If all good ideas start with a problem, Alex Rattray had only to look as far as his hands for inspiration.
When he was growing up just north of Seattle, his penmanship was so poor that his mother forced him to do morning cursive exercises before packing him off to school. Upon enrolling at the University of Pennsylvania in 2010, Mr. Rattray labored to fill exam blue books with legible essay responses.
Professors and teaching assistants were suffering too, he realized.
"They don't like it any better," says Mr. Rattray, who is studying operations and information management at Penn's Wharton School. "They are sitting there trying to decipher these ancient runes. Maybe that is what they do when they are doing history research, but that is not what they want to do when they are grading."
His solution was to build a desktop application that allows instructors to securely administer quizzes and tests in class without pen and paper. Today, the Emerald paperless exam is still in beta testing but has been used by more than 500 high-school and college students in Philadelphia, New York City, and Dallas. The testing is set to expand this month during final exams, says the 21-year-old Mr. Rattray.
The Emerald team is building the company within a growing network of college-age entrepreneurs and investors fostered, in part, by the venture capitalist Josh Kopelman, who is himself a former student entrepreneur and a graduate of Penn's Wharton School. Emerald is among more than two dozen student-run start-up companies that have attracted seed financing from Dorm Room Fund, a student-run investment operation started in the fall of 2012 by Mr. Kopelman's venture capital firm, First Round Capital.
The fund is structured around teams of student investors based in Philadelphia, New York, Boston, and the Bay Area who identify and invest in promising student-led companies. The student investors are selected based on their past entrepreneurial experience and interest in start-ups.
Each investment team starts with a $500,000 account that has a two-year expiration date, says CeCe Cheng, Dorm Room Fund's director. Dorm Room Fund has invested about $20,000 apiece in 27 student-run start-ups, structured as "uncapped notes," debt that is converted into equity during the start-up's next financing based on its valuation at that time. The fund has a strong educational component, including mentors—often young professionals with start-up experience—who provide practical and emotional support.
"We want to maximize learning per dollar," says Ms. Cheng, adding that student-run companies with little overhead can stretch investment capital. "With that $20,000, can you validate what you thought would be a good business model, or will you discover it is completely nonfeasible? Either way, I think that is a valuable lesson."
Ms. Cheng doesn't hesitate to say that First Round Capital is looking to get in early on great ideas. Still, the mission is just as much about relationship building, she says.
"One of the outcomes we are hoping for is to invest in the next Dropbox or Facebook," Ms. Cheng says. "Another outcome we would hope for is that we connect with the next Zuckerberg or Drew Houston early through Dorm Room Fund, are able to work with them, and in the future they think to come back and work with us again."
During the past 10 months, Mr. Rattray has brought on Pulak Mittal, 22, a fellow senior at the university, as a co-founder of the start-up. He also added a programmer, Lauren Reeder, a 19-year-old sophomore. They expect to begin negotiations on contracts for a paid product in the spring, with a target of securing deals with 20 to 100 institutions. Penn is among those taking a look at the product, John MacDermott, the director for instructional technology, confirmed in an email.
To use the product, an instructor logs into a web interface to set up an exam. On the day the test is scheduled to be administered, the instructor receives a code, which students then enter into the application, triggering the opening of a full-screen window. An exam-taker is barred from clicking out of the exam window, and if he or she manages to do so, the exam is automatically submitted. An instructor can then use his or her discretion to permit the student to reenter the exam.
Once the allotted time has elapsed, completed exams can be viewed in different formats, including PDFs and Google Docs, according to the grader's preference.
The application is integrated with Canvas so that instructors can use the learning-management system's built-in speed grader, according to Mr. Mittal.
On a recent afternoon, Mr. Rattray, Mr. Mittal, and Ms. Reeder settle in at their office, a basement in Mr. Mittal's house a few blocks from the Penn campus. It is furnished with an assortment of furniture intercepted on the way to the landfill, abandoned kitchen appliances, and a dozen colorful doors artfully arranged against the walls at one end of the room.
They liken building a company to a serious relationship, saying they spend from 10 to 30 hours a week working in the basement, on top of other nonacademic commitments and coursework.
Mr. Rattray recalls how he took a first stab at the paperless exam during a Boston "hackathon" in March 2012. He was already involved in two other start-ups, a campus bike-share program called PennCycle and a market-research tool for apparel firms called DecisionCandy, and he didn't initially regard the exam app as a viable business venture.
But a few months later, with the other projects off his plate, he returned to the idea in earnest. The paperless exam is not an entirely original idea; versions of it are already used by some institutions, like law schools, for instance. But with Penn and others still administering tests with pen and paper, Mr. Rattray saw a window of opportunity.
By the fall of 2012, he had a prototype. After hearing about his work, a Ph.D. student working as a teaching assistant in a history class at Penn got in contact.
"She had been the one to grade the midterms, as is often the case," Mr. Rattray says. "She was so frustrated trying to read student handwriting that she was taking pictures with her iPhone of students' exams and then emailing them to the students" to ask what they'd written.
In December 2012, about half of the approximately 30 students in the course took their finals via Emerald. It went smoothly, Mr. Rattray says.
Two months later, he pitched Emerald to Dorm Room Fund's Philadelphia student investment team. Mr. Mittal was one of the Dorm Room Fund student investors present at the meeting, and he liked the idea so much that he got in touch with Mr. Rattray about joining the company. Dorm Room Fund and Emerald plan to publicly announce the investment this week.
The relationship with Dorm Room Fund allowed the team to have a presence in the vendor hall at the education-technology conference hosted by Educause in October, the student entrepreneurs say. It helped support them as they worked full time on the app during the summer, and will do so again after Mr. Rattray and Mr. Mittal graduate this month.
"It also helps as a form of validation for your idea," says Ms. Reeder, noting that the Dorm Room Fund brand carries credibility in the student start-up community. "It gives you the sense of legitimacy."
As a visitor prepares to leave, the trio turn their attention to their work, and getting the Emerald exam into classrooms.
"There are lots and lots of students in this country and around the world, and a vast, vast majority of them seem to be taking exams with pen and paper, which makes no sense," Mr. Mittal says.
"You ask anyone, in 10 years, five years," he continues, "it is clear that something like this is going to be the norm. We want to be that system."