Funding Penn’s IT Entrepreneurs

Class of ’78, ’88, ’02, ’08  | The entrepreneurial urge has long been an integral part of Penn’s identity. Medical professors tinker in their laboratories, searching for elusive molecules and hoping to patent new discoveries. MBA students form management teams to launch new businesses. Engineering undergraduates huddle around computers in their dorm rooms, designing Websites that, by processing information technology in a unique way, may one day generate enough Web traffic to debut as publicly traded companies.

At the center of this creative vortex are Michael Aronson W’78 and Boris Kalandar WG’88, whose venture-capital firm, MentorTech Ventures, provides financing to information-technology and life-sciences companies with Penn connections—faculty, students, or alumni. Since 2005, they have invested in 16 companies, and continue to scour entrepreneur and design competitions for the next big thing.

“It’s somewhat hard to quantify what we look for in a startup—it’s more art than science, at least to us,” says Aronson, MentorTech’s managing director and a former senior lecturer in the management department at Wharton. “We know it when we see it, having known so many Penn people over the years.”

Last summer Aronson hired Brett Topche W’02 to help manage the portfolio of MentorTech’s first fund and assist in raising and investing additional funds. Topche had worked in private equity and venture capital before meeting Aronson through the Wharton Private Equity Network, which holds a number of events every year.

Having learned about venture capital in Venture Capital and Private Equity Finance (a class taught by former Wharton professor Andrew Metrick), Topche gained valuable experience meeting with different clients, analyzing proposals, and structuring financing deals.

“For me it’s all about working with the entrepreneurs,” says Topche. “They are generally very qualified and can get a job at a big company wherever they want. Instead, they dedicate their time and money to chase this idea. If you can’t get excited about working with a group of people who are that passionate, then you should probably check your pulse.”

As venture capitalists, Aronson and Kalandar cull funding from a vast network of friends, former students, and business associates to distribute across an array of start-up businesses. They have invested in companies ranging from Diapers.com (one of the fastest growing internet retailers in the United States) to First Flavor (a marketing company that takes the same form of dissolvable strips used by Listerine and makes them taste like just about anything).

They meet these entrepreneurs in a wide range of places. Topche and newly hired analyst Jordan Leef W’08, for example, meet with professors in their offices and with students at such campus activities as the Wharton Venture Initiation Program. Aronson has even more entrees: He judges and sponsors the Wharton Business Plan competition, supports initiatives at the Wharton Entrepreneurship Center, and participates in mentoring programs at the Weiss Tech House and the engineering school’s PennVention competition. MentorTech also receives referrals from the Wharton Alumni Venture Capital Network, among other places.

Topche and the other portfolio managers at MentorTech spend a lot of time with potential clients, learning how they think about the world—and how they might deal with future obstacles.

“When I’m looking at the financial projections for a company, the one thing I know for certain is that they’re wrong,” says Topche. “Maybe the market changes; maybe a new competitor will appear; maybe there will be a regulatory change. The ability of the management team to adapt to that change in their environment by adjusting their product or doing something different strategically is almost always the determining factor in the success of that company. These are things that you have to get comfortable with before you write a check.”

MentorTech also enjoys a close relationship with Penn’s Center for Technology Transfer (CTT), which formalizes the process for bringing out new technologies that have the potential to succeed in the marketplace. The CTT helps professors to create companies around patents, or license and commercialize them. The University owns the patents, though its professors and departments get compensated if their technologies do well.

“When we talk to an engineering or medical professor, we usually have to do a lot more educating about how deals are structured and what market terms are for venture investors, and about how you build a business that is fundable by professional venture funds,” explains Aronson. “Typically we find the esteemed professors to be very willing to admit their lack of relative knowledge in this area, and we have been able to establish a nice dialogue.”

Topche spends much of his time searching for Internet companies started by undergraduates. One example is Yodle, an Internet firm that helps local small businesses create a Web presence for their stores and attract neighborhood customers through the Web; it was started in a Penn dorm room by Nathanial Stevens W’05 with the help of a handful of venture funds and has since expanded to New York, Washington, and Boston. PayQuik, founded and headed by David Noteware WG’99 and Bhairav Trivedi WG’99, was sold to CITI for $40 million this past January, bringing MentorTech’s investors a healthy return on their investment.

“We generally prefer to work with founders to build value to the next round of financing rather than argue about our ownership percentage up front,” says Aronson. “It is very important to discuss with the founders how many years they are willing to work at their company and what their expectation is about a successful exit. Sitting here in Philadelphia, we aren’t going to create any billionaires, but we can and have allowed founders to afford a very nice lifestyle and have a great deal of financial freedom while generating excellent returns to our investors.”

The company’s current fund, MentorTech II, is making investments through 2010 in more than 50 companies they are tracking, all of which have some kind of Penn connection.

“These managers are so passionate about the ideas they’re generating and the work that they’re doing,” Topche says. “You know they’re going to follow through on their plans. Whether or not they succeed, only time will tell.”

—Aaron Short C’03