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Innovation Agents

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).

[Image: Flickr user Jenni C]

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.

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