The 43North ROI: Analyzing 43North's portfolio companies and the work it has done

Since its founding in 2014, 43North has committed to pumping $40 million into 64 startups.

Those companies range from Buffalo-based seed cracker company Top Seedz to the region's first unicorn, ACV Auctions, to Flox, a London-headquartered software firm that helps chicken farmers manage the birds in their facilities.

Through its portfolio, 43North has brought hundreds of jobs to the region while broadcasting on a national stage about Buffalo’s growing entrepreneurial ecosystem.

In October, the largely state-funded accelerator and incubator will host its ninth pitch contest. As that approaches, Buffalo Business First analyzed the organization's portfolio companies and their impact on Buffalo.

Our findings: The success rate of 43North's startups significantly outperforms the 90% failure rate for new startups, widely known as high-risk, high-reward investments.

“The majority of startups fail within the first few years of operation,” said Vincent Harrison, Pitchbook venture capital analyst. “The reason for failure can be numerous … so obviously as an investor you hope you give to the startup, and they go be successful. But also, you’re reliant on them raising from others as well. Very rarely can they rely on one investment to take it to success."

As part of the annual pitch contest, 43North gets a 5% stake in each startup winner, and the companies have to move their headquarters to Buffalo for at least a year. About 55% – or 35 businesses – of the organization’s portfolio companies still have a Buffalo presence, according to 43North.

Still, 43North, created as an economic development engine with state funding as part of the Buffalo Billion project under then Gov. Andrew Cuomo, measures its success by more than just the portfolio performance.

“As we start to feel college graduates coming back, expats coming back, companies moving here without a 43North investment because they want to be part of something that’s really special, those to me are the true measures of success,” said Colleen Heidinger, 43North president.

The organization recently got a vote of confidence from the state via a commitment of $30 million from Empire State Development’s board of directors.

“We look forward to future competitions and to welcoming even more winning startups, adding to 43North's success,” said Pamm Lent, Empire State’s director of communications, via email to Business First.

Attracting and engaging companies

After the decline of the industrial sector of Buffalo’s economy, the Queen City missed the first “tech revolution,” while areas like Boston and Silicon Valley, California capitalized on the wave to create robust entrepreneurial ecosystems.

But Buffalo had the opportunity to jump on the second wave of the tech revolution, in part thanks to the region’s low cost of living and access to talent, said Bill Maggio, who chairs the 43North Foundation board, is past chairman of 43North and was part of the group that put the organization together in 2014.

“(It was) pie in the sky to a lot of people, but we believed we could do it,” he said. “So much so that we structured it in a way that we’d take equity in any of the companies that came because we believed we’d ultimately see the benefits of that.”

43North’s recruitment process for its annual pitch contest starts at the beginning of the year, as the previous year’s cohort is moving to Buffalo.

The team has focused on quality over quantity of applicants in recent years and especially aims to engage venture capitalists and active investors in the process, from recruiting to judging, both because the strategy tends to yield high-quality referrals and the network can be introduced to the organization’s portfolio companies, which typically need to raise further dollars.

After due diligence and a few rounds of cuts, about 15 companies are asked to come to Buffalo to pitch in person, leading up to the semi-finals and finals held in October at Shea’s Performing Arts Center's. (The pitch contest wasn't held in 2020 due to the pandemic.)

Last year, the nonprofit changed its prize structure to give out five $1 million prizes rather than a $1 million grand prize and seven $500,000 prizes. Writing bigger checks is part of a strategy to bring high-quality startups – that have already raised pre-seed or seed capital and have growing teams – to Buffalo.

Kangarootime CEO Scott Wayman won a $500,000 43North prize in 2016 and moved the company to Buffalo’s Seneca One Tower in early 2017.

The software startup, which supports the early childhood education market, also received follow-on funding from 43North of $225,000 in 2019 and $300,000 in 2021.

But prior to the 43North contest win, Kangarootime applied to the annual competition two other times.

“We saw 43North as super-efficient capital,” Wayman said. “43North was kind of that beautiful bridge between early stage and then raising a big institutional round.”

The Buffalo nonprofit was “efficient” in multiple ways. One, once you apply to the contest and get in, there’s a clear path to potential investment, compared to the typical process of getting institutional venture funds where a founder might take 100 meetings to get one prospective investor, according to Wayman.

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Then there was zero valuation pressure since 43North had specific terms, with certain thresholds of investment amounts on the table, all for a 5% stake in the company. There was no negotiation, which for typical venture capital processes could take several months.

Not to mention, a 5% stake for the $1 million grand prize on the table gives a startup a $20 million valuation. That's "a beautiful thing for many entrepreneurs," Wayman said.

Welcome to Buffalo

Retaining companies once they move to Buffalo is important.

“The retention rate is something that often when I’m asked about it on the road, it does shock people,” Heidinger said. “That work and the whole quality of life program really differentiates us from any other accelerator that I’ve run into.”

43North's quality of life program focuses on the not work-related supports for startup teams moving here. It includes each being paired with a social buddy who can be a local guide. The buddies are matched based on factors like what part of the area they live in, similar hobbies and what types of food they like to eat.

The program also includes a weekly email newsletter that highlights local events, a dinner club that tries out cuisines in different areas of Buffalo, weekly bagel Tuesdays that are open to the community and at least five fun events scheduled each month that range from kayaking to a bike tour of Buffalo to touring the Buffalo Bills stadium.

43North has 1.5 full-time-equivalent staff dedicated to helping the startup leaders acclimate smoothly, from connecting them with doctors and daycares to giving event and restaurant recommendations.

That attention to detail is paying off: The portfolio's success from its retention rate to its number of exits to its number of still-active companies is "tremendous," said Mike Wisler, 43North board chair and M&T Bank senior executive vice president and chief information officer.

He said that success rate is largely thanks to 43North's secret sauce of being mission driven while having a founding team of experienced venture capitalists.

"I have plenty of experience in venture capital either corporate venture capital or the more traditional private strictly venture capital," he said. "When you think about the normal hit rate, particularly when you think about the stage of company that we’re investing in, these are pre-seed, seed companies, it’s ridiculous."

When Wayman moved Kangarootime from California to Buffalo, a few “miracles” prompted him to keep his headquarters in the Queen City way past the required one-year mark and double down on his local presence with a new 8,384-square-foot office at 301 Ohio St., Buffalo. The 2022 move to the new building allowed him to accommodate his growing local team of 80.

The affordable cost of living in Western New York translated to a lower cost of doing business, and money goes a lot further when it comes to real estate and commercial leases as well. Wayman has also had success in tapping into the local workforce, where many want a stable job in their hometown and are excited to work in tech, he said. That’s a big shift from the expenses, cost of living and boomeranging tech workforce culture in Los Angeles.

“I think it’s very hard to understand how regional factors or how … the economics in a second city can really differentiate your operating expenses and capital expenditures,” he said.

When Plum Greatness Revealed, a talent assessment provider, won $250,000 from the 2015 43North contest, CEO Caitlin MacGregor said it was a pivotal moment for her Canada company.

At the time, she had raised some angel funding but then got pregnant with her second child. Even though her startup had viable metrics that investors look for like revenue growth and strong reference customers, she couldn’t get investors to write checks.

“It was at a time when I was pregnant and didn’t fit the pattern in a lot of ways, I wasn’t getting a lot of community support and 43North was that champion that believed in us and made me keep going,” she said.

Since winning the 43North prize, the business has raised over $15 million in U.S. dollars.

The company relocated its headquarters – for personal, not business reasons – back to Waterloo, Ontario, after its prize-winning commitment time was up, but being a part of 43North has continued to impact her business. (The startup switched to a fully remote workforce in 2020 and about one-third of its 50-member team is based in the United States, but not in Western New York.)

And she’s continued to engage with the organization and its portfolio companies.

Once a cohort's initial year is up, 43North has monthly optional programming for founders, other events and mandatory quarterly financial reporting.

Plum has investors from a Canadian national development bank who require stringent financial reporting. According to MacGregor, the startup’s financial reporting requirements for 43North are just as strict.

“From an accountability standpoint, that’s really good for you guys,” she said. “No chance of not having something tracked, because the reporting is top tier.”

Evaluating economic impact

As an economic engine, 43North can look to its portfolio to measure its success but there are also community impacts and ripple effects, according to the organization's leaders.

“We’ve forced other entrepreneurs in the community to think differently about how they view Buffalo,” Maggio said.

The organization established the 43North Foundation in 2021 to administer its proceeds from ACV Auctions' initial public offering, expected to be a windfall of tens of millions of dollars for 43North.

Since the foundation was created, all proceeds from 43North portfolio companies’ exits have gone to it. The foundation was one of the local investors that supported Bitwise Industries coming to Buffalo to train tech workers in underserved communities. (The Fresno, California-based company furloughed its entire workforce, including its Buffalo team, suddenly in late May.)

Heidinger and Maggio declined to disclose the exact amount of funding the foundation has, but the organization's 2021 990 form filed with the IRS shows the proceeds that year from ACV Auctions' IPO were $40,639,774.

“The 43North Foundation’s objective is to turbocharge all the great things that have come out of 43North, to continue to advance all the critically important things that a community like Buffalo needs to be sustainable and grow a successful startup ecosystem,” Maggio said.

So far, 43North’s portfolio companies have created 3,045 jobs globally, with 1,015 of them in the Buffalo area, according to the organization.

Naturally, all those regional jobs are not the same occupation. But to give a general idea of the impact, computer and mathematical occupations have an annual mean wage of $90,990 in the Buffalo-Cheektowaga-Niagara Falls metro area, according to the U.S. Bureau of Labor Statistics for May 2022.

That’s well above the median household income, which is about $62,300, for the Buffalo-Cheektowaga metro, according to U.S. Census Bureau five-year 2021 American Community Survey data.

“We don’t have to have graduated from Stanford (University). We don’t have to know how to code,” Heidinger said. “There’s something here for everyone. And the sooner as a city we understand that the better off we’ll all be.”

And the direct payoffs are more than just jobs.

“If people invest in companies and they start to really take off, it has all the economic multipliers you’d expect,” said Susan McCartney, director of SUNY Buffalo State’s small business development center. “They hire more people, they buy more things, they’re helping to churn the economy over and over with purchases they have to make, infrastructure they have to have. It’s very good for the economy.”

In cases like ACV, the success helped train hundreds of locals on what it takes to go from idea to growth to full-fledged company. It also made some Buffalonians wealthy enough where they could think about starting their own businesses, according to Wisler.

Heidinger said 43North doesn’t currently have a dollar value estimation for its overall economic impact on the region but she plans to hire an external consultant to do just that next year, which marks the nonprofits 10-year anniversary.

43North focuses on the future

43North currently has 15 full time-equivalent workers – the largest its team has been.

The most recent position added is an investor relations manager, who will focus on creating and maintaining investor relationships year-round.

“The opportunity we have as a team to do better is the connection to investors for our companies on a national basis and ensuring VC world considers Buffalo as a great source for deal flow,” Heidinger said.

Maggio expects that 43North will continue to elevate its quality of applicants, and more portfolio companies will opt to stay in Buffalo as the entrepreneurial community continues to grow.

The organization has the opportunity to shine during periods of time where capital is not as free-flowing. More quality companies might seek out different investment options, which could mean 43North gets more for its money and a richer set of choices for its annual pitch contest, according to Wisler.

Maggio said he hopes to see at least two or three more ACV-like exits and a host of long-lasting businesses that create jobs, innovation and recognition for the city, as well as a continued focus on bringing diverse startups to Buffalo.

About one-third of 43North's portfolio companies are female-led, 46.9% have a non-white founder or co-founder and 21.9% have a Black founder or co-founder, according to data provided by the nonprofit.

On the 43North Foundation’s end, its goal is to ensure the long-term sustainability of 43North. Maggio expects to soon announce major initiatives that he believes “will continue to have a transformative impact on the Western New York startup ecosystem.” He said he couldn’t disclose more details yet.

“As long as we know that we’ve exhausted ourselves in support to these companies, we’ll consider ourselves successful,” Heidinger said. “Because we’ll see it in the financial returns over time, (we’ll) continue to see Buffalo moving in the right direction. That is an optimistic mindset for our future.”

43North by the numbers