Seeds of Change

“I loved traveling back and forth to England from my co-op’s home base in Chicago, and I didn’t want it to end. But I had to come back to Drexel to finish a bunch of credits,” says Ericson, a LeBow marketing and entrepreneurship senior who started the company 3SecondReceipts his freshman year. “Truthfully, I just wasn’t looking forward to school.” Until he received a call from one of his favorite LeBow professors, Chris Finnin. He told Ericson about the Dorm Room Fund.

Initiated by First Round Capital founder Josh Kopelman, the Penn alum who founded and sold Half.com to eBay for $350 million, the Dorm Room Fund was created to give students experience managing an actual Venture Capital fund while funding student-owned businesses. The interview process was grueling, but in the end, Ericson and sophomore Christopher Gray landed two of the fund’s 11 enviable positions.

“I was thrilled to be chosen,” Ericson says. “As an entrepreneur you never know how VCs actually work and how their funding decisions are made. This is an amazing opportunity to sit on the other side.”

Since this is a startup fund, there are few rules for the group other than all investments have to fund student-run businesses; the entire $500,000 fund has to be invested within two years; and each business usually receives around $20–30k.

“It took us from November to January to establish the guidelines and how we wanted to proceed,” Ericson says. “Some of the others wanted to fund students in the tri-state area, but I was adamant that we should keep it in Philly.”

The group has a weekly two-hour meeting that usually runs four. “We are supposed to do our homework and study the industries and businesses of those coming in to pitch to us.”

Ericson compares the pitch experience to the ABC show, “Shark Tank,” in which entrepreneurs deliver a short sell to a panel of funders, who quickly decide whether or not they will invest in the business.

“Like the show, it’s very intense. Students pitch for 15 minutes; we ask questions for 15; and then we discuss among ourselves for 15. In 45 minutes, we decide if they’ll be funded.”

March, the group has deliberated more than 15 pitches, funded several and announced one. They plan to fund about 25 startups within two years.

The Dorm Room Fund is one of several VCs that have emerged recently in Philadelphia. That’s better news than January’s end-of-year MoneyTree Report* that described VC funding in the region at its lowest levels since 1996.

The report came as no surprise to Bob McGrath, Ph.D., executive director and vice provost of Drexel’s Office of Entrepreneurship & Tech Commercialization, who struggles every day to find funding for the many business ideas and innovations that come through his office.

“Historically, it’s just been difficult to find seed money in Philadelphia,” he says. “There are some funds that have been around a long time like Ben Franklin Technology Partners. But there is so much more money available in the Bay Area and in Boston where there is a deep culture for startups, and where there are great resources for obtaining seed funding. Philadelphia has always been a town of big banks and big pharma.”

McGrath is optimistic, however.

“There’s a sea change in the region,” he says. “More and more investors have started to come to Philadelphia over the last 18 months. You are starting to see a snowball effect instead of a lot of static groups. Efforts are starting to bear fruit. Philly is in the position to be a part of the next wave of entrepreneurial culture in this country.”

As head of Drexel’s commercialization office McGrath keeps close tabs on innovation in the region, and on Drexel, in particular, which receives $120 million in federally sponsored research annually and produces yearly about 120 to 130 inventions — more than double the industry standard.

“Inventions seem to come more easily at Drexel because of the use-inspired research we conduct and the entrepreneurial culture at the University,” McGrath says. “Developing technologies with an endpoint in mind makes it easier to identify new inventions along the way, and the desire of the faculty to see those inventions commercialized is a powerful combination that leads to more inventions being disclosed and intellectual property being pursued.”

But at the end of the day, research is only successful if its application can reach the consumer and there is a return on investment. That’s where McGrath gets to work. He takes innovations and helps turn them into viable businesses.

About 350 patents are available to entrepreneurs or businesses for licensing, running the gamut from an anthrax detector to a joint replacement bone cement system. Businesses buy in and then pay royalties to Drexel when the business takes off.

In 2010, Emunamedica, a healthcare startup, learned about an available patent for a near-infrared wound monitor device that measures the progress of wound healing. The device had been developed by two Drexel biomedical engineers, the late Elisabeth Papazoglou, Ph.D. and Leonid Zubkov, Ph.D., with Michael S. Weingarten, M.D. of Drexel Medicine. Realizing the device’s great application, Emunamedica ran with it.

McGrath explains. “This monitor is life-changing for a diabetic patient who constantly deals with wounds because the device allows a physician to see under the skin to monitor healing. Previously, wounds were measured with a ruler. We were thrilled it was going to get application.”

Financially, the company is thriving and currently undergoing a capital raise. McGrath anticipates that the device will quickly come to market once the financials are complete.

McGrath also works with faculty and students interested in bringing their own ideas to commercialization by providing mentoring and educational programs. There are different steps for faculty and graduate students than for undergrads, because the former’s research is federally funded and therefore owned by the university. In either case, McGrath’s role is to develop relationships with early-stage venture capital organizations and industry to help fund these new opportunities.

“We invent things at Drexel, but we don’t make things, and we certainly don’t sell things,” McGrath says. “We have to figure out who will.”

There are a lot of great ideas. The problem is getting someone to fund them. What happened to the money?

“We are still recovering from the dot-com boom and bust,” explains Mark Loschiavo, clinical professor of management and executive director of the Drexel Baiada Institute for Entrepreneurship, which offers numerous educational programs and competitions for entrepreneurs and coveted incubator space for new businesses.

At the turn of the century, there was a lot of Venture Capital activity at the startup stage which stemmed from the dot-com boom, Loschiavo explains. “Private equity from VCs and angels [initial investors like First Round Capital] flooded the market, and they were encouraged by rapid increases in valuation. And at the same time, pre-revenue companies were experiencing IPOs [Initial Public Offerings]. After the bust, angel investors were getting hurt as their portfolio companies entered the next round of funding before they built equity. Because of the slowdown in company value creation, VCs started investing further downstream. This is why seed money has largely dried up.”

It’s also why entrepreneurs are struggling to get their businesses off the ground.

In October, the City of Philadelphia announced the creation of its own VC, called StartUp PHL, as an initiative between the Department of Commerce and the Philadelphia Industrial Development Corporation (PIDC) that aims to boost the economy and build confidence in the region.

After searching for a partner for six months, Mayor Nutter announced in March that the PIDC will partner with First Round Capital to invest $3 million each in the fund that will support seed-stage investments in Philadelphia-based tech startups. First Round will manage the fund and make early-stage investments on behalf of the Startup PHL Seed Fund.

The second aspect of the Startup PHL is a $500,000 fund to support innovative proposals that support business creation and entrepreneurs in Philadelphia. Six organizations won grants for programs or services that support the entrepreneurial community in Philadelphia, including Ben Franklin Technology partners, the Greater Philadelphia Chamber of Commerce, Philly Core Leaders and others.

West of City Hall, Drexel President John Fry has plans of his own. Earlier this year, Fry announced the formation of Drexel Ventures, a new VC intended to commercialize university technology and serve as a resource for supporting the region’s entrepreneurs, including students and alumni. Fry is working closely with Loschiavo and McGrath to streamline plans and evaluate funds that will match Drexel’s $3 million commitment. McGrath stresses that Drexel Ventures’ funding decisions will be made by the fund managers, not by Drexel administrators or faculty, and that decisions will be based on two criteria: Does the invention or innovation address an unmet need in society? Does it have a reasonable chance of business success?

“We want practical innovation that will impact the city “ --Bob McGrath Ph.D.

Additionally, the Drexel Fund will serve to establish contacts for young companies looking for investors in the region. “We may make a seed investment in those companies, but there may be a next group of investors that they’ll need. We want the process to be supportive and to give companies as much feedback as possible. Investors will give us their views, so if the company is not selected for funding, the entrepreneur can modify his plans and have a better chance to get it to market.”

With just a few credits left to complete at Drexel, Ericson has plenty of time for early morning wakeup calls to cheer on Manchester United and ponder his future. Will he pursue another startup? A repeat stint with the Red Devils? Probably both, he says. For now, he’s enjoying his final days as a Dragon making the most out of his opportunity with the Dorm Room Fund.

“I know that when I was starting my business, $20–30K would have meant the world to me. One of them may make it big someday, and we are giving them that chance.”