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Many Long Island tech companies drop out of Start-Up NY

Codagenix Inc. chief operating officer J. Robert Coleman,

Codagenix Inc. chief operating officer J. Robert Coleman, left, and president and chief scientific officer Steffen Mueller in their laboratory in Farmingdale on Nov. 2, 2016. Photo Credit: Newsday / J. Conrad Williams Jr.

More than half of the participants from Long Island have dropped out of Start-Up NY, the state program that promises businesses “no taxes for 10 years” if they move to a college and create jobs, according to a Newsday analysis.

Fifteen of 28 local participants, all of them technology companies, have withdrawn or been removed from Start-Up NY, according to state records and interviews with firms in the program.

This poor showing points to the challenges Long Island faces in nurturing tech startups. The loss rate for Start-Up NY on the Island is 54 percent, more than double the statewide rate of 24 percent.

CEOs of Start-Up NY dropouts cited in interviews a range of reasons for leaving, including the high cost of doing business here, the dearth of local venture capital, the lure of New York City’s more vibrant tech scene and state bureaucracy that requires filing employment reports to obtain tax refunds each year.

The program, launched in the spring of 2014, provides benefits to companies beyond exemptions from state and local taxes. It also exempts their new hires from state income taxes for as long as 10 years, and, crucially, provides access to university research.

Most of the local companies that have withdrawn from Start-Up NY are still active. Only a handful have failed or run short of cash.

“We eventually found the program to be less relevant to us than expected,” said Chen Levkovich, co-founder and CEO of Zuznow, an Israeli mobile app developer that once was headquartered at Stony Brook University.

Howard Zemsky, CEO of Empire State Development, the state agency that oversees Start-Up NY, said it is too early to render a verdict.

“It’s important not to read too much into the early indicators,” he said, referring to Long Island’s high dropout rate. “This pattern may not necessarily continue. The Island may outperform the other regions of the state over some number of years.”

Business experts and economic developers, however, said Start-Up NY’s dropout rate gives important feedback about the environment in Nassau and Suffolk counties for growing small technology companies. Technology is the sector that the region’s business and political leaders are betting on to fuel economic growth and jobs.

The experts said tech startups often lack profits and large numbers of employees, thereby limiting the appeal of Start-Up NY’s tax breaks. New companies need access to venture capital, experienced entrepreneurs to advise them on business decisions, customers nearby to provide feedback on product development, and trained workers.

These are the elements of what small-business expert Debi Kleiman calls “the entrepreneurial ecosystem.”

Building an ecosystem

Kleiman, a former executive of several technology businesses who now directs an entrepreneurship center at Babson College, a business school in suburban Boston, said it takes years to build an ecosystem. The successful ones are generally found in cities, not suburbs.

“Most of these small tech companies need a fully formed entrepreneurial ecosystem to thrive,” she said. “The Start-Up NY numbers suggest they just don’t have that on Long Island.”

The program is the brainchild of Gov. Andrew M. Cuomo, who called it “one of the most ambitious economic development programs our state has seen in decades . . . These new tax-free communities will give New York an edge like never before when it comes to attracting businesses, startups and new investment,” he said in 2013 when the State Legislature agreed to establish the program.

State officials said recently that Start-Up NY seeks to replicate the development of California’s Silicon Valley by commercializing university research and inventions.

The program fits Long Island’s ambition to build an innovation economy based on ideas conceived at Cold Spring Harbor Laboratory, Brookhaven National Laboratory, Stony Brook and other research institutions, the officials said.

Under the program, the state approves tax-free zones on the campuses of public and private universities.

On Long Island, zones have been OK’d for Hofstra University, New York Institute of Technology, Suffolk County Community College, SUNY Old Westbury, Farmingdale State College, LIU Post and Stony Brook. So far, only Farmingdale, Post and Stony Brook have businesses, with most housed at Stony Brook.

Colleges recruit and vet companies, paying close attention to how they will work with faculty and students, and their likelihood of success. Statewide, nearly 270 companies have been admitted to the program.

Participants must be an existing business new to New York State, a new business or a new division of an existing company in the state. Only technology firms are eligible in Nassau and Suffolk.

Collaborations with others

State officials said the Start-Up NY tax breaks serve as a lure — they were the focus of a $53 million advertising campaign — to attract businesses to New York. But once they have moved to a campus, the program’s biggest benefit becomes evident: collaborations with other incubator tenants and access to university research, the officials said.

That has been the case for Jasmine Universe LLC, a Uniondale-based energy management company that is still in Start-Up NY. The company is developing a software and console system that allows businesses and homeowners to reduce their energy usage remotely.

Jasmine applied to Start-Up NY in 2014 to open a research lab at Stony Brook’s Advanced Energy Research and Technology Center. “There’s a lot of cutting-edge research happening at the center,” said Mohan Wanchoo, who started Jasmine as a division of EC Infosystems Inc., an energy software company also based in Uniondale that he launched 22 years ago.

“We wanted to tap into the best brains, to have access to the young, restless and brilliant minds that are coming out of the university. That was more important to us than the tax advantages offered by Start-Up NY,” he said.

Between 20 and 30 Stony Brook students have had internships with Jasmine in the past three years. Five now have jobs with the company, which has tripled its payroll to 15 people since being spun off as an independent business.

Start-Up NY dropout Iontraxx LLC also was impressed by Stony Brook’s resources.

Still, Artur Madej, president of the developer of a system to manage solar farms remotely, said he closed the local office because it was too far from his Florida base and the Start-Up NY tax breaks couldn’t make up for New York’s higher costs.

“The New York salaries are much higher than Florida salaries, thus making the initial R&D costs in New York arguably higher than in Florida,” Madej said.

Leave for various reasons

Among the other businesses no longer in Start-Up NY, two moved to big cities, two closed, and two were removed by the state for failing to file yearly employment reports.

Significant withdrawals include Zuznow and C&M Robotics Co. Ltd., which both joined the program from overseas, and Codagenix Inc., which makes vaccines from live viruses.

Zuznow, the mobile app developer, moved its headquarters from Tel Aviv to Stony Brook in 2015 because of Start-Up NY. However, after about a year on campus, the company left for Manhattan because the program wasn’t meeting its needs, Levkovich, the CEO, said.

Last year, Zuznow launched Susie, a virtual assistant similar to Siri from Apple Inc., which uses voice-controlled artificial intelligence but can be applied to any mobile app. “The company is doing well . . . We have gained more customers and have four employees,” he said.

South Korea-based C&M Robotics also opened its first U.S. office at Stony Brook because of Start-Up NY.

However, CEO Joo Myo-hee said the company, which specializes in robotics hardware used in making automobile parts, moved its office from New York to Chicago “to be closer to our customers — U.S. automakers,” most of which are in the Midwest. C&M’s technology has been used to make the Toyota Prius and several Hyundai models.

Codagenix continues to develop vaccines for influenza, Zika, dengue and other diseases in a laboratory at the Broad Hollow Bioscience Park on the campus of Farmingdale State.

The company had been considered a Start-Up NY success, but withdrew from the program in April after not sending a required yearly report to Empire State Development.

“Because Codagenix was founded prior to Start-Up NY being initiated, we just couldn’t take full advantage of all of the benefits,” said J. Robert Coleman, co-founder and chief operating officer.

“Most of our seven employees were employed before we joined Start-Up NY; only one was eligible for the program’s tax benefits,” he said. “The company was doing all the [required] paperwork for one employee. . . . I didn’t want to invest the time to do it.”

Nationwide failure rate

Stony Brook officials said they aren’t surprised by the university’s high Start-Up NY loss rate: 13 out of 23 participants have withdrawn or been removed by the state.

University spokeswoman Lauren Sheprow said tech startups are prone to failure in their early years.

Yet more than half of the startups that graduated from Stony Brook’s five business incubators in 2003-2013 were still operating, she said, citing a 2013 study. That count excluded Start-Up NY companies. Nationwide, only 10 percent to 15 percent of incubator graduates are still operating.

Sheprow also said Stony Brook’s Start-Up NY companies, as a group, have provided internships to 40 students in the past two years, secured $4.5 million in grants and $7.5 million in private investment, and generated sales of $2 million.

She said two Start-Up NY dropouts are now enrolled in a different state program on campus.

Still, Start-Up NY’s performance at Stony Brook and elsewhere on Long Island is a reminder that the region lacks some of the ingredients needed to raise technology businesses.

“Being on a college campus is a good first step in terms of receiving technical support,” said David L. Calone, a venture capitalist based in Setauket. “But these companies left Start-Up NY because they probably weren’t well funded or mentored.”

He said investors willing to back young companies and entrepreneurs willing to mentor them are in short supply locally. He started the Long Island Emerging Technologies Fund, which has invested in 10 local companies including one Start-Up NY participant and one that left the program.

“Long Island needs to do more so that startups value being here because of the financial support and business coaching,” Calone said. “We want them to feel that they don’t have to go to New York City to get these things because they have them right here.”

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