One change to be expected in the future Buffalo is a growing group of men and women in their 20s and 30s running companies. For an early glimpse, look no further than a nondescript low-rise office building near the waterfront or a new-age office suite in a downtown student apartment building. These are the homes of Synacor and Campus Labs, respectively, two of Buffalo’s newest high-tech success stories – one now publicly traded with more than 350 employees, the other just acquired for $40 million. Neither is traditional for a blue-collar city built on shipping and manufacturing.
Unlike the city’s formerly dominant companies, these are truly 21st century firms, built in just the last dozen years. But their rapid success in new and evolving technological fields, and the infrastructure that has developed around them, points to a future area of growth in Buffalo.
“That’s how economies grow, and we’ve been lacking in that over the last couple of decades,” said Jack McGowan, project manager at Insyte Consulting and director of the Buffalo Angels, a network of private investors in Western New York that work with early-stage firms.
“It’s not about luring big companies. It’s great if we can do that … but it’s not what you build your economy on, and there’s no reason Western New York can’t get its act together again and start doing it again.”
Welcome to the new economy. It’s a world where the growth of jobs, revenues and spending will come not just from the expansion of long-established companies and industrial giants, but from new startups born of ingenuity, imagination and entrepreneurial spirit.
“Startups are really the key to revitalizing the economy,” said Dan Magnuszewski, managing director of Z80 Labs, a high-technology business incubator that was launched last July by Jordan Levy and Ron Schreiber. “It’s not going after the giant corporations that you’re going to pay hundreds of millions or billions to bring in.”
It’s an environment driven by risk-taking, supported by mentoring, advice and collaboration, and funded by insightful and visionary optimists. It’s a highly fluid society, in which entrepreneurs must be able to think on their feet and pivot their plans quickly, making sometimes-radical changes to adjust their ideas. And it’s one where the quality of the business team, not just the idea, can make or break a company.
“The entrepreneurial environment is really where the future is going to be,” said John J. Seman, president and CEO of Launch NY, a new nonprofit entrepreneurial support organization that brings management expertise and investment dollars to encourage the growth of technology and other startups in 27 counties, including Erie.
“It’s light-footed, it’s flexible, it’s adaptable, it’s changeable. You don’t know where the next opportunity comes from, but you continue to look, because you know it’s going to be there. You accept some level of failure because you get some … success,” he said.
Such a world is already familiar to those living and working in places like Silicon Valley, New York City, Boston and Austin, Texas, which are known for spawning technology enterprises. But it’s been far less common in areas where economies are still very much based on traditional industries and companies, and where an entrepreneurial mind-set is less established. After all, it’s much easier to just take a job at a bank or call center than to start a company.
Beyond that, startups in the Buffalo Niagara region often are hampered by a dire shortage of venture capital and other early-stage sources of funding, development officials said.
But an effort is under way in upstate and Western New York, funded by the public and private sectors, to spawn a new culture of technology entrepreneurs.
Fueled by the success of Synacor and Campus Labs, backed by community and business leaders, and spurred by a growing network of investors and retired executives who are eager to help, a new “ecosystem” for startup businesses is gaining traction and fresh momentum.
Changing a culture
Proponents of such an economic ecosystem say it takes time, often 15 to 20 years, for a community to really develop the educational, financial and other infrastructure to support a successful entrepreneurial climate. They point to places that have done it, such as Boston, Pittsburgh and Boulder, Colo., which started down the path long ago.
“Upstate New York is a very fertile environment to grow an ecosystem, but it’s in the early stages,” said Seman, whose fund has $1.2 million from public and private sources, and plans to raise $5 million more by year’s end. “There’s a lot of people and a lot of resources in upstate New York. The challenge is, how do you bring them all together and move them from the past economies into the new economy?”
So while conditions locally are much better for entrepreneurs, there’s still a ways to go before the startup economy generates significant jobs.
“We have some really safe landing places for the young, emerging workforce ... and it’s going to take a little shift in thinking. For better or for worse, we live in a conservative town,” said Campus Labs co-founder and president Eric Reich.
In the meantime, supporters say, people need to be patient. “Unfortunately, people are not going to see the results for a while,” said Levy, a veteran entrepreneur who co-founded two companies, sold them, formed an investment fund and then created Z80 in downtown Buffalo. “I frankly wish that there was an opportunity for a silver bullet.”
The quest for the “next big thing” is part of the ongoing broader economic development effort in Western New York. That usually involves attracting large, established employers to the region, but such “wins” are few and far between, while small businesses generate two-thirds of new jobs nationwide.
So economic development officials and business leaders are seeking to encourage the creation of more small companies, particularly in biotechnology, high technology and similar fields. Software and computer technology firms are particularly attractive because they can be launched quickly and easily, change quickly and either succeed or fail quickly.
Observers say there’s no shortage of ideas. The challenge lies in finding people with leadership skills willing and able to turn them into businesses.
“I prefer to invest in an ‘A’ team with a ‘B’ idea rather than a ‘B’ team with an ‘A’ idea, because the ‘A’ team will find a way to make it successful, and the ‘B’ team may not realize the opportunity that is there,” said Neil Arnold, a British-born former chief financial officer of an auto parts supplier in Buffalo who is now a local angel investor in eight companies ranging from high-tech to golf apparel.
Today’s efforts are a far cry from what existed when Levy and Ron Schreiber founded two technology companies in Buffalo on their own, without any assistance, advice or other offers of help, Levy recalls. Those companies grew and were eventually acquired by Ingram Micro and Softbank Capital, while Levy and Schreiber founded their own venture capital firm, Seed Capital Partners, to invest in and support other startups.
Contrast that with the experience of George Chamoun, founder of what is now Synacor. After graduating from UB with ideas for what would become his company, Chamoun met Sean Hus Var, owner of Edge Internet Marketing, who connected him to other local business leaders.
Chamoun received help from Levy, Rand Capital, Phillips Lytle attorney Fred Attea, Delaware North Chairman and CEO Jeremy Jacobs and former bank CEO Ross Kenzie, among others. His initial company, Chek.com, eventually merged in 2000 with MyPersonal to form Synacor. It went public last year.
“I had a lot of very smart, experienced businesspeople in Buffalo who helped me,” said Chamoun, who is now executive vice president of Synacor, which creates and runs Internet “portals” for telecommunications and cable companies to offer a range of content to their customers, including its TV Everywhere service that allows users to watch TV from any electronic device at any time.
Synacor’s success has been an inspiration to others, but it’s also easier to start a technology business in general now. For one thing, there are so many books, blogs and other social media sources written by successful entrepreneurs to guide others.
“People who have done it have written the recipe,” Reich said.
And the costs to start such a company are low, since entrepreneurs can use existing servers and platforms rather than obtaining their own.
Today, there’s also much more collaboration between the University at Buffalo, the Buffalo Niagara Medical Campus, governments and the business community to turn medical, academic or scientific research into commercial businesses. Indeed, that’s the very purpose of the state’s Foundation for Science, Technology and Innovation and UB’s Office of Science, Technology Transfer, and Economic Outreach (STOR). And UB is promoting entrepreneurship across all of its schools.
Additionally, various business competitions spur students and others to develop ideas and solutions into potential profit-generators. Campus Labs, for example, was the first winner of UB’s Panasci Business Plan Competition in 2001, receiving $25,000 in cash, plus attention.
Co-founded by Reich and Michael Reisman, also UB graduates, Campus Labs collects, analyzes and reports data on students from more than 650 campuses that can affect the services and programs that are provided. After gaining visibility within the burgeoning technology community and raising money primarily through “friends and family,” Campus Labs was acquired last year by Higher One Holdings of New Haven, Conn., for $40 million.
“We have a local network of people that are really accommodating and want to see people succeed and want to see the local area do well,” Reich said.
And Buffalo, like Rochester and other cities, now hosts a “Startup Weekend” program, a 54-hour event in which entrepreneurs form teams and compete over the course of a single weekend to turn an idea into a business plan that can start a company. That’s similar to “accelerator” programs, in which entrepreneurs are given cash and a limited and intense time frame, such as three months, to go from idea to company. Sixteen teams competed at Medaille College in November.
A support community has also developed. Many business leaders are eager to help with advice and mentoring. Lawyers, accountants, landlords and other professionals are stepping up to offer free or discounted services, in hopes of gaining future clients.
And entrepreneurs now meet frequently in organized social gatherings and networking events to foster collaboration and partnerships, share ideas and help each other through struggles and challenges.
Crossing the valley
But many startups still need significant help in the early stages, as money and other resources are tight, to get across what the startup community calls “the valley of death.”
So several “incubators” have formed in the Buffalo area to foster the growth of companies by providing them an array of free or low-cost services – including space – while they focus on developing their core business. And by concentrating them in a single place, as opposed to scattered locations, an incubator creates critical mass.
“It serves as a beacon for people. We have to create that spot that forces people to come together, to meet people who are out there,” Magnuszewski said.
On the Medical Campus, the Thomas R. Beecher Jr. Innovation Center, 640 Ellicott St., houses life sciences and biotech companies, as well as support services for intellectual property attorneys, recruiting, sales and marketing. It offers companies office, lab and research space or “plug-n-play” virtual shared suites, with month-to-month or longer-term leases. Currently, there are 38 tenants.
UB STOR runs both the UB Technology Incubator at Baird Research Park on Sweet Home Road in Amherst and the UB Biosciences Incubator in the new Clinical and Translational Research Center at Goodrich and Ellicott streets in downtown Buffalo. Together, they “graduated” five tenants last year and welcomed seven new ones. And Fredonia State College also has its Technology Incubator, with 16 tenants and four graduates.
Most recently, Z80 Labs, which opened last July, is focused on Internet, software and mobile technology. Co-founded by Levy and Schreiber and administered by Magnuszewski, a UB graduate and software engineer-turned-entrepreneur, the program has three tenants currently, with three more pending. It can handle 12 in all.
Z80 also provides mentorship, through the members of its investment committee as well as their access to other business leaders here and around the country. The program also offers educational seminars on business basics and brings in special guest speakers.
Even more significantly, Z80 provides seed funding for early-stage companies, using a $5 million grant from Empire State Development Corp.’s Innovate NY Fund.
Z80 will invest up to $100,000 in a company, taking a 5 percent equity stake that it hopes to recoup later as the company grows. The business must agree to locate within the incubator – basically a large open room with big tables for meetings, a couple of glass offices and plenty of laptops – and can stay for up to one year or until they have 10 employees. “If they hit 10 employees, they’re doing pretty well, or after a year, if you’re still alive, that’s pretty good, and you’re ready to go out into the real world,” Magnuszewski said.
One of Z80’s first three tenants is Oscar Pedroso’s GradFly, which was the third-place finisher at the Startup Weekend program in Rochester last spring. The company wants to link science and technology students to colleges, scholarships, internships and eventually jobs by enabling them to create an online portfolio of their work through videos, recordings and computer files, like an artist.
“I feel like innovation and high-tech is more accepted here, and people are doing more to help companies stay here,” said Pedroso, a University of Rochester graduate from downstate. “People are willing to help you, and they don’t even know you. They’ve just heard your idea.”
Calling all angels
Financing has always been a challenge for startups. While stories abound of companies receiving multimillion-dollar investments from venture capital firms or going public, those aren’t options for startups. Instead, entrepreneurs must first struggle through the initial startup phases, typically financing their business first with their own money and then with help from friends and family members until they can grow their revenues or even profits.
But that’s getting better as well. Grants, loans and other special investment programs are increasingly available, both through public and private sources. That includes Small Business Innovation Research (SBIR) grants, administered by the Small Business Administration, and investments through the U.S. Commerce Department’s Economic Development Administration. There are also research grants from federal and state agencies.
There is also now a growing group of “angel” investors in Western New York willing to invest capital in very early-stage companies that show promise. “Angels” – typically former business owners or executives who cashed out when they sold their businesses and are now looking to invest their money for good returns – enter the picture before venture capitalists, but only after friends and family.
Under Securities and Exchange Commission rules, a person must have a net worth of at least $1 million, not including their home, and income of at least $200,000 in each of the two most recent years, in order to qualify as an angel investor. There are 318,480 angel investors nationwide, according to the Center for Venture Research. And their money is often critical, because the companies can’t get to the next level – the venture funding level – without it.
“People talk about lack of venture capital, but you really need to grow angels first, because it’s almost a necessary precondition,” McGowan said. “You won’t get to the venture stage if you haven’t gotten the angels to start with.”
Angel deals are usually smaller than venture capital investments, but there are far more of them, accounting for almost as much money.
Already growing in number locally, they are now a subset of the Western New York Venture Association called Buffalo Angels Network, which started in 2003 and meets monthly to discuss possible investments.
Now they’re seeking to create a separate angel fund, Buffalo Angels LLC, with $2 million to make pooled investments in companies. That reduces the risk for each investor and gives newcomers an entry.
Needed: Good ideas
“The pieces are falling together in angel funds, early-stage funds, and we need help in attracting that next round of capital,” said Daniel P. Penberthy, executive vice president and chief financial officer of Rand Capital Corp., a Buffalo-based publicly traded venture capital firm. “Now we need to execute in the right ideas and invest in the right opportunities.”
Besides dollars, they also have expertise they are eager to share to support the growth of new companies in Buffalo. That’s key because company founders may lack business experience.
“You have an entrepreneur who might be a scientist or researcher, but they don’t necessarily have the complementary management skills in order to build a company,” Seman said.
The efforts are paying off, albeit slowly.
“All the building blocks are here, and we’ve taken the steps, and as long as we stay focused, I see no reason why it wouldn’t work,” Seman said.
“You’ve got an environment, rich history, good people, good academic institutions and a willingness to work together to make it happen, and that’s what I think is exciting,” he said. “It will transform, and the city will sparkle again.”