Why Investors Are Turning to the Midwest—and How to Keep them Coming
For decades, venture capital investors have targeted the East and West coasts to find and fund their next big startup growth company. The result? Two thirds of VC deals and dollars are currently, as of the first quarter of 2019, held in three states—California, New York, and Massachusetts—in three regions of the U.S.
Trailing those three top regions is the portion of the Midwest defined by PitchBook as the Great Lakes Region, consisting of Michigan, Ohio, Indiana, Illinois, Wisconsin, and Minnesota. The data below shows the distribution of venture capital investment deals and the volume of capital in those deals.
Percentage of venture capital deals and deal value by U.S. region as of Q1 2019:
|Regions||Percent of Deal Count||Percent of Deal Value|
The coasts are still leading the league because of the market maturity dominance of venture capital investment there. In the other regions of the country, entrepreneurial ecosystems may have been slower to take root or to develop, and ecosystems are still aspiring to grow both deal count and value. In those regions, many companies that raised their early-stage VC funding locally from smaller-scale investors relocated to regions where later-stage, high-volume VC capital was more abundant, thus slowing down the development of the regional market from which the company originated. However, the tide has now begun to turn as we witness the key elements of entrepreneurial success—customers, talent, and cash—become more evenly distributed around the nation and the globe.
As the nation transitions toward becoming a global service economy, based on technological entrepreneurship, there is a trend toward opportunities for startups in the Midwest and other parts of the country to turn locally developed entrepreneurial enterprises into national and global success stories. The talent emerging from the Midwest’s colleges and universities, along with the technological and scientific advances they’re creating, is beginning to rightfully claim more of the spotlight. But as far as we’ve come, there’s still plenty of progress to be made before the Midwest is seen as the true tech heartland it has the potential to become.
Success creates success: the Midwest’s ecosystem has risen in prominence in recent years partly thanks to some big headlines, like Duo Security’s $2.35 billion exit, the largest exit by a Michigan VC-backed company in modern history. Likewise, the Midwest is home to rising stars like LLamasoft and Strata Oncology out of Michigan; Chicago, which has made a name for itself with nation-leading VC returns; and Columbus, which is establishing itself as a leading smart city. As the Midwest builds its innovation profile, both local and national investors will look to the region for more investment opportunities.
The practice of coastal investors looking to the Midwest for investments doesn’t present the logistical challenges it once did. Due to growing technology-enabled interaction among the markets, a VC can easily invest in a Midwest company and maintain a close, open relationship with its founders, regardless of the VC’s location. Technology and a more mobile workforce means that no one is pinned to a single location, investors and entrepreneurs alike can travel as needed, and startup staff rarely all need be in the same room at the same time.
This more flexible working style also creates new opportunities for the talent in the Midwest. In addition to the people who keep the current startup ecosystem running, the Midwest is home to some of the finest researchers in the country: the faculty and students at the Midwest’s top colleges and universities. The tech transfer programs at top schools in the region, such as the University of Michigan, University of Wisconsin, University of Chicago, Northwestern University, the University of Minnesota, and others, keep our entrepreneurial ecosystem busy by creating new companies to commercialize the cutting-edge technology they’re developing.
Even more promising to the Midwest’s outlook is the accelerating “reverse flow” of startups and investment deals from the coasts to Michigan and neighboring states. Over the next year, we’ll see investors and entrepreneurs from both coasts trying to come to the Midwest because the region offers a high quality of living and great schools at a lower cost than on the coasts. As this shift continues, there will be an increase in local investing in startup companies in every major community and metropolitan area throughout the Midwest as high-net-worth investors see it is now more economical to build entrepreneurial companies in the Midwest than on either the East or West coast.
We have all the ingredients for a booming innovation ecosystem in the region. Successful exits serve as catalysts to keep the ecosystem growing, and we need those who are involved in those exits to keep their money and talent here in the Midwest. That talent and cash, along with customers, are what we must invest in to drive momentum and ensure we are actively encouraging the development of companies in our region.
One way to do this is to loosen up funding available through the many institutional investors in the region, which can counteract the fact that many of the local venture funds suffer from a small size in comparison to their coastal counterparts. The Wisconsin Alumni Research Foundation is a great example of this as an institutional investor directly inserting funds into the University of Wisconsin-Madison research, discovery, and commercialization process. Community accelerator programs and investment and pitch competitions expose venture capitalists who serve as mentors and judges to the immense talent our communities have to offer. As a result, these VCs express increased interest in local companies and local talent. Midwest institutions must support our budding talent to ensure this interest turns into investment.
Events like the Midwest Growth Capital Symposium also play a role in supporting the region’s ecosystem. We’re looking to build companies in the Midwest and to help the Great Lakes economic region by providing Midwest startups with a platform to network with each other and with investors from all over the country. This year’s event, taking place May 14-15, will be held in combination with the National Venture Capital Association’s VC University LIVE Midwest, co-presented by UM’s Center for Venture Capital and Private Equity and the University of California at Berkeley Law School. We recognize that we need a forum for entrepreneurs to reach VCs from across the nation, and we aim to make that forum as strong as possible by bringing together the best and brightest the Midwest has to offer.
With any hang-ups about geography curbed by technology and success stories aplenty, smart investors realize that innovation is happening all over this country. The cure to cancer could be found right here in the Midwest—talent isn’t lacking—but we must continue to actively free up resources and change attitudes to maintain momentum.
This trend permits the healthy transition of the Midwest toward a technology-based, product and service economy in which life and natural sciences and information technology are leading the way toward new aspects and dimensions of living.