4 Lessons Your Startup Can Learn From A Rust Belt Incubator

It's one thing to attract adequate startup funding in New York or Silicon Valley. To do so in a place like Buffalo requires something more (a business plan, for one).

Note: Today we are celebrating a year of Innovation Agents--from French chefs to Hunger Games directors, and war-ravaged generals to a girl who codes. We're re-posting all our great 2013 stories about the men and women (and, occasionally, youngsters) driving real change through creativity. Check back to check them all out. Meantime, here's an excellent primer on the series--enjoy the stories and happy innovating!

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Even Jordan Levy, founder of Buffalo-based incubator Z80 Labs, admits that the post-industrial town is missing one very important ingredient for startup success: money. "It’s very challenging," says Levy, a western New York native who spends his weekdays in New York City as a partner at SoftBank Capital. "I’ve lived with this my whole life; it’s very challenging to get funds to invest in Buffalo companies."

That scarcity makes Buffalo a less than ideal place to start a business. But Z80 Labs is attempting to change that. In addition to providing a space--a jazzed up corner, complete with ping pong table and red furniture, in the otherwise dreary Buffalo News building (the newspaper is one of Z80's sponsors)--Z80 offers mentorship and access to important VCs like Fred Wilson, a long-time connection of Levy's. It also offers cold, hard cash. Armed with a $5.2 million Innovate NY grant, plus funds from its creators, the incubator matches a dollar for every $2 a startup raises. However, Levy and the five other members of Z80's team will only contribute if it helps the startup attain meaningful funding, like finishing a series A round. "If they can raise enough that we believe can get them the traction to get them to the next round," said Levy, "we'll throw in the money."

Z80 Labs Team

Since its founding in July 2012, Z80 has promised funding to nine companies from the area, which spans the western New York (Buffalo, Rochester, Syracuse) and southern Ontario regions. So far, a third of those have been able to raise enough outside capital to receive matching funds from Z80.

Buffalo News BuildingPhoto by Rebecca Greenfield

Two Z80 companies, CoachMePlus and Decision Pace have closed significant, $1 million rounds. Even in areas where venture capital abounds, any early stage startup would consider that a mark of success. (And a million dollars goes a lot further in Buffalo than it does in New York City.)

Most budding entrepreneurs aren't about to migrate to the snowy banks of Lake Erie. But, companies scrambling over each other in the New York and Silicon Valley scenes could learn valuable lessons from businesses that don't have the luxury of launching in a frothy market bursting with money. After all, tech booms don't last forever.

1. Have paying customers.

In stark contrast to the pitches from plenty of New York or Silicon Valley startups, every single company I spoke with at the incubator already has a plan to generate revenue. TouchStream Solutions, a tablet-based home health care system, plans to charge a monthly fee for the service. CoachMePlus, which pulls in data from all the different wearable fitness devices, already has paying customers, including the Buffalo Sabres and other major sports teams.

"You’re not going to have an Instagram clone," Dan Magnuszewski, Z80's managing director explained to Fast Company. "You need to have a good business model here because it’s not as speculative."

Having an plan for a possible revenue stream sounds like an obvious point, but with companies like Twitter--which up until recently made pretty much no money--going public and making a lot of people very rich, many startups (and investors) put off thinking about revenue. The assumption goes: Get big, then get rich.

But, in an area with scarce venture dollars, investors won't throw money into a venture without any return. To get attention companies need to "have a solid business model tailored to the investors of upstate, which is less money and less risk," explained Magnuszewski. And since dollars won't always proliferate in the richer tech scenes, startups that hope to stay afloat might want to consider this novel money-making policy.

2. Think outside your demographic.

So many of the apps and tech-related services out there solve the problems of 20-something dudes. "I need a beer app," one entrepreneur working out of Z80 Labs offered as a fictitious example. (Of course, the world suffers no shortage of beer apps.) It's not that all the dating apps are terrible ideas, but that mentality leaves a lot of people waiting for tech solutions to their problems.

Not all of the startups at Z80 followed this rule. GradFly, an "online gallery where high school and college students showcase their projects in science, technology, engineering, and math"--like a social network for robotics and engineering students--was founded by a somewhat recent University of Rochester graduate and a current SUNY Buffalo engineering student. It's also worth noting that the 19-year-old chief technology officer, Joe Peacock, was the youngest founder I spoke with that day, by far.

But, the other entrepreneurs looked to the market--rather than their own needs--for business ideas. Jeffrey Milkowski, the founder of Sale Diem, a Gilt Groupe competitor, doesn't have an affinity for fashion. A burly man wearing a crumpled white button-down and jeans, Milkowski said he got into the fashion business because he saw that boutiques didn't have much success with online sales. His cofounder, who worked in retail in Charlotte, N.C., shops, makes up for his lack of experience in the space.

3. Ideas must travel.

"I sat with a company yesterday," said Levy, who had flown up to Buffalo that day from New York City. "I got angry with them because I said, what about the rest of the country? You're building this just for New York City?" So many of the startups out there not only cater to young, single people, but city dwellers. The entrepreneurs at Z80, in part because of Levy's urging, all have ideas that can "travel," as he puts it.

While CoachMePlus started as a service for the local hockey team, the company now works with major sports teams across the country and in Canada. Proximity to the Sabres arena, just a few blocks down the lake, helped them make that first sale. But, the business model works for any sports team at any level. Now CoachMePlus works with colleges, football teams, and even high schools.

Likewise, each of the startups started with some sort of local advantage that has the ability to go national. For instance, the aging population of western New York made it a good place to start a home health care service like TouchStream.

4. Know the right people.

If a great idea doesn't get pitched to the right people, does it exist at all? The advantage that Z80 has over other incubators in the area, besides its stockpile of cash, is its connection to the New York City venture scene via Levy and his cofounder Ron Schreiber, also a Buffalo native and partner at SoftBank. "No matter how good or bad your business idea, it's down to who you know," Milkowski admitted. And, lucky for these Rust Belt entrepreneurs, Levy knows a lot of the right people.

In addition to Wilson, Levy mentioned entrepreneur Seth Godin and Spark Capital's Bijan Sabet as two of the many people he plans on bringing up to see the companies. "In the VC community it’s a small little exclusive club," noted Magnuszewski. And Levy's squarely in it.

Abiding by the aforementioned rules helps these western New York companies that might otherwise struggle get into a very competitive game. They need the leg up; imagine the advantages startups in New York or Silicon Valley, surrounded by capital and speculation, would have as businesses if they worked on these terms.

As for Levy, a proud Buffalonian tired of seeing economic depression in his hometown, he hopes one or two of these companies grows enough to leave his incubator. Once a startup reaches 10 employees, it can no longer work out of Z80, though that hasn't happened yet.

"We're trying to do our little part," he said.

[Image: Flickr user Jenni C]

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8 Comments

  • Spook SEO

    Letting ideas travel will be very easy nowadays. It is even harder to
    contain your urges to share it all over the Internet for the fear of being
    dimmed as scam. All programs should be done in moderation. This keeps you safe
    from the algorithms and it also helps you build reputation.

  • Jim Preston

    Not hard for them to discover what we do in Silicon Valley. The tech media makes sure we have no secrets :-) The most important issue wasn't covered in this article - the local culture. If the founders leave the office for a hostile environment with friends and relatives asking why they don't get a job then those founders will be on a flight to Silicon Valley. We endlessly hear these stories here in SV.

  • Jim Preston

    Every entrepreneur in Silicon Valley knows all the points in this article. It is all obvious. Not amazing they figured it out in Upstate NY or anywhere else in the world.

  • Buffalonian

    "If the founders leave the office for a hostile environment with friends and relatives asking why they don't get a job then those founders will be on a flight to Silicon Valley."

    Not sure what this comment about local Buffalo culture means.

    But also not sure why your seemingly negative comment was needed in the first place. The rust belt has tons of great resources & people and it's great to see movement & growth in these areas that could use it.

    And, it's also great to see people putting the SV models into practice and improving upon them, which I think was the point of this article. No one needs another beer, dating or photo sharing app. The rust belt cities have real problems that can be solved with tech and the solutions to those problems can be spread to other places that need them.

    Call me crazy, but I like to see improvement in American cities. A little buzz from the tech media for the rust belt can't hurt at all, but lingering negative attitudes can.

  • Jim Preston

    I'm not at all referring to just Buffalo or even Buffalo. Yes, highly negative because that is the experience of thousands of entrepreneurs, it is a common discussion in tech entrepreneurship and well published.

    The cultural baggage is highly negative. I experienced it in Seattle. Since I'm a native of Silicon Valley I was stunned by their behavior but I hear the same story from pretty much everyone here and I've probably met people from Buffalo. This problem is almost certainly in Buffalo if you look around.

    I wish other areas the best but they have to face the culture issue dead on.

    You probably aren't aware of all the study on this issue and how other areas around the world are aware of it and trying to do something to keep entrepreneurs from leaving. There is a constant parade of delegations in Silicon Valley from governments everywhere trying to figure out a way to create their own Silicon Valleys. Almost everyone one of them has failed and I just informed you why.

    An excellent little book is "Regional Advantage".

    The vast majority of the innovation projects in Silicon Valley are not trivial apps. There is innovation here in hundreds of industries and disciplines. Unfortunately a few of them get billion dollar valuations and all the press. Most just quietly become part of our lives.

  • Buffalonian

    Ah. I must admin I was confused by your initial comment, and I do agree that the culture needs to be addressed. The SV model isn't one size fits all and hopefully the rust belt is aware of that and acts accordingly.

    Also, thanks for the "Regional Advantage" book recommendation.

  • Jim Preston

    I don't have time to cover every possible issue in a comment :-)

    Careful, if you read Regional Advantage this topic will envelope you. Annalee Saxenian's analysis of the differences between Boston / Route 128 and Silicon Valley really pissed off Bostonians but she was dead on. Pretty much everything she said about her native Boston is also true of Seattle and I've heard the same stories for decades about everywhere else.

    What is needed are massive marketing programs to change the culture and get relatives and (mostly) girlfriends and wives off the backs of struggling innovation entrepreneurs. It is very hard to do what we do and face the high probability of failure over many years. Self esteem sinks to the bottom. Confidence struggles daily. Bitching relatives is too much for most people - unless they move to Silicon Valley.

    Look at the number of entrepreneur Meetups here vs anywhere else. Why should some want-to-be-entrepreneur or even their little team struggle mostly alone when they can join their own kind here? This is a human issue, not an investment money issue.

    Build something - even if it is wrong.

    Jim Preston
    SV Startup Lab
    Santa Clara, CA