Rice Business Plan Competition: Hail to the champions

May 17, 2012, 9:00 AM UTC

Cashing out: Winner NuMat, representing Northwestern University

FORTUNE — It may not have the ubiquity of Facebook or the scale of Wal-Mart, but NuMat Technologies someday could change the world just a little bit. At least that’s what the audacious student entrepreneurs behind it believe. NuMat is a university spinout that aims to revolutionize clean tech by making natural-gas vehicles more practical. The Northwestern students behind the startup have come up with algorithms that design nanomaterials that could disrupt the gas-storage industry. Liquid gasoline is expensive. Natural gas is cleaner and cheaper, but it’s hard to squeeze much of it into a tank in a car. NuMat says it can do that at low pressures, increasing capacity by a factor of five. The secret: a proprietary kind of metal-organic framework (MOF), which is a type of remarkable crystalline material with a vast internal surface area; if all of the tiny walls on the inside of a single gram were unfolded, the structures would cover a football field. NuMat’s nanomaterial is ultraporous and, as the plan goes, will hold natural gas the way a bath sponge contains water. The vision is ambitious. Says chief technology officer Christopher Wilmer, a 29-year-old Ph.D. candidate in chemical engineering: It’s “the majesty of self-assembly on the molecular scale.”

Sounds cool — and really complicated to some of us in Houston listening to NuMat’s presentation at the recent 2012 Rice University Business Plan Competition. But for investors there, it was entrepreneurial gold. NuMat’s four founders won the grand prize — a record total of $874,000 in investments and cash grants, including $100,000 from Kleiner Perkins Caufield & Byers, the celebrated Silicon Valley venture capital firm. (Bonus honor: NuMat will get to ring the closing bell at Nasdaq in August.) NuMat says it will use its haul to build infrastructure, as well as to hire more engineers, chemists, and programmers on the way to producing a prototype.

Were it not for the Rice competition, which bills itself as the “world’s richest and largest,” NuMat might never have gotten the opportunity. Forty-two teams, culled from 1,600 entries, made it to the finals in Rice’s brick-bedecked McNair Hall this year. There may be lots and lots of money available to startups these days — from established VCs and angel investors in such places as Northern California, Manhattan, and Texas. Yet unless you’re a star graduate student at Stanford or MIT — or, say, a particularly precocious and well-connected curly-haired dropout from Harvard — you probably don’t have easy access to the investors. Similarly, while business incubators and accelerators can provide useful coaching and backup services, those programs are difficult to get into and sometimes demand too much equity.

That’s where business plan competitions like the 12-year-old Rice event come in. “We’ve created an ecosystem of investors, mentors, and other suppliers that allows entrepreneurs to be more successful faster than they would otherwise be,” says Brad Burke, the managing director of the Rice Alliance for Technology and Entrepreneurship, which sponsors the competition. The Alliance combines the talents of Rice’s schools of business, engineering, and natural sciences. At the three-day marathon of 15-minute presentations, 60-second elevator pitches, shark-tank grillings, barbecues, and an awards banquet, Burke is the barker.

The ringmaster, Rice’s Brad Burke

Some of the $1.5 million awarded this year comes with no strings attached — like $45,000 from NASA and $100,000 from the U.S. Department of Energy. Most of the money comes from organizations like the GOOSE Society of Texas (Grand Order of Successful Entrepreneurs), which in return get a percentage of companies that’s determined by later financing rounds. (Fortune is the media sponsor of the competition and writes about it each year but gives no prizes.) Because teams are university-based, they often unite cross-disciplinary skills — engineers and Ph.D.s with imaginations, MBAs with balance sheets. In the history of the Rice competition, 354 teams have raised nearly a half-billion dollars, and 128 of the startups are still in business, employing more than 1,000. The most dramatic success has been Auditude, a video advertising platform that won the grand prize in 2005 and was sold to Adobe (ADBE) in November for $120 million.

Inter-university business plan competitions go back to the early 1980s. The first — Moot Corp, at the University of Texas at Austin’s business school — was intended to mimic the venerable moot court competitions at law schools. But Moot Corp did more than a moot court and more than the traditional case studies in MBA education: The competition was among actual, rather than hypothetical, ventures, and the judges were VCs with real cash. Over the course of the past decade, the number of competitions has proliferated — from about 350 in 2006 to triple that today. At Wake Forest University, competitors get two minutes and 28 floors in a moving elevator to pitch their ideas. Columbia University hosts the Outrageous Business Competition to showcase, well, schemes like Turn Off, a drug that blocks sexual arousal by stopping the production of pheromones.

Rice Business Plan Competition: The winners

The closest that teams got to whimsy at Rice might have been Action Figure Laboratories, a retail-store notion from Rice students that gives boys the chance to customize toys in the way girls do at Build-a-Bear. The twist: a 3-D scanned miniature version of your face on your action figure. (Voodoo note to editor: We now have your mug on a doll!) Then there’s PhoneSoap, from students at Brigham Young, which won top honors for marketing. Targeting “the germ-conscious public,” PhoneSoap says it has the “world’s first UV-sanitizing cellphone charger.” Wide-eyed investors (all with cellphones) learned that mobile phones carry 18 times more bacteria than the flush handle in a public restroom. “Gross!” proclaim PhoneSoap’s co-founders during their presentation. Maybe they’re talking profits. So, if $39 PhoneSoap makes it to market, when you wake up every morning to the tune of, say, “Hells Bells” on your iPhone, it will be not only charged but clean. (Never mind that you then immediately put your bug-infested fingers on it.)

Several Rice contestants had purely online plays. SasaAfrica, from MIT, didn’t receive a boatload of money but was the darling of many judges. The for-profit social enterprise is an e-commerce site, connecting craftswomen from the developing world directly to consumers worldwide, via a mobile phone. SasaAfrica won $26,250, including $10,000 for social impact. Still, the typical startup focused on a new medical device or industrial process — the kind of idea that costs more to develop. Lemm Technologies, from Purdue, won $111,500 to help develop a non-invasive way to monitor glucose levels in diabetes patients — a $7 billion industry in the U.S. In the way a finger-mounted pulse oximeter measures a patient’s oxygen level, Lemm says it will be able to measure blood glucose by shining a laser horizontally through the curvature of a nail; because nails are translucent, the system theoretically allows for a more accurate reading than going through skin. If it works, Lemm will have a diabetes test that doesn’t involve drawing blood. But the company needs to build a prototype and show that it can work on a real finger rather than nail clippings of the wife of COO Marcus Kramer, 26, who recently got his doctorate in biomedical engineering.

Sixty seconds: That’s what teams had to make their case in the elevator-pitch competition. The winner, Gaylene Anderson of Solanux, from the University of Idaho, got a check for $1,000.

Another Purdue startup, Medtric Biotech, is trying to bring to market Osmotec, “an entirely new concept for bactericidal action” that the startup claims also facilitates wound healing. The company says there are no newfangled ingredients in the gel that would worry the FDA — only “nanobubbles” that are able to pierce and dehydrate bacteria, even superbugs. Rice investors and judges were impressed: Medtric was the runner-up to NuMat Technologies, winning $146,000 in investments and grants, including the $25,000 NASA Game Changer Award. More important, says Sean Connell, Medtric’s 27-year-old president and a biomedical engineering Ph.D. candidate, the company gained visibility. “I just knocked on the door of 250 investors,” he says. Those investors can be pretty good at wooing back. Just ask Henrik Skovsgaard of Senseye, a University of Copenhagen software company that markets its product as “eye control for mobile devices.” Skovsgaard, who holds a Ph.D. in “gaze interaction,” hung around the night the competition festivities ended. Some of the sponsors, he wrote in an e-mail to Fortune, “introduced us to American whiskey (in large quantities) in the hotel bar.”

Entrée to investors is what attracted Solanux, an entry from the University of Idaho that promises a healthier potato. “Idaho’s not crawling with angels and VCs,” says CEO Gaylene Anderson, 41, who’s an executive MBA student and also works in the university’s Office of Technology Transfer. Her company means to transform potato products from a diabetic nightmare into a fiber-rich resistant starch that produces only a low glycemic response. Anderson has the ebullience of an evangelist who was thrilled to be out of town for a few days, but she nonetheless carried in her handbag a piece of home wherever she went at Rice: a big potato, which she used as a prop. Solanux won $25,000 in the competition.

For their part, the grand-prize winners from NuMat Technologies could not have had a more perfect time. At the closing gala, where NuMat was announced as the victor, the team came to the stage to pick up their grand prize check — in giant form, just like at state lotteries. But with a flourish, the sponsors added another $300,000.

Even with that investment windfall, it was still neckties rather than nanotechnology that people wanted to ask the NuMat team about. Everybody at a business plan competition seems to be in a dress shirt and a somber suit. But the four NuMat guys sported matching ties that shouted “geek”: illustrations of the MOF structure that the team aims to get rich on. Designed by Wilmer’s wife, Emily Winerock — a Ph.D. candidate in history at the University of Toronto — the ties were printed by the do-it-yourself retailer Zazzle. Just two days after the competition, the “silky, 100% polyester” ties were up for sale at numat-tech.com for $32 apiece — along with NuMat-branded coffee mugs. It’s “our backup business,” says COO Tabrez Ebrahim, 31. Once an entrepreneur, forever an entrepreneur.

This story is from the May 21, 2012 issue of Fortune.