Business Incubator Series: Art Boni, Donald H. Jones Center For Entrepreneurship, Carnegie Mellon University — Pittsburgh, Pennsylvania (Part 3)

By guest authors Irina Patterson and Praveen Karoshi

Irina: When did you launch the accelerator?

Art: We launched last summer for the first time, and we are planning to run it again this summer. We will take probably three or four companies for a period of three months. Last summer we had six companies apply and we took four.

Irina: What are the core benefits the companies receive in these three months?

Art: They will receive $15,000; mentoring from us and people in our network, who are largely angel investors and successful entrepreneurs; and some physical space. Rather than invest our capital in a physical space, what we have done for our first couple of years is borrow some space from partners who work with us.

Irina: When is the time for students to apply for this program?

Art: We received applications about two to three weeks ago, and we will now go through an interview process. We have a selection process. Applicants have to supply us with a short summary, and then we interview them to understand the opportunity and try to get a better sense of what their objectives should be for the three months they are going to be in the accelerator.

The thing we did this year is, in addition to accepting students from the Tepper School of Business, is open it up to other parts of the campus.

Irina: How many applications did you receive?

Art: We received six applications and plan on funding three or four companies.

Irina: So once you accept them, what is their next step?

Art: The next step is to develop a plan for advancing the product, the service, or both; testing it in the marketplace by talking to real customers and users; and iterating the solution depending upon the feedback they get.

Irina: The three companies that were incubated last summer, are they still working on their projects?

Art: Yes. Last summer the teams that were accepted were all between their first and second years of the MBA program. They are back in school and they are all working on their projects. I think all of them have products that are either in the beta test stage, later beta test stage, or they actually have customers.

The challenge, obviously, is to raise enough capital to sustain and grow the organization. One of the reasons we like the idea of funding between the first and the second years or as they are leaving our program is that they have a three-month runway to advance their products, get customers, and work very actively on the fundraising for their project. Another part of this program is working with these companies to get them funded as they launch.

Irina: What are the usual sources of funding?

Art: Most of these organizations will not be ready for venture funding until they get market traction or they have a revolutionary breakthrough product that would justify [such funding].

So, the typical sources of funding are twofold. One is angel funding, basically private capital. The second is, in Pittsburgh, we have a well-developed network of what we call technology-based economic development groups, which include Innovation Works, Idea Foundry and Pittsburgh Life Sciences Greenhouse [PLSG]. Those groups generally provide funding in the neighborhood of $100,000 to $150,000.

The typical funding scenario would be like this: They get funding from one of those groups, and then they raise angel or venture capital. So, we are looking at a first investment of maybe $100,000 to $150,000, then bringing in another few hundred thousand, maybe up to $500,000. Then they are basically ready for more angel capital, or some of them at that point become ready for venture capital.

Irina: The economic development groups, what kind of investments do they make?

Art: Those groups use what we call a convertible note, so they are investing capital in a nonprice round. It is very difficult, as you can imagine, to value a company at this level. These groups did not even try to do that. They simply put in their money, and that debt is converted into equity during the first price round.

This segment is part 3 in the series : Business Incubator Series: Art Boni, Donald H. Jones Center For Entrepreneurship, Carnegie Mellon University -- Pittsburgh, Pennsylvania
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