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The Transformative Power of Venture Capital for Startups and the Midwest


The Transformative Power of Venture Capital for Startups and the Midwest

Originally published at https://twoclarify.com on October 30, 2019.

If you follow tech, venture, and startup news, you probably have heard that several cities in the Midwest and Southeast have rising startup ecosystems.  Cities like Columbus, Chicago, Detroit, Kansas City, Atlanta, and others have been receiving more and more media attention regarding the great things happening in their respective startup communities.  

For decades, venture capital dollars have been highly concentrated in three cities: Silicon Valley and the greater San Francisco Bay Area; Boston; and New York City.  According to PitchBook, over 67% of the capital and 41% of the deal-count goes into Boston, New York, or San Francisco. Furthermore, if you were the founder of a high-growth startup, you often had little choice but to move your company to where the money was.  However, that has started to change.  There’s more capital in areas long considered “flyover country” than ever before.  

More ambitious young people are relocating back to the Midwest or choosing not to leave in the first place. I’m an example of that.  After growing up in Cincinnati and then leaving for college in Florida, I did not want to come back to Ohio.  However, when I returned for a visit to meet with several startups and VCs, I fell in love with what was happening in the Midwest in cities like Columbus, Ohio. 

Truthfully, there are several key macroeconomic data points that make the Midwest an attractive place for startups to operate.  

  • 200+ Fortune 500 companies based in the Midwest.

  • 20 of the world’s top research institutions

  • 31% of university R&D

  • 35% of US bachelor’s degree holders

  • 33% of STEM graduates 

  • 52 million people or roughly 31% of the US population

  • $2.7 trillion in GDP

Despite all the data points I listed above and others that I didn’t, the Midwest has historically received a small amount of attention from Venture Capitalists.  Earlier this year, I sat in a meeting with a very experienced Midwest investor who has been part of this community for decades. He said that the Midwest startup ecosystem has always had three problems. Capital, Capital, and Capital

He’s not wrong.  Ultimately, you have to have capital to build great startups, especially at the early stages.  While bootstrapping is noble and often necessary for a time, eventually, startups chasing massive, J-Curve level growth will need to raise capital.  Great technology companies like Apple, Intel, Microsoft, Amazon, Facebook, Google, and many others were born from investments made by early-stage venture capital firms and angel investors.  Today, these companies are a huge part of the world as we know it.  However, it’s hard to imagine most of them becoming what they did as fast as they did without the spark of capital that launched them in the first place.  According to a study at the University of Illinois, venture capital funding for startups represents approximately the .2% of the US GDP but leads to over 21% of GDP in VC-backed business revenues. 

Even as the aggregate Midwest is receiving more capital than ever before, our startups need more capital than what is currently being deployed in this region.  However, we have also come a long way from being a community with little to no venture capital in the ecosystem.  Slowly but surely, more VCs have set up shop in the Midwest. Several coastal VCs have started to make more investments here, leading to success stories for both startups and investors in the region.  

For instance, after years of bootstrapping, Columbus based CoverMyMeds was able to raise capital from a mixture of local and coastal VC’s before ultimately selling to McKesson for $1.1 billion in 2018.   

Venture firms like Hyde Park Venture Partners, Allos Ventures, and a host of Chicago-based VC firms have raised funds and made significant investments across the Midwest.  The Rise of the Rest Seed Fund, started by AOL co-founder Steve Case, recently closed a $150 million fund two with investments from several notable LPs such as Jeff Bezos and Ray Dalio.  

The most notable Midwest VC is undoubtedly Drive Capital.  Founded in 2013 by former Sequoia Capital partners Mark Kvamme and Chris Olsen, Drive Capital’s arrival in the Midwest has done much to move the region forward.  With over $1.1 billion in AUM, they are the biggest Midwest focused VC in the region in terms of capital.  Drive is a perfect example of the transformative power of capital for startups. 

One of Drive’s earliest investments was an investment in Root Insurance, a Columbus based InsurTech startup.  Since its founding in 2015, Root has raised over $627 million and is currently valued at $3.65 billion.  Root Insurance founder Alex Timm had originally approached Drive Capital for a job.  Instead of getting a job, Drive’s partners convinced him to start Root.  

Drive Capital also seed-funded InsurTech startup Beam Dental that recently raised a $50 million Series D. While Beam is quickly becoming another Midwest success story, its founders would have gone bankrupt twice had it not been for the capital deployed into their business by Drive Capital.  

Clearly, Columbus and the Midwest have come a long way.  I think we can go even farther.  Over the next several weeks, I will be doing a series of posts on startup and venture capital activity in the Midwest.  I’ll be looking at what’s happened in the past, what’s happening currently, and what needs to happen for the Midwest to continue growing as a major region for startups.  I’m excited to dive into what’s been happening in Columbus and the rest of the Midwest.  Great things have happened. Let’s do even greater things in the future.

TL;DR– Historically, the majority of venture dollars have gone to startups in the San-Francisco Bay Area, New York, or Boston.   However, that has started to change.  In recent years, the Midwest has been on the rise in terms of startups and the capital deployed to them.  New venture capital firms like Drive Capital and startup success stories like CoverMyMeds and Root Insurance have helped drive significant growth in Columbus and other Midwest startup communities.  This city and this region have come a long way.  Over the next few weeks, I will be writing a series of posts on startup and VC activity in the Midwest, exploring how far we’ve come and what needs to happen next.

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Disclaimer: The views expressed in this blog and my respective social media accounts exclusively reflect my personal views. They do not in any way reflect the views of my employers. The posts in this blog are purely personal opinion. They are not meant to be taken as investment or legal advice. 

Elio

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