0:00:00 - (Joe Herbst): We are a research powerhouse at Penn State. Over $1.4 billion of research is conducted annually at the university. Those companies get adequate capital through that period of time until they have strong product market fit. And that's where Nittany Angels comes in. The model that is hybrid between a network and a fund working together is one that can be very, very effective. Think again. We can just magnify our impact by more dollars to invest and having more investment opportunities to support.
0:00:36 - (Andrew Kazlow): Welcome to the Diligent observer, where we help angel investors see what most miss. I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators. My guest today is Joe Herbst, executive director of the Nittany Angels, a newly launched investor network focused on supporting the Penn State startup ecosystem. In this episode, Joe explains why a $1.4 billion research engine still has a place for angel investors, tells the story of a bedbug killing Penn State exit, and walks me through his mental model of the local startup scene.
0:01:15 - (Andrew Kazlow): I hope you enjoy learning from Joe as much as I do. Joe, thank you for being with me today.
0:01:27 - (Joe Herbst): Great to be here.
0:01:28 - (Andrew Kazlow): Well, I'm really excited to learn more about this ecosystem in which you find yourself. You've been part of this for a while, but it's growing and changing quite rapidly. So I wonder, Joe, if you could just start by introduce me. I don't know anything about the Penn State startup ecosystem. Tell me about it.
0:01:50 - (Joe Herbst): Absolutely. Happy to do that. Yeah. Penn State's been around since 1855 and from an innovation standpoint, we really got going on that many decades ago with a lot of early inventions. But from an innovative ecosystem standpoint, it was really probably about 15 years ago under President Barron, really started Invent Penn State, which was a conference that we actually just had our eighth conference there conducted every 18 months or so and really started pushing the word innovation and that brought that into the Penn State lexicon.
0:02:34 - (Joe Herbst): And as a result of that, you know, we many things have come from that. The ecosystem has evolved. So over that period of time we've got what we call the launch box. It's a 28 different physical locations throughout the Commonwealth of Pennsylvania to help entrepreneurs start up businesses. They do not have to be Penn State related those businesses. It really is a, you know, part of the Penn mission, which is to help the Commonwealth as well as educate the folks. So we have the launch boxes throughout the the Commonwealth. We've got the Entrepreneur in Residence program which has been around for six or eight years now to, to advise and help founders and CEOs get up and, and going.
0:03:21 - (Joe Herbst): And we have a number of small investment funds that are philanthropically funded, including the Garber Fund and the Propel Fund, which are part of the Smeal College of Business, and now also the Momentum Fund, which is part of the research organization. So that's really the ecosystem. And our piece of that comes from. Our piece being the Nittany Angels piece comes from providing capital. So I can launch into that more as soon as you.
0:03:55 - (Joe Herbst): As soon as you want me to.
0:03:56 - (Andrew Kazlow): So you said, did you say 28 physical locations across the Commonwealth? Like
0:04:02 - (Joe Herbst): that's correct.
0:04:02 - (Andrew Kazlow): That's okay. So this is, this is way bigger than just local to. Yeah. That's incredible. I imagine those get utilized quite regularly. Founders are always looking for space and, you know, ways to get access to good resources.
0:04:18 - (Joe Herbst): Absolutely. And this can be a landscaper, this can be a, you know, someone that wants to open a yoga studio. This is not just high growth business businesses. This is to support entrepreneurs Commonwealth wide, to get businesses up and growing. Small businesses are what drive employment, you know, throughout the country and certainly in, in Penn State as well. So in addition to that, one of the other pieces of this is the Entrepreneur Assistance Clinic, which is a legal clinic that is headquartered out of State College and it's the largest provider of free legal advice to companies throughout the, you know, Pennsylvania.
0:04:57 - (Joe Herbst): So anyone that wants to start a business, this is for small businesses and mainly at the startup phase. So how do I do that? A lot of that you can do online, but actually being able to speak to an attorney, or in our case a law student overseen by an attorney is really, really helpful for an entrepreneur starting up a business.
0:05:17 - (Andrew Kazlow): So you've been involved in kind of the broader Pennsylvania startup scene for a number of years. Before we get to Ninja Angels, I wonder if you could just walk me through, like, what are the major things you've seen change or grow from an entrepreneurial standpoint, you know, over your career, last couple of decades? Because even just hearing you describe a lot of the programming at Penn State, it sounds like this is all somewhat new within the last 10, 15 years. And so I imagine quite a lot has changed. And I wonder if you could just react to me like, describe today versus 20 years ago.
0:05:50 - (Joe Herbst): Well, it's a focus on actually starting things up, being innovative. And what's really happened over the last five years, which is really exciting, is focusing on trying to have the university capitalize on that. So what you heard earlier was really a lot of our Land grant mission supporting startups and entrepreneurs throughout the state. We're also trying to do that so that it benefits the university.
0:06:16 - (Joe Herbst): So Nittany Angels is actually part of the research organization. So not we're not in the business school and we're not a separate entity. We are actually part of the research organization. And this really got, got legs, so to speak over the last three or four years with, with having our president, Neely Bendaputi prioritize it. So we are a research powerhouse at Penn State. Over $1.4 billion of research is conducted annually at the university.
0:06:50 - (Joe Herbst): But our ability to capitalize on that in the form of licensing revenue of out licensing that technology to either large or small companies has been subpar, so to speak. So we're not in the top of the our, you know, compared to our big ten peers. So there has been a focus on that. And part of that is just, you know, staffing up the Office of Technology Transfer comparable to our peers so that we better serve our faculty so that they're more satisfied, get quick returns and getting their licensing in place with whoever they're licensing to.
0:07:26 - (Joe Herbst): But another piece of that is helping those companies with capital as they come out. Some of the big, big technologies are licensed to, you know, very large companies because they're capital intensive and it's an improvement on whatever is in that particular industry at time. But other technologies, particularly in the ag space and material science and life science, particularly life science device, you form a company around that, recruit in a commercial CEO, license into the technology and then build a company around that. Well there, there's a need to have those companies get adequate capital through that period of time until they have strong product market fit.
0:08:10 - (Joe Herbst): And that's where Nittany Angels comes in. So we try to actually be closer to seed investing than pre seed investing. The pre seed investing is funded by grants, sbir funding, some of those other philanthropically funded resources that I had mentioned. So we like to see that whatever product or service is developed is sort of in market. There's some customers we can get some reference to and then Nittany Angels will step in to, to, to consider providing support for those businesses.
0:08:45 - (Andrew Kazlow): So say more about why the organization has been situated within the resort, within the research function because we've had a bunch of different university affiliated investor communities represented on this show and every one of them is structured differently. That's one of the beautiful things about you know, setting up an investment community alongside an academic institution is there's just a million ways to do it. So I'D really love to hear like why was this situated where it is in the ecosystem?
0:09:16 - (Joe Herbst): Mainly because we really want to focus on improving our licensing revenue that can come both in the form of royalties and also in the form of companies that succeed. The university has an equity interest in those companies and there could be a big chunk of return that happens there. So that's why this is in the research function. And I got pulled into this role as exec Executive director of Nittany Angels primarily because of two things.
0:09:44 - (Joe Herbst): One, I'm a long term angel investor through an entity, a network in Philadelphia called Robinhood Ventures. So I was, I've been in that group for over 20 years and was managing partner of that group for four years as well. So not just in angel investing but also managing an angel network. And I also served as on the board of the Penn State Research Foundation Board, which is the independent board that oversees the out licensing of technology from the.
0:10:12 - (Joe Herbst): So as I mentioned, research powerhouse, room for improvement on commercial licensing revenue. So you know, what can we do to support those companies, have those companies succeed, grow, increase royalties and equity return and that from the research arm. So there are other efforts and considerations in the business school with these small philanthropically funded funds, but putting this network together and hopefully we'll be able to also launch a fund to work with the network is part of the, part of the idea of really helping improve our commercialization statistics at Penn State.
0:10:55 - (Andrew Kazlow): And so the basic value prop is if I want to see more deal flow that's got Penn State research affiliated with it, this is the community for me because I'm going to get a consistent stream of that kind of opportunity.
0:11:11 - (Joe Herbst): Yeah, exactly, exactly. So, so right now, beyond just investing in companies that are coming out of the university with Penn State intellectual property licenses, we also invest in Penn State affiliated businesses. So the, the actual, the larger volume of deal flow comes from Penn State affiliated companies anywhere in the United States and in any industry. So you know, normally Penn State founder, Penn State founder, co founder, early investor, that refers us in advisor board member, some sort of relatively tight affiliation with Penn State. We look at all of those investment opportunities as well as the companies coming out of the university with, with a license. But we do have, you know, we are focused on companies that have Penn State ip. They're at the top of the list when we're doing our screening and consideration.
0:12:06 - (Andrew Kazlow): Can you give me some examples of any companies that would have kind of met this criteria, you know, had this community existed earlier? Like who are some of the well known founders Entrepreneurs, businesses that kind of. Backed by. Supported by Penn State IP or talent.
0:12:22 - (Joe Herbst): Yeah, we have a company that has Penn State IP that is in the agricultural space. I mean Penn State is a very big supporter and innovator in the ag tech space. And there's a company that has that, that does improvements to crop yields through its own certain technology. And that, that came out of the university probably nine or ten years ago and did wind up doing very well, has not exited yet, but is it in position to do that, but wound up bootstrapping and raising venture capital without us.
0:13:07 - (Joe Herbst): But that's where it operated. That would be an excellent example of where we could have stepped in and supported, supported that company and got it up and running that from years ago. And, and now we're a new group. So we are just getting off the ground. Started at the end of March at our first few meetings in the spring and we're about to make our first investments here this week actually. So excited about that.
0:13:31 - (Andrew Kazlow): Okay, so let's, let's talk about this because you're not a brand new group for very long that only lasts for a year or two and then you've settled in a little bit. What are the things that you've learned that are super obvious to you over the last six to 12 months, getting this thing spun up? You obviously had some background in the angel space already, so it's not like you're walking in totally fresh, but this is a new environment in which to do that. So what have you learned? What are the things that have stood out to you just personally like over the last few months?
0:14:01 - (Joe Herbst): Well, it's been really exciting, really, really exciting. And I'm thrilled to be have the opportunity to do this because mainly because the Penn State brand and the Penn State network, there are over 800,000 living alumni, Penn State alumni throughout the United States. So we're one of, you know, very large R1 university. The power of the brand is really impressive. So we attract interest from alumni that want to become members of the network and from companies that are raising capital where we never otherwise would have had an opportunity to invest.
0:14:43 - (Joe Herbst): So in launching the network, we really try to take what we knew coming into the effort from learnings from the Angel Capital association and my experience as an angel investor both do, making the investments and running a group and took best practices that we had from that before and applied them here to get the network up and running in a really pretty short period of time. And then we're relying on the power of the brand to recruit members to the network and also get the word out relative to investment opportunities as well. So we're up and running. Have about 35 members in the group, hope to grow to over 50 before the end of the year and hopefully even a hundred within, within another 18 to 24 months.
0:15:32 - (Andrew Kazlow): What's been the hardest part of the process for you? Personally?
0:15:36 - (Joe Herbst): I'm used to working with owners and small business, small businesses and Penn State's a big university. So, so there, there are, you know, things, things don't always move at the same pace that I'm used to working with, but there are reasons for all of that and the university has been very supportive. So I think that, you know, that has helped us get up and going.
0:16:03 - (Andrew Kazlow): Has anything in particular surprised you as, as you've settled in, given your background, I imagine you had some set of expectations. But like what's been surprising to you in this process?
0:16:14 - (Joe Herbst): I again, I'm pleasantly surprised by the power of the Penn State brand, the doors it opens, particularly with investment opportunities.
0:16:25 - (Andrew Kazlow): So give me an example. You mentioned that a couple times. What does that mean?
0:16:28 - (Joe Herbst): Well, it's a, we, we found an entrepreneur who is a co founder of a business and he lives here in, in Pennsylvania and however, the company is in Silicon Valley and they're doing a seed raise and on the, you know, it's, it's actually in an AI robotics company that we, you know, that is doing a seed raise and we had an opportunity to invest in the round and we just closed on that investment on Tuesday.
0:17:02 - (Joe Herbst): So we, you know, we probably never would have had access to that company if we hadn't had, you know, a Penn State alum in the, as a co founder. I mean he opened up and now as a result of that he also got more involved with Penn State and is working with, with one of our departments actually using their product to, you know, to test a number of things that on their end and also help help one of our real estate businesses.
0:17:31 - (Andrew Kazlow): A quick note before we continue the conversation. Alongside the Diligent observer podcast and newsletter, I also run an outsourced operations service specifically built to serve Angel Networks. My team handles things like initial screening, social media, newsletter prep, platform management and a whole lot more. The kinds of things that either aren't getting done or shouldn't be done by busy community leaders.
0:17:53 - (Andrew Kazlow): If that sounds interesting to you, send me a note. Now back to it. So I think one of the things that's always really exciting to me is seeing regional university kind of very specific communities that spin up. I wonder if you Just look at the future for me. What does this community look like three years from now?
0:18:17 - (Joe Herbst): Well, I think from the Nittany angel standpoint we're a much bigger group. I mean we're focused on growth right now. So we've got the core tenets of how we operate in place and now we just need to grow and we grow by growing the number of angels, the number of investors in the network. We grow by the number and quality of investment opportunities that come our way. We do that by just spreading the word that we're, we're in market looking for good investment opportunities.
0:18:47 - (Joe Herbst): So I, I believe that will benefit the Nittany Angels, it'll benefit the university and it'll benefit the companies that we're, that we're investing in. The, the other piece of this is we do want to, you know, we've done a number of benchmarks, you know, a good bit of benchmarking with some of our university colleagues and also at the Angel Capital Association. So I really believe that, you know, the model that is hybrid between a network and a fund working together is one that can be very, very effective.
0:19:17 - (Joe Herbst): So over the next, you know, 12 to 24 months we will be working on setting up a small angel investment fund that will probably be member managed that will be able to have a, you know, a single investment amount for the companies with sidecar from the, the angel group or vice versa the other way around. And I think again we can just magnify our impact by having, you know, more dollars to invest and having more investment opportunities to support.
0:19:52 - (Andrew Kazlow): So why is that that that hybrid structure is more effective? Like double click on that for me.
0:19:58 - (Joe Herbst): Yeah, sure. Having a network is, is really good and we keep our costs really low because we to do a lot of the work. Meaning diligence teams are volunteer led and volunteer members that are doing the work. They come back with a diligence report to the group. The group in a network makes up their, every individual makes up their own mind. And but one of the, one of the, you know, my opinion weaknesses with that model is that if you're on the Entrepreneur, the entrepreneur asks what's my investment piece going to be?
0:20:33 - (Joe Herbst): You know, the leader of that group can't say. I can't tell you exactly what the investment amount is going to be once you finish the due diligence here because it'll depend on the members interest levels. So that could be 150,000, it could be 400,000. I can't tell you what it's, you know what it's going to be in that range. If we have a fund that also operates and looks at the same opportunity. If they go through the diligence with the both the fund and the network, I can tell them your investment amount is going to be certain amount, you know, half million dollars from the fund.
0:21:04 - (Joe Herbst): If, if there's interest from the group you'll get, you could potentially double that from the, from the network. And that's the value to the entrepreneur. So that they know is that dollar amount fit in the round that I'm raising. And then there's synergy between the two, the fund and the network relative to sharing information, making decisions and you know just sort of momentum or lack thereof.
0:21:30 - (Andrew Kazlow): Love it. Yeah we see this in a lot of groups that we work with so it definitely adds value in the right circumstance. Let's come back to the Penn State ecosystem and if you want to go wider across Pennsylvania what do you feel like most people that aren't local miss or like don't understand about this, like what, what are the common misconceptions or things that you're like man, if everybody understood this there would be so much more excitement like what are we not seeing?
0:21:57 - (Joe Herbst): Well, Pennsylvania's a phenomenal place to live. I live here, have all my life and I really really love it. And there's lots of good investment opportunities right here in the state but we are nationwide so we're looking at opportunities anywhere in the country. And we're looking you know mainly seed and A or seed C add on and A is where we're our main kind of focus is. And then as we get bigger we'll have you know we'll opportunistically look at later stage and earlier stage.
0:22:28 - (Joe Herbst): But you know coming out of Pennsylvania there's you know we have, we have real areas of focus like I said ag tech, material science and life science device particularly those three are kind of our strong suits and, and we do see lots of innovation coming out of the university in those particular areas and companies being formed. We just had a, you know it was, it was a phenomenal win and exit last year with a company that you know is very unexciting product but really, really useful. And it was for the elimination of bedbugs.
0:23:08 - (Joe Herbst): So you know university prevent. Everybody hates bedbugs. I mean that's, that's universally agreed to and yeah so company professor and came up with this non toxic way of eliminating them and separated out left her job at the university, started a company with brought in a commercial CEO lead. They grew it for over a six or seven year period of time and just exited last year. So it was a win for the university both from a licensing standpoint and the university from getting a nice equity chunk upon that exit. And then the, you know, the professor and, and, and all the other early investors and there was a relatively small cap table on that small exit, relatively speaking. But, but a beautiful win for Pennsylvania Penn State University.
0:24:02 - (Joe Herbst): And then everybody that goes to the hotel room doesn't have to worry about headbutts.
0:24:08 - (Andrew Kazlow): I love it. It's interesting because I feel like it's often the case that as companies grow they require more capital and ultimately end up needing to exit regional or local ecosystems to gain sufficient capital. Do you feel like the local capacity to finance startups is sufficient? Do you feel like companies leave a lot of the time? What's your take on the local ecosystem's capacity to finance this growth? I mean you've been doing this for a minute so you probably got a pretty clear perspective on that.
0:24:40 - (Joe Herbst): Yeah, Commonwealth wide, plenty of capacity. State College is in the middle of the state, so it's not a major, you know, you know, United States town or city. So there is a bit of a challenge recruiting experienced CEOs into State College. But at least from our perspective, moved to Pittsburgh, moved to, you know, Philadelphia. Two really great innovative cities particular. Philadelphia in particular has a real stronghold in, in life science, both device and therapeutic.
0:25:16 - (Joe Herbst): So plenty of opportunities to support the companies that stay within the Commonwealth. So we, we encourage them to do that wherever we can. And I think there is enough capital, if they're successful enough, they can draw capital from Boston, New York, Silicon Valley. Even if we can get them far enough down the road where they're, they have something really unique and they need larger capital. But you know, we, we also really look for capital efficient businesses too that, that don't need huge AI build out type capital and they can create a lot of jobs and support a lot of, you know, financial and economic value to the community, to the university and the Commonwealth is as well.
0:25:55 - (Andrew Kazlow): Who are the main partners or communities that you all focus on in terms of like sourcing these companies? Oftentimes it's an accelerator or an incubator, some community that's focused on doing kind of the ground level work of getting a company off the ground. I imagine a lot of that happens locally. But as you look at you mentioned Pittsburgh, other places like who are the, the communities that you guys specifically look to work with often for emerging company?
0:26:22 - (Joe Herbst): Yeah, well we, the Office of Entrepreneurship and Commercialization and research ventures here at Penn State are the main areas where those support functions that I mentioned earlier are the entrepreneurs in residence, the launch boxes, the you know, where those companies are kind of supported until they reach a point where they have a license in plate and come come out. So that whole support function is here in State College.
0:26:52 - (Joe Herbst): So we have that and then beyond that we have similar type organizations in the Pittsburgh and Philadelphia area. The the Commonwealth of Pennsylvania has a very well established group called Ben Franklin Technology Partners. And there are four different bends around the state geographically, southeast, you know, southwest, northeast and then all central and northern. And they provide both capital and advice to businesses that have scaling capacities.
0:27:26 - (Joe Herbst): So companies that can really scale and need capital willing to take outside capital. So that is a great organization. It's been around for 25, 30 years and is really supportive of small businesses throughout the Commonwealth.
0:27:40 - (Andrew Kazlow): Joe, what else should we know about you? I mean you've stepped into this role leading the charge at Nittany Angels. What else should we know about you and your story that we haven't already covered?
0:27:51 - (Joe Herbst): Well, I'm really excited, as I mentioned, to be here at Nittany Angels and leading it and we're all about growth. So if there any Penn State alumni that are interested in angel investing that are already angel investors in a local group but want to have access to nationwide deal flow support, Penn State alumni, etc, we would love to have, you know, have reach out to them to, to contact me to see if you're interested in becoming an angel investor and then again growth in our deal flow opportunity. So we're always looking for new, unique, high growth, high return investment opportunities that are have some sort of Penn State affiliation. So that's really what I'm excited about.
0:28:41 - (Joe Herbst): And doing something new that has real brand support and ability to grow very rapidly is really exciting.
0:28:50 - (Andrew Kazlow): Well Joe, thank you for taking the time to share about this community. We look forward very much to staying in touch and I'll see you for the next conversation.
0:28:58 - (Joe Herbst): Wonderful. Thank you very much.
0:29:01 - (C): Thanks for listening to this episode of the Diligent Observer. I'm your host Andrew and if you're an angel investor are looking for essential angel intel in five minutes every week. I think you'd enjoy my newsletter. I send my best stuff, interesting deals and more straight to your inbox so you never miss a thing. Subscribe today@the diligentobserver.com.
