Building An Entrepreneurial Buffalo, Part 2

19 Aug

‘Earlier this week, I wrote about making Buffalo and WNY a more entrepreneurial city and region and questioned whether the importation of innovation was the most effective way to improve our economy.

In many ways, the notion of “imported innovation” is the core tenet of our local economic development strategy.  We strive to identify companies who will move here or we struggle to keep existing companies here, but we do little to help generate innovation and entrepreneurship.

I took a stab at identifying the core issues that hold us back from making Buffalo’s entrepreneurial engine roar once again.

The reason Buffalo struggles to innovate is related to the lack of an innovation community, a self-perpetuating problem.  We lack a thriving community of innovative and energetic entrepreneurs who are willing to take risks.  Sure, there are some, but they are a disconnected group and access to capital to fund their ideas is limited, at best.

So, in essence, the problem set is defined as follows:

  • Lack of leadership on economic development from elected officials
  • A crumb hoarding mentality from wide swaths of our existing business community
  • Lack of capital for innovative small companies
  • Lack of an innovative and networked entrepreneurial community

Well, damn. That’s a big sticky problem, eh? No wonder our elected officials focus on the window dressing, this is a tough problem to tackle.

I think I have the skeleton of a solution, but I’ll need your help to flesh it out. This idea has come from lengthy discussions with a dozen or so young emerging entrepreneurs over the last year or so (our own pocket network effect).  We figured if we want to empower entrepreneurship, we should start by asking others to help us create the vision.

We start with a community wide venture capital investment fund.  One in which we all pay what we can to fund the next wave of companies that will employ our friends, neighbors and our children.  Let’s stop looking for someone else to save us when the answer is right in our own wallets. If our Mayor and civic leaders are disinterested in signing up for the Kiva City program, we’ll take the idea of their program and use it to inspire our own.

Kiva City extends microfinance to small businesses across America. With Kiva City, credit unions or other financial institutions partner at a local level to facilitate the loans, while community groups and civic leaders build awareness among small business owners and refer them to the program.

The basic concept is that not every business idea needs a $500,000-$10,000,000 initial investment.  Most need some seed funding for basic salaries, access to technology and office space, time, mentorship and community.  A good example of what this would look like is a community funded version of Y-Combinator.

Y Combinator does seed funding for startups. Seed funding is the earliest stage of venture funding. It pays your expenses while you’re getting started.

Some companies may need no more than seed funding. Others will go through several rounds. There is no right answer; how much funding you need depends on the kind of company you start.

At Y Combinator, our goal is to get you through the first phase. This usually means: get you to the point where you’ve built something impressive enough to raise money on a larger scale.  We make small investments (rarely more than $20,000) in return for small stakes in the companies we fund (usually 2-10%).

Y Combinator has a novel approach to seed funding: we fund startups in batches. There are two each year, one from January through March and one from June through August. During each cycle we fund multiple startups.

So, we combine the best of two programs to make our own, The Buffalo Fund.

We estimate that we’ll need live/work space and an initial funding stream of $2,000,000 to fund 8-10 companies at a maximum of $20,000 in the first year.  Ideally, we want to raise money from the community, in small denominations.  We want everyone invested in the idea of creating innovation and the companies which will employ the people of our region.  Let’s stop thinking of economic development as a top-down planning mechanism and treat it like a grassroots campaign.  When people are invested in the business community, even at a small scale, they become active participants in the local business environment.  Not pawns in a multi-national corporate game of pleasing distant shareholders.  We begin to think locally, we begin to empower entrepreneurs, we begin to see what’s possible.

We aim to build companies that look beyond the horizon of our own region and export their goods and services to the nation and the world. We’ll utilize our intellectual capital to create our own network effect.

Is it possible to raise $2,000,000 in Western New York through small donations from Joe Six-Pack in Lancaster and Tom Twelve-Pack in Hamburg?  Maybe.  However, we’d need to identify some larger investors who are not part of the existing power structure to provide our own seed funding and provide the mentorship for these budding entrepreneurs.

Each investor, no matter how small, get a weighted vote on which businesses get funded.  There will be a fund manager and a CEO hired who will report to a board of directors elected by the wider membership.  The board will manage the program, provide leadership and advise the membership.  Everyone is eligible for a leadership position as half of the board would rotate each year.  This would be a corporation, not a non-profit.

During the startup phase, we group the entreprenuers together and they hack away at their projects with legal oversight and receive guidance from guest speakers, advisers, and business planners.  We set them up for success by letting them focus on their business idea while giving them the tools to grow the idea.

So, I’ll leave it to you to tell me what you think.  Add to the idea, tell me what we’re missing or what we have right.  We’re walking the idea around town to people we’ve identified as potential partners and seed investors and I’ll post updates as the idea either blossoms or stalls.

It’s time we took control of our economic future, help make it happen.

 

28 Responses to “Building An Entrepreneurial Buffalo, Part 2”

  1. Dan Gigante August 19, 2011 at 8:39 am #

    Love the idea, we’re totally on the same page.  
    I’ve been thinking about an idea for GeekSpace modeled after ArtSpace –  live/work space available on an application basis with the goal of getting 16-20 like minded individuals living in the same building with reasonable rent, high speed internet, and meeting spaces.  
    I wonder if these 2 ideas can work together.  Either way I’d love to be involved with The Buffalo Fund

  2. buffalo progressive August 19, 2011 at 8:52 am #

    I think approaching the larger local banks (Like M&T, First Niagara, etc), as well as the Credit Unions; with the idea of creating a seed pool for innovation investment is a fantastic idea.

    We don’t need the cities/towns/villages to do it.  All we’d do is tie up the money in the bureaucratic red tape inherent in our culture here.

    And, since the risk would be spread among all the financial investors in the area, they would be more willing to take on a risk that a lone bank would never even consider.  Adding to this, they already have the risk analysis structure in place, whereas the city/towns/villages/county would need to create yet another nepotistic agency to control the flow of money.  And, we see how well that went, with Brown tossing fistfuls of dollars at his friends, where it just dissappears.

    When the banks (Local ones only, no thanks HSBC or BOA, you scavengers) who are already vested in our local economy manage it, you can be sure there would be a better return than our nepotistic plutocratic governments can muster.  And, NYS wont be able to suck it dry like they do everything else.

  3. Jesse August 19, 2011 at 9:06 am #

    It’s kind of like the Green Bay Packers of entrepreneurship.

    It’s a good idea.  Are there other cities doing similar?

    • Christopher Smith August 19, 2011 at 9:10 am #

      No one is doing anything similar that I’ve found. A very different idea, which brings associated risk.

  4. RaChaCha August 19, 2011 at 9:15 am #

    Is there any investment of local union pension funds in local business development? If not, Ken Warner of Rochester would be a good one to talk with. He’s executive director of UNICON, a group formed by construction unions in my hometown in order to secure a place at the table in local economic development efforts and business recruitment. He was on a panel at Accelerate Upstate, and talked about how they took a look at tapping local resources — like union pension funds — when the State abruptly pulled the plug on the Empire Zones program and also put a hold on tax credits previously awarded. He could tell you what specifically they’ve been doing with this, and how it’s working out.

  5. Leo Wilson August 19, 2011 at 9:30 am #

    The word “we” is repeated many times in this article. Do you have any ideas of names to attach to the organization’s leadership? Are there people interested enough in this idea to change it from a discussion to a reality?

    Since this looks like a high-risk investment from the get-go, I won’t ask about projecting ROI. However, what mechanism would you propose to allow those small, local investers to recoup their investment if the organization does profit?

    I like the idea. I don’t know that there’s a way to keep the “nepotistic plutochratic” out (this is Buffalo you’re talking about!), but the idea looks to have substance. Whose legs will carry it, and what will guide their direction?

    • Christopher Smith August 19, 2011 at 10:29 am #

      The “we” is a small group of mid-career professional and entrepreneurial people with quality educations and a lot of “want-to”. So, converting it from discussion into action is the next step.

      Recouping investment? There is an idea of an annual dividend or a reinvestment of the profits into the community.

  6. buffalo progressive August 19, 2011 at 9:53 am #

    @Leo Wilson

    All innovation investment is inherently high-risk.  It’s why the federal government has long led the way on R&D in innovation.

    The reason being is a large amount of available capital/borrowing ability, to the risk of “bankruptcy” was non-existent to the funder of the R&D (The Fed).

    So, I would think if we have as many local financial institutions seeding the pool, the risk can be spread out (As well as the reward, ie interest payments, or shares in the investment), which would encourage more investment.

    A single credit union would be hurt a lot by a loss of $30K.  Many banks/credit unions?  Not so much.

  7. Leo Wilson August 19, 2011 at 10:25 am #

    @buffalo progressive, I don’t argue with any of that, which is why I specifically said that I wouldn’t ask about ROI and asked instead about a mechanism to distribute it *in case* it happened.

    I like the implied credit union analogue. It’s what I envisioned myself.

    Scouts honor, I’d rather hear that people of substance are interested in changing this from a discussion to a reality, and have an idea of who might lead and what beacon will guide them. it’s a great idea.

  8. D.C. August 19, 2011 at 10:27 am #

    If you haven’t already, these guys are a worthwhile contact: 
    http://www.insyte-consulting.com/

    They manage the Western New York Business Development Fund: 
    http://www.insyte-consulting.com/Funding/BDF

    @Dan Gigante: What you’re describing sounds similar to the Main Washington Exchange (minus the living space):
    http://www.buffalorising.com/2011/08/main-washington-exchange-adds-life-to-500-block.html

  9. Leo Wilson August 19, 2011 at 10:27 am #

    Even if it were a half-vast idea, its AN idea. I haven’t seen a hint or heard a whisper of one from our local gov’t’s of late. Kudos!

  10. Leo Wilson August 19, 2011 at 10:46 am #

    Keep good notes, Chris. Once your team decides to take action, those notes could good guidance for other challenged communities… and, maybe a book deal in the mix. 🙂

  11. Brian Castner August 19, 2011 at 11:11 am #

    This is essentially the Buffalo version of what Da Napoli is doing with the state pension fund with the added twist of local folks being able to add to the pool. A couple thoughts on realism: 1) I think your first market is credit unions, pension funds, etc that would put up 80% to 90% of your $2M. I don’t see individuals finding more than $200K. 2) I’d chat with Chris Carosa at the Bullfinch Funds (based in Rochester). He runs the only WNY focused fund like this that I know of – it just holds public stocks, but it appeals to people (like me) who want to invest locally. He may have a sense of the size of the potential market – his much safer fund has attracted less total capital.

    I love the idea, but I’m afraid your target is high. What about reversing it into a local Kickstarter that only funds businesses when the money is available, instead of raising it all first and investing in a bunch second?

  12. Sean Myers August 19, 2011 at 11:30 am #

    Think locally, empower businesses with start-up loans, embrace low carbon industries, and export goods and services – all good themes. We need a plan that identifies goals related to these themes; an inventory of businesses in the region (location, industry type, revenues, etc.); and an identification of those current and future businesses whose expansion will help us meet the goals of the plan. Focus monies and energies according to the plan.

    • Christopher Smith August 19, 2011 at 12:04 pm #

      Good points! I think we need to put together a list of people who are willing to take the next step and put some meat on the bones of this plan so we can better shop it around to initial funders.

  13. Dan Gigante August 19, 2011 at 12:35 pm #

    @D.C.  very familiar with MWX, I see it working with MWX, including their goals of an incubator. in fact there are 2 potential buildings literally right next door and i think that’s the ideal situation – critical mass.  people live at “cluster” (my name that i think is better than GeekSpace but GeekSpace makes it easier to understand via ArtSpace) and use the coworking space at MWX and move their projects into their incubator.  and now the Buffalo Fund has its own incubator, hopefully also right next door, and people live in cluster, work at incubator or just out of their apts

  14. RaChaCha August 19, 2011 at 1:55 pm #

    WILMERS WANTS TO HELP http://www.buffalonews.com/business/article525781.ece

  15. Jack McGowan August 21, 2011 at 10:55 am #

    D.C. – Thanks for mentioning Insyte. We have experience managing the WNY Business Development Fund (has invested $1.2 million in local startups) and the WNY Venture Association/Buffalo Angels http://www.wnyventure.com . I’d be interested in participating in the discussion. Don’t want to come off as being negative, but there are several issues that need to be examined such as legal restrictions on offering a fund to small individual investors, transaction and management costs may be to high to make $20K investments, and the reality of how much progress a company can really make with $20K. Anything that gets more people focussed on entrepreneurship and the need for funding is worthwhile. Let me know if I can help.

  16. Tracy Diina August 21, 2011 at 2:37 pm #

    I would love to help!

  17. Leo Wilson August 22, 2011 at 1:00 pm #

    Since no comments are allowed in the morning grumpy I just finished, I’d just like to say… “WTF!!! There goes the smallest semblance of rabies-free!”

  18. John Howell August 22, 2011 at 2:55 pm #

    Our company, nxtARROW has been doing all but the financial assistance part of this for several months now with growing success. I can see us fitting into this project by continuing to offer the work space and a complete menu of business to business providers offering services, benefits and infrastructure to new business in town for the first year. The $20K grants can then be used toward salaries or other needs that can’t be procured in-kind. If this gets off the ground it will be one more advantage that we can promote to attract startups to Buffalo as well as helping local startups. nxtARROW definitely welcomes the Buffalo Fund and hopes to establish a formal corporate relationship.

  19. magnachef August 22, 2011 at 2:56 pm #

    We have an effort that has been underway for a few months now called Main Washington Exchange (www.themwx.com) which provides office and coworking space for small companies, entrepreneurs and freelancers. Over the past few months we’ve been consolidating the tech community and I’m ready to put together the incubator and student startup accelerator portion of the project. We’d like to put together a program similar to the Student Sandbox in Syracuse that provides non-students and students (UB, Buffalo State, Canisius, etc) an opportunity to build a company with mentors and eventual access to funding. We are also looking to setup a fund where we can do some angel/micro investing in local people who need early stage investing.

    For those interested in keeping tabs on the local tech/entrepreneur scene, you should join stop by Buffalo OpenCoffee Club, at Main Washington Exchange (2nd floor), every Tuesday morning from 8am – 10am. It has done great things to bring the community together over the past year and a half. You should join the Google group as well:

    http://groups.google.com/group/buffalo-opencoffee-club

    If you’re interested in what what we’re trying to do and would like to discuss, or be a part of it, then I’d love to talk with your further.

    • Christopher Smith August 22, 2011 at 3:13 pm #

      Dan, I’ve been excited about the MWE project since you first described it a few months back and I think it’s a perfect match for The Buffalo Fund. I’m sure we can work together to make a real difference in the entrepreneur community in Buffalo.

  20. magnachef August 22, 2011 at 3:04 pm #

    @buffalo progressive: Having worked at a bank for many years, I think the last thing we want is for a bank, or “Bank People” managing this fund – at least in terms of being a part of the deciders of what startups to fund. Banks and other type institutions are generally very bad with current trends in consumer/internet tech and startups.

  21. SteveWa August 22, 2011 at 10:51 pm #

    @magnachef: great point about “bank people”. You need to have an eye on “the great future unknown”, not looking backwards at “it worked before so let do it again”. 

    @others: what if this wasn’t such a focus on investment i.e. ROI, but more of a sponsorship program, where Joe “Six-Pack” could donate $20, and be a supporter of “Grow the Herd”, or something like that. Sometime people will donate to be part of something and be recognized for that, and not necessarily want to get a return from it. Almost like a PBS situation, if that would help cut down on admin expenses. If a rising tide lifts all boats, a donor should reap rewards of some sort.

    Secondly, do we have an inventory of startups in Buffalo & surrounding communities, to get publicity that gets people excited enough to participate? When people heard about the millions Groupon was making (sic), everyone jumped on that bandwagon. So finding a way to realistically promote what we have here and how it can honestly succeed, can create that hope that is part of the network effect. But our bullshit meters are extra sensitive, so that’s why it has to be realistic and truthful, otherwise it’ll go over like a led zeppelin.

  22. Leo Wilson August 23, 2011 at 7:45 am #

    @SteveWa, I have to say that I agree about the benevolence of the WNY population, and its willingness to put forth when called upon. But, another charitable effort isn’t really needed in WNY, we already have groups of them.

    IMHO, Joe six-pack has a special need to see that acts of generosity sometimes have a return after watching decades of economic decay that leaves most people helpless in its face. What you’re suggesting will work, I have faith in my neighbors’ willingness to open their wallets AGAIN. Should it, though? Is it the therapy that WNY needs?

  23. Leo Wilson August 23, 2011 at 7:48 am #

    This is part 2 of a series, after all. There was a whole discussion about an attitude that seems harmful and needs to change.

  24. Eisenbart August 23, 2011 at 9:54 pm #

    I was just looking at fixbuffalotoday flikr and seen some pictures of old buildings. I followed the link to here.

    http://books.google.com/books?id=GHcoAAAAYAAJ&pg=RA1-PA26&dq=#v=onepage&q&f=false

    I looked at pretty pictures of buildings and google street viewed them to compare in horror at what they had become. Then I actually read the article, starting page 11, in the above link. Instead of “look at this pretty picture of a Buffalo building” like I am used to seeing now a days it talked about actual economics of the time and the business associations and how the city of Buffalo hadn’t expanded its borders and the economic numbers in and around Buffalo. Just reaffirms that buildings are a by products of a healthy economy and planned growth.

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