Economic Development 2.0
“If you could get the right ten thousand people to move from Silicon Valley to Buffalo, Buffalo would become Silicon Valley.” – Paul Graham in his essay “How To Be Silicon Valley”
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.
This is odd as Buffalo has a rich history of innovative entrepreneurs who powered the growth of Buffalo and WNY at the turn of the last century. At some point, we seem to have lost our way, we lost our network effect.
The reason Buffalo struggles to innovate is related to the lack of innovators, a self-perpetuating problem. We lack a thriving community of innovative and energetic entrepreneurs who are willing to take risks. There is no center of the city which fosters shared ideas and creative entrepreneurial energy. Sure, we have a couple of areas in the city chasing the Richard Florida model of huddling hipsters and creatives into small alcoves to create an economic impact, but there is no effort to create an Artspace-like environment for business.
In cities where innovation thrives, you’ll find strong academic universities surrounded by an urban area populated by entrepreneurs with access to capital investors who are willing to fund risky ideas. You need a confluence of wealth and energy to create a network effect.
Chairman Emeritus, IBM Academy of Technology, Irving Wladawsky-Berger had this to say about innovation and network effects:
Throughout history, certain cities and the regions around them have been the major centers of innovation in a variety of different fields as a result of their unique accumulation of talent and wealth. Innovation is very susceptible to network effects – that is, the more talented people you have in close proximity, the more their ideas and their work influence each other and stimulate them to innovate. While talent is necessary to becoming an innovation hub, it is not sufficient. You need wealth, in order to support the talented people and bring their work to market. You also need an open culture that values a diversity of ideas and experiences.
So, we lack a thriving urban area which creates shared energy. We lack access to innovation capital as most of our local wealth is inherited and descended from the casino capitalism tree (those interested in collecting wealth for the sake of collecting it). Our talent base is drained each year as they migrate to greener pastures. Most importantly, we lack people willing to invest in what Keynes called the “real economy”, the economy of production capital, long-term investment and job creation.
So, how do we overcome all of these factors? The answer from the likes of BNE/BNP and most IDA’s is to keep paying a vig to companies like Geico and Yahoo! to set up shop in our fair region and bless us with midlevel jobs. Those jobs are designed to create wealth for plutocrats in other regions of the country. While this strategy has merit as a force multiplier for the local economy, it’s shouldn’t be the primary driver of economic development, it should be a tactic in a wider strategy.
I’d posit that we need to build our own network effect. No longer should we look to the local “business leaders” for handouts and capital. We rebuild our culture of innovation from the ashes of closed steel mills and shuttered auto factories. Looking to ourselves to fund a new wave of innovation, a rising tide of locals who want to build a better future for themselves and their neighbors. To give this city back the entrepreneurial roar that was heard around the world at the turn of the last century.
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.
What follows is a skeleton idea that emerged from discussions with a dozen or so young emerging entrepreneurs over the last couple of weeks (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. Which is why we need your help.
Not every idea needs a $500,000-$10,000,000 initial investment. Most need 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.
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.
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.
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Really, really good article.
Having lived and worked across the lake from Buffalo for the last 25 years I have always wondered why it didn’t flourish as Toronto did. When I came here they had an NBA team, were offering culture world-famous musical talents and seemed to be on the cusp of becoming a big beneficiary of being the cross border economic partner of the Golden Horseshoe. But for some reason it didn’t develop that way.
On more thing – a few years back I think Toronto’s great mayor, David Crombie, was involved with one of our great developers (who has since passed away) to bring some innovative development to the other side of the gorge. I am close to some of David’s key people I’ll check on what happened.
I think this is a great idea, although I could swear something like it was tried here before (maybe it was in one of Mark Goldman’s books). You are absolutely right that GEICO and Yahoo!, while providing jobs, do nothing for Buffalo’s economic independence. They just put us further at the whims of absentee ownership.
I’ve come to agree a lot with Jane Jacobs’ concept of “import replacement” – that strong cities are economically independent; that they export products and services, bringing outside wealth into the city. A back-office city like Buffalo (which has been true since probably at least the 1920s) just serves as a supply of employees for helping move wealth to other cities.
The thing about Y Combinator is that it funds a very specific type of business – two college roommates building a “get lots of eyeballs” website, usually with the goal being to flip it to Google/Yahoo/Microsoft/etc. I’m not sure you can build a strong economy on that, and when it’s sold to a bigger company it does no longer continues to be a profit generator for its home city. So if your goal is to rebuild Buffalo by creating thriving locally-owned businesses, then they need a different business model than “get bought by Google”. Besides Reddit (which got bought by Conde Nast), how many Y Combinator startups have you actually heard of? How many are profitable? It’s cheap to fund rinky-dink website hackers, but harder to fund companies that are creating actual physical products and need money and facilities to build prototypes, etc.
The other thing with Y Combinator is that the seed money is not really the reason people sign up. It’s because of the Internet fame of Paul Graham (not Gibson), and the contacts he and the other venture partners have in the Web 2.0 world. Does Buffalo have a business celebrity whose endorsement and publicity makes it worth selling 6% of your new company for just $15,000?
I used Y Combinator as an example of how the funding mechanism would operate, not as the model for the types of businesses which would be funded. What a Y Combinator style incubator can accomplish is the establishment of a community. Without community and the ability for young entrepreneurs to work collectively, share ideas and build off each other’s energy…we’re kind of pissing in the wind. So, I see what you mean about Y Combinator’s limitations and narrow focus on web apps and internet content development. However, I think the model can be used as a basis for a larger idea.
There is a huge of group entrepreneurial, innovative and just plain inventive companies and people in Buffalo. Dismissing them as huddling hipsters is your first mistake. These people are too busy doing to sit around chattering about it. Get out, do the research and highlight some of these efforts. A good place to start would be the patent office. ( http://www.uspto.gov )
The Gioa/Rudnick/Group-of-18 noise takes up all the space and makes everyone think that a $600 million student dorm is industrial development #@*$?.
Common, embrace your inner geekness and start looking under the hood.
Actually, I did not dismiss any budding entrepreneurs in Buffalo as huddling hipsters. I am referring to our efforts at urban revitalization which follow Florida’s ten year old meme about artists and creatives.
Certainly there are already startups and entrepreneurs in WNY, however, there isn’t a community around them and the number certainly isn’t classified in any category which could be referred to as “Huge”.
“The reason Buffalo struggles to innovate is related to the lack of innovators, a self-perpetuating problem. We lack a thriving community of innovative and energetic entrepreneurs who are willing to take risks. ”
There is no lack of innovators in Buffalo. But you are right, there is certainly a lack of capital to fund them. UB incubators and vulture capitalists want a large ownership stake in these budding businesses, essentially stealing your ideas from you for the chance to grow them. You think things up, you take the risk, you do the work and they take the profit. The irony of this, is that much of this, around here anyway, has state money involved, so the state helps steal your ideas. But, I would posit, the state doesn’t seem to profit that much from the money being thrown around. For one thing, this game sucks the life out of things before they ever really get a chance to get going.
I’ll totally pat myself on the back and assume my article earlier this week which began by analyzing the lack of capital in Buffalo was the inspiration for this post.
I’ll play the part of devil’s advocate/curmudgeon – my first comment is that we have a business incubator’s all over the city (which don’t necessarily focus on innovation) already, and one specifically at the medical campus that is trying to fund real ideas and real projects so we become an exporter. It has state money and backing, access to world class researchers, and tons of incentives and subsidies. And it is strug-gl-ing. Why? Our tax system and business climate. I’m afraid your fund would be the good seed thrown on rocky soil, to mix metaphors, while we have the current anti-business system in place in NY. So maybe I disagree with Paul Graham on some basic level.
Second, I see lots of innovative and motivated people in Buffalo . . . and they are opening T-shirt stores, coffee shops, desert cafe’s, beer-tasting joints, and kayak rentals. I love drinking beer and kayaking, but these are not the basic building blocks of economic development 2.0 that you are talking about. We need to produce and export goods and services. This is a chicken and egg issue – has Buffalo become too much like Vermont? Great quality of life, cool colleges to hang out at, never going to invent the semiconductor? Vermont exports ice cream, and so do we. I don’t see Buffalo producing the break through electric car, the next gen non-silicon based computer chip, or algae produced biofuel that’s a substitute for diesel. What level of innovation is required to call the fund a success? What does “winning” look like?
I love the idea Chris, but as Brian pointed out in his previous post, what happens when these seeds grow?
Brian, I don’t want to defend the tax and business climate of NY state exactly, and I don’t disagree that it is an issue, but how does that explain Silicon Valley in California? Or the Boston/Cambridge entrepreneurial engine in Massachusetts? Why is New York City still the business capital of the world (it even has significant city taxes on top of state taxes)? Why does Toronto seem to be thriving, when I have to imagine that by American standards, Canada has a far worse tax and business climate than the worst US state?
If low taxes and “business friendliness” were the fundamental things suppressing entrepreneurship and larger-scale business, then shouldn’t states like Wyoming (ranked by Tax Foundation as having the most business-friendly tax code in the US) be the centers of economic activity in this country?
While low taxes and “business friendliness” are big factors, there are other factors in play. The best way to put it is ROI on tax dollars.
NYC, Boston, Toronto, the Bay Area, LA and Chicago are all located in some of the worst performing states in terms of “Cost of Business” yet the thrive. I feel this is due to the ROI is different in these areas.
These areas all have passed the tipping point in regards to critical mass. Something Buffalo does not have. Because of this, these areas are somewhat immune to the ailments that areas like Buffalo suffer from.
I think people are migrating to two areas when they have the chance. Metro regions that are “already there” or metro regions that are “on the way” so to speak. Another way to look at it…is if you are going to struggle, you might as well do it in a great city.
This is just the emotional argument as to why Buffalo has trouble. I am sure there is countless data that shows Buffalo has opportunity.
OK–I need to respond! In 1999, when I was ah so young (relatively speaking), I worked for Mayor Masiello and the City of Buffalo/Buffalo Economic Renaissance Corp,(the scandal free years). We tried to galvanize the IT Community and DID! From 1999-2001, we did well–until tech companies massively tanked. There was, however, a lot of energy and excitment and I think it was about 30 very innovative entrepreneurs and companies came out of nowhere, It was amazing! I am including an article I wrote at that time (quite the pro-city rant) but until the tech bubble burst here and nationally we were kicking butt. We also started the 21st Club and New Millennium Group in 1998ish which also gathered a bunch of young thinkers and doers…Ha notice the mention of the silver bullet–at that time–Adelphia…but the other facts stand. Oh, and I bought a condo Downtown 2000, and we tried very heard to “create” a market for Downtown housing then…I also became a Libertarian at that time realizing that the market cannot be pushed and also realizing that I didn’t like politics! At any rate, here is a funny read….
Buffalo Boasts Byte Belt Boom
By Tracy Diina, Director of the Buffalo Byte Belt
The City of Buffalo has truly entered an exciting time due the creation and implementation of the Buffalo Byte Belt Technology Development Initiative. We are slowly but surely transforming ourselves from Rust Belt to Byte Belt!
In my position at the City of Buffalo’s economic development agency–the Buffalo Economic Renaissance Corporation (BERC)—I am poised to see trends and empowered to act on them. About two years ago, we started to witness growth in our information technology sector. The BERC and City of Buffalo Mayor Anthony M. Masiello directed me to create a plan to capitalize on this emerging trend. This tremendous opportunity became a galvanizing force and I—along with BERC President Alan DeLisle and private sector business leaders–coordinated a number of incentives, packaged and presented as the Buffalo Byte Belt Technology Development Initiative. We began to realize that our future is predicated–in part–by our ability to use emerging technologies as catalysts for economic growth. And much to our delight, Downtown Buffalo has a remarkable appeal for IT businesses. Over the last two years, many IT businesses have opened their doors or expanded in the Buffalo Byte Belt. These companies include: E-Merge Strategies, Digicon Imaging, Full Circle Studios, Algonquin Studios, Key Video Productions, Tek 21, Ivergent and M Power Specialists. There has also been tremendous growth in our existing IT companies. Chek.com went from 3 to 100 employees in a mere two years and Choice One Online, BuffaloatHome.com and Reciprocal have all substantially expanded. Of course, our biggest coup was Adelphia Communications’ recent decision to build their national operations center on the city’s waterfront, creating 1,500 jobs. In 2000 we had 9 new IT companies open or relocate to Downtown Buffalo and 15 companies expand. Our data confirms that there are currently 38 IT businesses employing 3,000 people–including many fresh young faces–in Downtown Buffalo.
Why Downtown Buffalo?
Our most important discovery has been that information technology businesses want to be in Downtown Buffalo! There are many reasons for this: our extensive fiber-optic network, access to seed capital, approximately 20% reduction in telecommunications costs, “urban chic” architecture, available and affordable real estate, and benefits from our Economic Development/Empire Zone, which provides businesses with significant tax incentives, discounts on utilities and property and sales tax abatements. These benefits will be greatly enhanced – particularly for start-ups – with the initiation of the Empire Zone Program. Buffalo also has tremendous bandwidth. As Paul Bandrowski of Reciprocal and @visory states “I have more bandwidth in Downtown Buffalo than all of Raleigh–Durham.” Another reason that IT businesses like Downtown is that they see the value of being part of a community. Many of our IT firms are currently clustered, creating a linked force of momentum.
The mostly Generation X employees enjoy the entertainment scene: bars, concerts, coffeehouses and professional sports. I know this firsthand as I fit squarely in this key demographic! Visionary developers have taken note with new residential opportunities being created for our urban pioneers. We’re currently busy working with a number of new IT prospects that want to locate Downtown.
Byte Belt Benefits
The Buffalo Byte Belt Technology Development Initiative includes the Mayor’s Information Technology Council, which meets regularly to discuss IT issues and is comprised of local IT leaders who provide input for a variety of issues. The Byte Belt Initiative also includes: special lending programs, real estate assistance, regulatory assistance, public relations assistance and our brand new Connectivity Initiative which provides wiring, connectivity or hardware grants for eligible companies. Another facet of the initiative is that I have been named as the Director of the Buffalo Byte Belt and as such, am available for ombuds-like assistance to IT companies.
It is significant that our technology sector has begun to be recognized by major publications like Forbes, Fortune and Inc. magazines as well as The New York Times and Global Business Technology magazines. It is an exciting time in Buffalo with our Byte Belt Technology Development Initiative.
All in all, there is a spirited momentum developing in Buffalo and I am proud to be a part of these dynamic times. I invite you to call or e-mail me at 1-888-GROWBFO/716-842-6923 or tdiina@berc.org if you would like to offer suggestions or have any questions or comments.
Chris – would be happy to share my thoughts given my (still ongoing) efforts to help develop a community-oriented VC fund in WNY. There is a great need. The devil is in the details.
Great post! I never read the Paul Graham article before that you linked to, which contains some very interesting points. Government should not be in the economic development business as bureaucrats and politicians just do not have the ability to make the right decisions for the right reasons. A grass roots approach that taps into the energy and commitment of engaged citizens could be effective in creating a network that brings together wealth and entrepreneurs to create new businesses.
As was pointed out, the tax and business climate is a large problem. Take care of that, and then bring in the private investment and you will have some real synergy.
What happened to all those studies the Partnership did? FAIL
If we want to see this region bounce back we have to assimilate into the larger regional economies that already exist. The Golden Triangle (Toronto, Missisuaga, and Waterloo) is booming. Ontario and WNY need to create a unique open border new regional plan. Allow small businesses to cross nationally offer products and services. Give people the ability to cross FREELY like Europe and everywhere else in the world. And a mechanism to easily transport the millions of Tourists. Imagine a highspeed rail system connecting the triangle, niagara falls and the buff. Thats major infrastructure development with net benefit results.
Not to beat a dead horse, but had UB and the Ralph been built downtown on waterfront land we would be having a much more positive discussion,
And if the area wants to keep the little partying pukes that come here for an education we need to develop more activities for them to take advatage of in the region. There is a lot to offer young people but its not presented correctly. I think the CVB should take advantage of the higher ed market that exists. They have money, nothing to do (except party), and indeed want to try to ski, see, climb, row, listen, and eat.