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The Reinvention of Innovation Works

In the first years following its founding as one of four centers in Pennsylvania’s Ben Franklin Technology Partners, Innnovation Works concentrated on providing seed financing to tech start-ups, with perhaps the occasional follow-on investment. While IW still focuses on start-ups, their range of services and support has expanded exponentially.

Such as: It now offers grants to assist local universities in commercializing promising new technologies and provides funding to support the formation of angel investor networks. A human resources professional on staff helps portfolio companies identify and hire key staff. And IW has recently launched AlphaLab, a discrete South Side facility that provides emerging software and IT companies with capital, space, mentoring, networking opportunities and links to other investors.

This growth has produced impressive results. Since 2000, Innovation Works has invested about $40 million in start-ups, which have used that financing to leverage $550 million in additional capital. IW portfolio companies have created nearly 5,000 jobs, positions that typically pay roughly double the average wage in Pennsylvania. Most significantly, of all the local companies that received venture financing in 2008, about 70 percent were in the IW portfolio.

“That’s not by accident,” says Rich Lunak, IW president and CEO. “We believe that we succeed when our companies succeed. They’re the real story, not Innovation Works. At the end of the day, we feel we’ve been successful if we help those companies grow and move on to bigger and better things.”

Less is More
When Lunak, former president of McKesson Automated Healthcare, came to IW in 2004, expansion was not the first order of business. In fact, one of his immediate priorities was an internal review that yielded a 40 percent cut in the administrative budget.

“Nonprofit is just our tax status; we run Innovation Works like a business,” Lunak says. “We’re constantly looking at our strategy and how we can have the most impact on the community. If you look at what we’ve done in recent years, it’s been an evolving model. We advise our entrepreneurs that they have to course-correct, adjust and change their businesses to be most relevant. We’re no different.”

Yet less turned out to be more; the cost-cutting exercise helped drive a new approach. Says Lunak:

“We defined a three-pronged strategy: How could we impact more entrepreneurs? How could we be more responsive to their needs? How could we collaborate with other community partners to have greater impact?”

This was nothing short of a reinvention of IW, and it fueled creation of a number of innovative programs. Among them:

University Innovation Grant Fund. The region’s major universities are hard at work developing new technologies, yet their principal funding may be restricted to pure research. That leaves no money for commercialization. IW grants help finance that.

Angel Group Assistance Program. Rare is the start-up that can grow without angel financing at the early stages, yet some prospective angels may not know how to pursue such opportunities, or they may be wary of investing without guidance from sector veterans. IW provides funding support for any group of at least five angels, and its services run deeper than that. When Pittsburgh Equity Partners was ready to hire its first set of key executives, IW wrote the RFP and guided the fund through the process that yielded Steve Robinson and Ed Engler as general partners.

HR Expertise. In 2007, IW brought on Kathy M. Mitchell as human resources strategist to help portfolio companies secure top talent.

“One of the most critical success factors is putting together a world-class team to go with world-class technology,” Lunak says. “When it comes time to hire that first head of sales or manufacturing services, you want to get the best person you can.”

Though on the job only 18 months, Mitchell has placed about 35 senior executives at IW investees.

AlphaLab. The most far-reaching of IW’s innovations, AlphaLab serves as a sort of super-incubator. The space at the East Carson Street facility may be austere, but the atmosphere is nurturing. IW offers seed financing and mentoring for resident companies as well as networking opportunities and expert presentations — 32 of those for the first cohort alone. The 20-week program culminates in Demo Day, when participants make their pitches to more than 100 potential investors assembled by IW.

“We developed this program to provide all the essential ingredients to help an entrepreneur launch a company,” Lunak says.

Still in its infancy, Alpha Lab has been a magnet for nascent software firms; more than 100 applied for the 12 slots in the first two cohorts. Many were from out of state — one even relocated to Pittsburgh to participate more fully — an indication of what Alpha Lab can do to raise Pittsburgh’s profile as a technology bed.

Budget Cuts and Offsets
One worry for the new-look IW is the moribund economy and its potential effects on the organization’s funding sources and investment generally. IW hasn’t seen its state funding cut yet, though Lunak acknowledges the possibility.

“It’s certainly impacted every sector of the economy,” he says of the current malaise, “and venture is no different. Probably more than ever, companies need to be conscious of their cash flow and burn rate and revisit their expense and growth strategies.

“That said, good companies still are able to raise money. Year over year, our follow-on funding stats are not dramatically different. If you look at the Pittsburgh region in general, venture investment was down only about 15 percent, which is on par with the overall economy.”

Should those feared cuts materialize, there are offsets. For one, the Commonwealth has allocated Ben Franklin Technology Partners $40 million — $10 million for IW — through the state’s Energy Independence Strategy. When that money rolls in later this year, IW expects to launch a drive to form and support energy-related companies.

For another, some of those tiny companies in IW’s early portfolio have come of age. They’re generating profits, some of which will provide a revenue stream for IW as an equity partner.

“It’s definitely a harder environment,” Lunak says, “but our companies still are making it happen.”

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Captions:  Rich Lunak; Alpha Lab's Meredith Benedict meeting with start-ups John Feghali (left) and Vasco Pedro (right); Jim Jen, Rich Lunak, Meredith Benedict and Mike Woycheck, at Alpha Lab.

Photographs copyright Brian Cohen

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