Buffalo News: The Venture Adventure
The venture adventure Startups seeking more capital in region to advance their dreams
BY: Matt Glynn Published: October 19, 2014, 12:06 AMUpdated: October 19, 2014, 12:11 AM
OnCore Golf is chasing the entrepreneurial dream of turning a startup into a thriving company.
The Buffalo-based company has the product to pitch: a hollow metal core golf ball that promises to fly straighter. But developing and marketing the technology is only half the battle: OnCore also wants more capital to follow through on its growth plans. The company has attracted about $1 million in investment from the InVentures Group, an angel investor group in Tennessee, and some private individuals in Buffalo and Florida.
Steve Coulton, a co-founder of OnCore, calls the climate for venture capital in the Buffalo Niagara region "very challenging. There's a lot of great companies, great technology chasing very few venture capital dollars."
"I think there's plenty of capital here, but it needs to be deployed," he said.
As the Buffalo Niagara region tries to stimulate more startups, experts say venture capital and early-stage sources of funding for companies are necessary financial fuel. There are signs of more of that type of money coming into play in Western New York: the $5 million 43North business plan competition, the Erie County Industrial Development Agency's revived venture capital fund, and the Buffalo Angels' new investment fund.
The Buffalo Niagara region may be far from Silicon Valley when it comes to startup investing, but it is trying to establish a new reputation for itself. Angel investors, entrepreneurs and other experts generally say the situation here is better than it was a few years ago, with more resources for startups, but they acknowledge there is more to be done. The test is whether more investors and entrepreneurs will ultimately connect with each other, succeed, and generate the business and job growth the region craves.
The 43North competition symbolizes that aspiration. Next week, the competition will name 11 prize winners, at least one of which is guaranteed to be a locally based company. All the prize winners, including the $1 million grand prize winner, must agree to locate their operations in the Buffalo Niagara region for at least one year, starting in January, and 43North will get a 5 percent stake in their businesses.
Just as organizers hoped, 43North attracted attention to Buffalo, drawing 2,600 qualified entrants from the United States and other countries.
Andrew Pulkrabek, executive director of 43North, compares the competition to a drop in the water that keeps rippling outward. While the prizes will mean real dollars for the winners, the contest also created exposure for the region, giving investors a reason to look at innovative companies they might want to invest in, he said.
"You've got to show them that there's a reason for them to be here," Pulkrabek said.
David Colligan, a lawyer, a Buffalo Angel investor, and the chairman of Launch New York, which promotes entrepreneurship, has seen 43North bring people to his office door.
"I can't tell you the number of businesses that have approached me for legal work based on the fact that they wanted to form a company so they could go after the 43North prizes, because they think of that as actually a way to fund a business that wasn't here before," Colligan said. "And that's fantastic."
Z80 Labs in downtown Buffalo has helped hatch a number of prospects chasing investment dollars, including CoachMePlus. The company has created a Web-based software application aimed at helping coaches and trainers organize data they collect about their athletes. The startup has raised $1 million and signed up numerous pro sports teams and colleges as clients. The business has grown to eight full-time employees and three part-time or contract workers.
CoachMePlus likes its growing roster of clients, but recognizes it will need more money for its marketing plans, said Kevin Dawidowicz, CoachMePlus's president. "I would say the (funding) opportunities are there, but Buffalo requires you to be further along than other markets might require you to be."
More conservative here
Coulton, of OnCore Golf, previously worked in New York City and Boston, and he sees a more conservative approach toward venture capital investments around here. Coulton said that type of investing should be viewed as a process that requires repeated attempts and multiple investments to create positive returns, rather than being held back by fear of failure.
Buffalo has established investment players including Seed Capital Partners and Rand Capital Corp., but advocates for startups want to bring more investors into the picture. Groups like the Western New York Venture Association and the Buffalo Angels provide forums for budding entrepreneurs to cross paths with investors. The Venture Association holds meetings several months a year at the Buffalo Club.
Typically, two companies per meeting make presentations to a roomful of angel investors, lawyers and others interested in startups. In 2013, three of the companies that presented at association's meetings ended up receiving funding from members of the association or the Buffalo Angels.
From 2011 to date, members of the Buffalo Angels have invested nearly $1.7 million in nine companies, said John McGowan, the group's executive director. The members co-invested with other angel investors or venture capital firms in all but one of the nine companies, and the total amount invested was nearly quadruple what the Buffalo Angels members invested.
The Buffalo Angels reached a milestone this summer, closing a $1.2 million fund after selling membership units to local accredited investors. The fund gives the Angels a new way to collaborate. Initial investments from the fund are expected to be in the $100,000 to $250,000 range - a level probably too high for most of the members to handle on their own, but feasible for them to take on jointly.
Colligan said the Buffalo Angels' new fund is one of several positive signs he sees related to encouraging more venture and early-stage capital. "I think the climate is improving, and what I think we have here is people coming to the party to help with the financing that were on the sidelines just a few years ago."
The Erie County Industrial Development Agency is jumping back in. The agency revived a venture capital fund - tentatively named the Bridge Capital Fund - that was dormant for several years. Steve Weathers, the ECIDA's chief executive officer, says County Executive Mark Poloncarz was a driving force behind bringing it back.
The ECIDA has allocated $2 million for the fund, which Weathers expects to become active in early 2015. An investment committee will review potential investments and make recommendations to the full ECIDA board.
Applicants will have to explain their "strategic reason" for being in Erie County. And the ECIDA will invest alongside other investors to round out a company's financial needs, rather than act as the lead investor. "You need to come with your investors in hand," Weathers said.
The ECIDA's typical investments will likely be in the $100,000 to $300,000 range, allowing the agency to spread funds among multiple companies, Weathers said. He stressed that the funds are not taxpayer dollars.
The agency would recoup its investment through a "liquidity event," like a company going public or selling to a buyer. When the ECIDA's venture capital fund was active from 1996 to 2008, the agency said made $9 million in investments in 34 deals that yielded a $20 million return. Its investments included companies like Synacor and Gemcor.
As the Buffalo Niagara region tries to build its presence in startup investing, it can find encouragement in national trends. The Center for Venture Research says angel investments increased last year by 8.3 percent, to $24.8 billion, which was close to the market high of $26 billion in 2007. Software attracted 23 percent of angel investments, followed by media at 16 percent and health care at 14 percent. The average deal size was $350,830, an increase of 2.6 percent from 2012.
Crossing the valley
Any startup faces the challenge of crossing the "valley of death," to survive long enough to begin generating revenue. One of Launch New York's goals is to compress the length of time companies spend in that "valley," Colligan said. The organization is considering creating a seed-stage fund that would support companies even earlier in their development than when angels typically step in.
Something else Colligan believes will drive more startup investing: more successful "exits," when companies are sold and investors cash in. Liazon Corp. sold for $215 million last year, generating a $6 million profit for Rand Capital on its $1 million investment. QuaDPharma, which members of the Buffalo Angels invested in, was sold to Kinex Pharmaceuticals for an undisclosed amount. And Campus Labs, which traces its roots to winning $25,000 in seed capital at the University at Buffalo School of Management's Panasci competition, was acquired in two years ago in a deal worth more than $40 million.
"You start seeing exits like that, and exits beget exits," Colligan said.
Colligan said it will take time, but he sees the local "ecosystem" for cultivating more early-stage investment taking shape.
"It's got a long way to go," he said, "but it's noticeably better than it was five years ago."