Investigative Post: Is 43North a Success?

by / Oct. 4, 2017 5pm EST

Investigative Post: Is 43North a Success?

As the startup competition announces a new round of winners, a look at the results of its first three rounds of funding

Cory Rosenfield knew the deal: In exchange for up to a $1 million state investment in his fledgling company, he would have to move the business to Buffalo for at least a year, and hopefully much longer.

So, when he made his pitch to the judges of the 43North competition two years ago, he assured them this wouldn’t be a problem.

“We are so excited to be making our new home in Buffalo,” he said. “We are here to stay no matter what.”

Just over a year later, the company had gone back to Toronto, despite winning $250,000. Being in Buffalo, Rosenfield said, was not helping them grow.

For almost any other economic development program, giving so much money to a company that leaves the state a year later would be a glitch. For 43North, it’s an accepted part of the plan.

Rosenfield wasn’t alone in his decision. Most of the companies that have come to Buffalo after winning have since left: Of the 14 out-of-town winners from the first two years of the competition, 11 no longer have any employees in Western New York.

The founders of six of those companies said they liked Buffalo, valued the camaraderie they shared with the other winners, and appreciated how 43North had helped them. But it wasn’t enough to make them stay. Many struggled to find investors or hire people in Buffalo; others simply wanted to go home.

The one-year relocation requirement is a “gamble that, unfortunately, hasn’t paid off,” said James Allen, who for years lured companies to Amherst as executive director of the town’s industrial development agency. “If we can get them to stay for three to five years, we can keep them. But if it’s only a year commitment, then, chances are, we’re going to lose them,” he said.

Billed as the largest competition of its kind in the world, 43North was meant to fix a weak link in the local economy—the lack of startup companies. As well as the money, the program offers mentoring, support services, and rent-free office space to the winners.

Aside from the $750 million factory for SolarCity, 43North has attracted more hype than any of the other projects funded by Governor Andrew Cuomo’s Buffalo Billion initiative. Since its launch in 2014, officials have lavished the program with praise, calling the competition evidence of Buffalo’s renaissance and its winners, “entrepreneurial champions.”

Where many state-funded competitions concentrate on local companies and offer more modest prizes, 43North has attracted applications from all 50 states and dozens of countries. The draw is an opportunity to compete for some of the most generous prizes offered by any business plan competition in North America.

But with bigger prizes come bigger risks. Of the $9.55 million paid out as prize money in the first two years, $4 million has gone to companies that no longer have any employees in the region. Most of the 10 companies that currently employ people in Western New York were local to begin with.

“Of course we want them to stay, of course we want to increase the likelihood that they would want to retain a presence in this community,” said John Gavigan, 43North’s executive director.

The competition, Gavigan said, is a “marketing juggernaut,” promoting Buffalo’s image as an entrepreneurial hub.

“In North America and around the globe, people are beginning to believe that Buffalo is a place that you can start and grow a business and have a successful life,” he said. “How do you put a pricetag on that?”

For state taxpayers, it’s $17 million and counting. Most of the competition’s funding comes from the state, with additional contributions from private sponsors.

This story is based on interviews with 30 people, including 43North winners, 43North officials, managers of similar programs in other states, and academics and other experts who study entrepreneurship.

Many experts said it was inevitable that companies from outside the region would leave after a year. In the long term, many argued, it’s better to focus on growing local startups than trying to attract them from elsewhere.

“I’m not surprised you’re finding entrepreneurs who come for the money and then leave—I would be surprised if that wasn’t the case,” said Craig Rogers, an associate professor of economics at Canisius College.

Why startups matter

43North’s incubator space on the Buffalo Niagara Medical Campus hums with the sounds of intense games of ping-pong and people writing frantically on whiteboards, brainstorming with their teams. The program’s staff are kicking into high gear for the fourth annual 43North week—a hectic schedule of events, mixers, and a smaller pitch competition for local minority and women-owned businesses. It all culminates Thursday, when the latest round of 43North winners will be chosen, after pitching the judges in front of a live audience at Shea’s Performing Arts Center downtown.

For years, Buffalo had little of this kind of entrepreneurial energy. Between 2003 and 2008, a state report found, Buffalo created startups at a rate of just three percent a year. The city wasn’t just trailing high-tech hubs like Charlotte and Austin: Even Rochester and Syracuse, hardly known as hotbeds of entrepreneurship, were producing more new companies than Buffalo.

Economists agree that startups are crucial for a region’s economic growth. Research shows that new companies are responsible for almost all net job creation in the US. This might seem counterintuitive, since most startups fail. The ones that succeed, however, grow fast and hire much more rapidly than established companies.

“Entrepreneurship needs to become a pillar of our economy,” one state report urged, “or we will fall further behind other regions.”

Consultants working to identify the best uses of the Buffalo Billion suggested giving small grants to dozens of promising new companies—maybe $10,000 each, recalled Jordan Levy, a local entrepreneur and venture capitalist who helped launch 43North. He was not impressed.

“No one’s coming from New York City, San Francisco, Tel Aviv, because we have $10,000 awards,” Levy said. Instead, he proposed something that would “put Buffalo on the map”—the biggest business plan competition in North America.

Some researchers argue in favor of the more cautious approach rejected in Buffalo, since there’s little evidence, so far, that winning competitions like 43North makes companies more likely to succeed in the long run. Better to spread the risk more widely, they say.

But being able to bill itself as the “biggest startup competition in the world” bolsters another of 43North’s aims, changing the region’s image. One metric organizers report to the state each year is “positive media hits” about 43North, headlines like “Buffalo Tech Scene Reboots the City” (USA Today) and “Entrepreneurial spirit is driving Buffalo forward” (Huffington Post).

No one disputes that Buffalo’s startup scene is stronger than it was just a few years ago. Networking and education events abound, many of them organized by 43North, and a spate of high-profile fundraising deals is attracting attention from out-of-town investors. Buffalo startups raised $125 million of venture capital last year—up from just $6 million in 2014, according to Gavigan.

For a handful of out-of-town companies, too, the competition has worked exactly as organizers had hoped. Toronto-based CleanSlate UV, which makes a device that disinfects smartphones using ultraviolet light, won $500,000 in 2015 and another $300,000 the following year. Half of the company’s 10 full-time employees now work in Buffalo.

Winners from the first two years of competition currently employ 111 people in Western New York, another 16 across the rest of the state, and 84 outside New York. Two-thirds of the local jobs come from one company, ACV Auctions, whose app makes it easier for dealers to buy and sell cars wholesale—the competition’s biggest success story so far. The remaining nine companies employ only 37 people in the region.

Since winning 43North’s $1 million grand prize two years ago, the company has increased its workforce more than tenfold and, after a successful round of fundraising, is now expanding aggressively across the Northeast.

To stay or go

Vladislav Sandler left his wife and one-year-old child in New York City and came to Buffalo with a singular focus: producing the scientific data he needed to prove his ideas were worth investing in. His company, HemoGenyx, which is developing new treatments for blood diseases like leukemia and lymphoma, won $250,000 in 43North’s first year.

Most days, Sandler would walk his dog in Delaware Park in the morning, then work long hours in a lab on the Buffalo Niagara Medical Campus. He stayed in Buffalo for a few months after the required year was over, trying to raise money. Eventually, he found a group of British investors.

After that, he said, “there was no benefit for us to stay in Buffalo. I was not born and raised there, I have no personal attachment to the place.”

So far, almost three-quarters of the companies that came to Buffalo after winning 43North have left. Most simply go home.

Marc Ramer and Christine Sapan moved back to Miami, where their company, Asana Medical, is based.

Ace Callwood wanted to let his employees choose where they worked; many of them wanted to go back to Virginia, where the software company, Painless1099, was founded.

Peeyush Shrivastava spent much of his year in Buffalo crammed into a two-bedroom apartment with seven other people. He moved home to finish his degree in biomedical science at Ohio State University, taking his medical device company, Genetesis, with him.

43North’s struggle to keep out-of-town winners in the region highlights the tension between the competition’s various aims.  The focus finding the “best and brightest” entrepreneurs and rebranding Buffalo demands casting a wide net for applicants. But creating jobs in Western New York, some experts say, would be better served by concentrating on local companies, who are more likely to stay and grow their businesses here.

“When you create your own startups, all of that is original to the region. But it’s hard to transplant those startups to another region,” said Alejandro Amezcua, an assistant professor at Syracuse University who studies government efforts to encourage entrepreneurship.

Not all winners uproot their entire company and bring all their employees to Buffalo; they’re not required to by 43North’s rules. Instead, some leave one co-founder at home to manage the existing business, which can stretch the winning startups too much, too soon.

Daniel Shani’s smiling face is still the first thing you see on the “winners” page of 43North’s website. His company, Energy Intelligence, won $500,000 in 2014 and Shani stayed in Buffalo after his year-long commitment was up, winning further investment from AOL founder Steve Case, who visited Buffalo on his “Rise of the Rest” tour, and from local incubator Z80 Labs.

But, with operations split between the Hudson Valley, Boston, and Buffalo, the company was spread too thin. Eventually, Shani moved to New York City, to be closer to potential investors and the company’s manufacturing site.

“Companies leave cities all over the world every day for many reasons but Buffalo is working very hard to develop our ecosystem for helping our companies build networks, raise money, and attract a talented workforce to name a few,” said Pamm Lent, a spokesperson for Empire State Development, one of the state agencies that funds 43North.  

Gavigan, 43North’s executive director, insists that the steady exodus of winners doesn’t mean the program is failing. The companies that leave can still be “ambassadors” for Buffalo, he said, as well as providing inspiring “visuals” for local entrepreneurs while they are here. Some companies that have left Buffalo still have customers, lawyers, or accountants in the region.

Even the companies that still have a presence in Buffalo, though, don’t necessarily have all, or even most, of their employees here.

Caitlin MacGregor’s HR technology company, Plum, has more than doubled its workforce since winning $250,000 from 43North in 2015, and now has 18 employees. But only one of those is in Buffalo.

This, MacGregor says, was a deliberate choice: “We recognize it’s a metric of success for the program.” Still, hiring the developers the company needed was easier, and cheaper, in Waterloo, Ontario, a well-established startup hub with an abundance of tech talent.

MacGregor is no stranger to relocating for the good of her company. She moved to Waterloo in 2013 to take part in an accelerator program.

“We were so young, we didn’t have roots yet,” she said.

Young entrepreneurs tend to be highly mobile. A 2014 survey of 150 entrepreneurs leading some of the fastest-growing startups in the US found that three-quarters started their companies in a different city than where they went to college. Once they had founded their companies, though, they tended to stay put.

By the time Plum won 43North, MacGregor had a newborn and a five-year-old at home in Toronto.

“I’m 36—a lot of my developers have several kids in school. We can’t just pick up and move,” she said. “If we were 20-year-olds with no families, it would be different.”

Location, location, location

In today’s networked world, where the Internet has made communicating long-distance easier than ever, it might seem that where on the map a startup is based shouldn’t matter—to investors, customers, business partners, even to employees, who can work remotely.

But, in fact, it’s the opposite: Location matters even more for startups than for established companies, research shows. Local networks and relationships—best nurtured and developed in person—are the lifeblood of early-stage companies. Many investors still prefer to fund companies located nearby.

Experts like to talk about “entrepreneurial ecosystems,” as if startups are fragile new shoots growing on a forest floor. 43North, then, uproots its winners, plants them in new soil in Buffalo, and hopes they take.

Some say that hope is misplaced. When a company moves to Buffalo after winning the competition, they have to start rebuilding those vital networks all over again—in a year.

“Boosting economic growth and opportunity through entrepreneurship is not as simple as importing more entrepreneurs,” warned a 2015 report from the Ewing Marion Kauffman Foundation, which studies and promotes entrepreneurship.

“You’re kind of saying, ‘Forget the connections you had, come here and start almost from scratch,’ ” said Yasuyuki Motoyama, an assistant professor at the University of Kansas who studies the geography of entrepreneurship. “That’s not a very easy thing for entrepreneurs to do.”

Lauren Washington knows this firsthand. One of the biggest challenges of moving to Buffalo, she said, was having to build relationships from scratch, a time-consuming process for a business trying to grow quickly. Washington liked Buffalo, but she flew back to New York, where she had lived and worked for years, at least once a month.

“It’s difficult to rebuild that kind of network,” she said. “43North can get you meetings, but trust only comes with time.”  

And when, toward the end of her year here, an agreement with a Buffalo investor fell through, Washington knew she would have to leave.

“Without that, it was really difficult for me to justify being there, so far away from all my networks,” she said.

Doubling down

Doubts over whether the winners would stay surfaced almost as soon as 43North was launched.

At the time, Howard Zemsky, while co-chair of the Western New York Regional Economic Development Council that hatched the idea, said he wasn’t worried.

“A year is a pretty long time in the life cycle of these businesses,” he told the Buffalo News.

State officials also said entry to the Start-Up New York program, which exempts new businesses from state and local taxes for 10 years, would offer winners a powerful incentive to stay. In many cases, that hasn’t happened.

At least five of the 11 companies that no longer employ anyone in Buffalo entered the program, then dropped out once they moved. Another dropped out when it couldn’t meet its original hiring targets. The tax incentives were appealing, but not especially significant given that many of the winning companies weren’t yet making money and couldn’t take advantage of the tax breaks, their founders said.

Organizers have debated increasing the year-long relocation requirement, but decided against it on the grounds that it would deter the best applicants, said Gavigan, 43North’s executive director. Previous years’ winners told him they wouldn’t even have applied if the relocation requirement had been more onerous.

Many state-funded business plan competitions—in Alabama, Alaska, Nevada, Michigan and Wisconsin—avoid this conundrum altogether by concentrating on local companies, or asking companies to stay for several years, which discourages out-of-state applicants. In New York, two state programs that invest in startups, in amounts similar to 43North, require companies to stay in the state for three and five years, respectively.  

Since 43North takes a five percent stake in each winner, the organization—a private nonprofit which receives the bulk of its funding from the state—could recoup its investment, or even turn a profit, if they increase in value. Organizers concede this is unlikely in most cases, though.

43North’s former executive director, Andrew Pulkrabek, said the competition should focus on finding companies that will have motivations beyond the prize money to come to Buffalo.

“You’re not going to think of social networking apps as being located in Western New York, so don’t try to own a space someone else already owns,” said Pulkrabek, who left at the end of 2014.

Organizers said they have been targeting companies more carefully, identifying startups in areas that fit with Buffalo’s regional strengths and inviting them to apply. But, once it comes down to the final round of judging, the competition still focuses on finding the “best” startups, regardless of where they are from, or how likely they are to stay.

Last year, none of the winners were local. Fourteen of the 16 finalists for this year are from out of town.

Despite the pattern of companies leaving, state officials say 43North is a “tremendous success.” Governor Cuomo is doubling down, pledging an additional $25 million to the program, enough for another five years of competition.

43North has been the single largest recipient of a special fund created to ensure Western New York gets its fair share of profits from the sale of hydropower generated at the Niagara Power Project in Lewiston.

“No element of the Buffalo Billion has done more to build the brand of the New Buffalo than 43North,” he said in his state of the state address earlier this year.

Whether that brand-building results in a stable of startups that take root in the region is still a question.

Charlotte Keith is a reporter for Investigative Post, a nonprofit investigative journalism center focused on matters of interest to Buffalo and Western New York.