest business category in existence—a biotech startup.

Eventually, of course, the economics caught up with him. Intelligently administered university endowments do invest in venture capital, but only as one part of a carefully diversified whole. These venture capital investments, in turn, are spread between multiple funds, which are themselves composed of investments in many different companies and sectors, and managed by professionals with experience in the relevant fields. There was no reason to expect that Silber's intuition would outperform established venture capitalists in calculating a risk-adjusted price for Seragen's future income stream. And Silber certainly had no reason to repeal the established laws of risk management, under which a large, undiversified investment in a single security is unquestionably foolish.

Apparently, even many "smart" people like former BU president John Silber lack the foggiest understanding of investment strategy. It's borderline criminal that he had this power in the first place.


Anonymous said...

"John Silber, the Larry Summers of BU" - that's about as good as "Vanderbilt, the Harvard of the South"... dave.s.

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Anonymous said...

It's a sad story of stubborn incompetence. Silber's son had AIDS and Seragen was showing promise in this area.

They also supposedly had a "magic bullet" cancer drug in the works.

See links: