Rich Lunak and Innovation Works continue to change the startup world

 

Rich Lunak, president and CEO of Innovation Works, has been the struggling entrepreneur trying to raise money, secure customers, get products out and hire the right team to execute.

Lunak’s company went from a three-person startup to an acquisition by McKesson Corp., the nation’s 16th largest company. That business grew to employ about 2,000 people and generate hundreds of millions of dollars in revenue. Today, the tables are turned as he leads Innovation Works’ efforts to support the entrepreneurial technology community.

“I’m actually an entrepreneur that’s benefitted from support. (Innovation Works is) a program that was started in Pennsylvania over 30 years ago. Back when I was building a health care robotics company here in Southwestern Pennsylvania, Innovation Works gave us funding and assistance that we probably wouldn’t have survived and been around without,” he says.

Lunak’s story isn’t unusual. Most people who are employed by or have partnered with Innovation Works have walked in his shoes.

“We need that in order to have that street credibility to an entrepreneur who walks in the door for help,” he says.
Innovation Works is the most active seed and early-stage investor in the Pittsburgh region, and last year PitchBook named it the third most active investor in the U.S. It runs Riverfront Ventures, an early-stage venture capital firm where Lunak is one of three managing directors.

Innovation Works also has two nationally-ranked accelerators, AlphaLab and AlphaLab Gear, and since 2000, its companies have raised over $2 billion of follow-on investment. AlphaLab and AlphaLab Gear Demo Day, held twice a year, draws more than 1,000 people and hundreds more watch online. Lunak says the most recent Demo Day, which “is like a rock concert for entrepreneurs,” drew 40 investors from China who brought their own translator, as well as others from across the U.S.

AlphaLab Gear, which is less than five years old, has spawned other programs and services like Startable Pittsburgh and the AlphaLab Gear International Hardware Cup. It also sparked other regions to develop similar accelerators.

A new model for an emerging trend

The idea for AlphaLab Gear began around 2008. Lunak and his team recognized fundamental changes in the way people built hardware products from high-profile successes like Square Inc., MakerBot and Fitbit.

Software engineers already were deploying new products on Amazon Web Services and the cloud with immediate access to global markets and scalable infrastructure.

People rethought the traditional waterfall method for product development — a sequential design process where progress flows downwards — in favor of the agile approach. Agile starts with a simplistic design. After weekly or monthly sprints on small modules, project priorities are evaluated and tests are run. Bugs are discovered and customer feedback is incorporated before the next sprint.

The same revolution started in hardware, Lunak says. Entrepreneurs had access to new tool sets like 3-D modeling, 3-D printing, fabrication labs and open-source hardware. The build cycle shortened and became less expensive. Developers could put prototypes into customers’ hands faster.

“We felt like Pittsburgh had tremendous assets in this area,” Lunak says. “We had a strong base of electrical and mechanical talent from our universities and corporate employers. We had a world-renowned supply chain to build, design and manufacture things. We had organizations like America Makes, TechShop and today we even have an advanced robotic manufacturing initiative here locally — so a lot of national recognition.”

In addition, he says area startups, 4moms, Dynamics Inc., BodyMedia, SolePower and others, were emerging and could serve as models.

So, Innovation Works followed the same advice it gives to entrepreneurs.

“We did customer discovery, we tested our ideas out to prospective entrepreneurs who are our customers. We did some pilot tests with some hardware companies that went through AlphaLab, our software accelerator,” Lunak says.

The new program, AlphaLab Gear, ended up very different from AlphaLab. It had a different funding model, up to a $125,000 investment, rather than $50,000; a program of about 40 weeks, not 20; and a different support system, seasoned entrepreneurs who’ve built and scaled hardware companies and partnerships like ANSYS and StartBot.

“We surround them with the investment and resources that they need to take it forward,” Lunak says. “It’s not perfect for every product. You can envision a medical device that might be complicated and needs to go through an FDA process, a regulatory process, that’s not a fit. But for a lot of products, we call them agile hardware products, it’s a great fit — think internet of things, those types of products, those are terrific.”

Improved product development

Innovation and product development cycles are dramatically different — more fluid and faster than they ever were, Lunak says.

“Customer discovery and product market fit a lot of times can be done very cheaply and without significant investments to test out models and theories, so engineers can build mock-ups to test customer reaction,” he says.

Just like Lean manufacturing improved reliability and efficiency, Lean product development does the same thing. Lunak says one leader in this space, Eric Ries wrote “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses.”

There’s always been an age-old problem of engineers and developers whose comfort zone is in a lab rather than out working with customers, Lunak says. That can lead to re-engineering a product that’s already designed and developed, which is more expensive.

Another challenge for AlphaLab Gear participants is that engineers and founders know how to design products and want to race to the end solution, but they don’t necessarily design for manufacturability or serviceability.

If engineers need to design a box enclosure, they might want six sides that are fastened or welded together, Lunak says. But a manufacturer’s first thought is to stamp it out of one piece of metal, bend the parts and spot weld the ends for one-third the price.

Serviceability is also sometimes an afterthought, which is a mistake.

“If you’ve got products in the field and they need to be repaired and serviced, sometimes that can be the most profitable portion of your business, and a long-term annuity stream of revenue,” he says. “If you don’t design the products from the onset with that in mind, a lot of times it negatively impacts both your customers and your ultimate revenues and profits.”

To counteract these tendencies, entrepreneurs work from day one with manufacturing engineers and designers and local supply chain partners to do design reviews, and ultimately save time and headaches, Lunak says.

The accelerator has already built out a large network for this because it’s a win-win.

“The entrepreneur gets the input and help of seasoned manufacturing and engineering talent, and the manufacturers stay up on the latest and greatest technology trends, but also get to diversify their revenue streams,” he says.

Be willing to disrupt yourself

In the few years that AlphaLab Gear has been around, the lines between hardware and software have started to blur. The two accelerators already do a lot of cross-programing, and Lunak believes that will only continue.

“Marc Andreessen, a famous entrepreneur and investor, has a saying that software is eating the world, meaning it’s becoming part of everything,” he says.

The latest refrigerators, for example, have software and user interfaces that can give you a weather report and take pictures of what’s inside and send it to your phone while you’re at the store.

Innovation Works may have to innovate again as hardware and software grow closer, but that’s how companies remain leaders for decades.

“You’ve got to not be afraid to innovate and disrupt your own markets and your own products,” Lunak says. “In this case, we could have stuck to the same old formula of working with companies, but we realized these trends were dramatically changing the markets and areas that our entrepreneurs were working in, and launched new programs and services to deal with that.”

As lines blur and the market changes, he says you can sit still and do nothing or be out in front.

“For first movers, like in our case, you can grab national attention and national brand and then be a sought-after place, where you have entrepreneurs that vie for these programs and apply to them from all around the world. Or, be the laggard that adopts late and is trying to play catchup,” he says.

There’s risk in going first, so it has to be measured. However, Lunak says, if you give your employees the freedom to think big and innovate, they often overachieve and surprise you with the results.

“If you’ve got people like that, that are ambitious and strong, sometimes the worst thing you can do is micromanage and stifle them,” he says.

For example, Ilana Diamond who runs AlphaLab Gear, was a seasoned entrepreneur who ran, built and sold a global consumer electronics company that sold products through big box retailers. Diamond has been a force of nature that built the program to what it is today.

She’s helped Innovation Works stay on the forefront as a national model for creating a thriving startup ecosystem.

“In the businesses that I ran, a metric that we always tracked was how much revenue we were generating from new products, viewing that as our future growth potential and the engine that could feed our profitability,” Lunak says. “You’ve got to be willing to take risks and stay on the front edge of things.”

How to reach: Innovation Works, (412) 681-1520; AlphaLab; AlphaLab Gear; Riverfront Ventures

 

Takeaways:

  • Faster, more fluid product development requires new thinking.
  • Design with manufacturability and serviceability in mind.
  • Don’t be afraid to disrupt yourself to stay on the cutting edge.

 

The Lunak File:

Name: Rich Lunak
Title: President and CEO
Company: Innovation Works

Born: In the Pittsburgh area, Bell Acres

Education: Bachelor’s degree in electrical and computer engineering from Carnegie Mellon University; master’s in business administration from Joseph M. Katz Graduate School of Business, University of Pittsburgh

What was your first job and what did you learn from it? I started early, like a lot of kids, with paper routes and mowing lawns, but the first significant job was helping my dad repair cars. He was an auto repairman, like body work, and he did work in our garage.

I learned the value of hard work and that you can sometimes overlook the skill and artistry of a job that looks simple on the surface. I learned to respect every aspect of a job and how every contribution is critical to the end product.

As someone involved with the community, what do you see as a big issue that the city needs to work on? Pittsburgh has tremendous momentum and it serves as a model for a lot of regions across the Midwest that are trying to diversify and build their economy, whether it’s the strength of our economy or quality of life and lifestyle in what our community has to offer.

As we build, though, it’s important to do it in a way that’s inclusive and makes sure that opportunities are available and shared and accessible by everyone in our community. But Pittsburgh is a place that can get that right and it has a lot of terrific civic leadership right now.

You said you read a lot and listen to many podcasts. What are some of your favorites? I mostly read nonfiction. I like books by Michael Lewis and David McCullough, as well as biographies like those on Elon Musk and Steve Jobs. “The Double Helix” talks about the discovery of DNA, “The Last Days of Night” is about Thomas Edison and George Westinghouse, and “The Devil in the White City” is another excellent book. As far as fiction, I enjoyed “All the Light We Cannot See.”

For podcasts, I listed work-related ones like “How I Built This with Guy Raz,” “Stuff You Should Know,” podcasts by the Harvard Business Review, “This Week in Startups” and “This Week in Tech.” For fun, I like the “60 Minutes” podcast, “Here’s The Thing with Alec Baldwin,” “Song Exploder” and “Nerdist Podcast.”