Why the Midwest is an Attractive Place for Startups and Venture Capital

Why the Midwest is an Attractive Place for Startups and Venture Capital

This is part 2 in a series of posts I’m doing on the state of VC and startups in the Midwest.  The first part was a topical introductory piece entitled The Transformative Power of Venture Capital for Startups and the Midwest.  Since then, I’ve been considering about how I want to attack the topic and what topics truly need to be explored.  As I alluded to on the last post, I want to explore some of the following questions:

• Why the Midwest?  

• What has been accomplished in the region so far?  

• What needs to happen next? 

• What are the major misconceptions of the Midwest? 

• What’s holding us back?  

• What can we do better? 

While not each of those questions will get its own post, I think the first one should.  So today’s post is about the “why.”  Why the Midwest.   

There are many reasons to want to start a technology startup in the Midwest.  I mentioned some of the macroeconomics data points in my last post, but since they’re important, I’d like to reiterate them and provide more context as to why they matter for startups.

• 200+ Fortune 500 companies based in the Midwest.

  • The last decade has proven Marc Andreesen’s often quoted “Software is eating the world” thesis. As software companies tackle large incumbent dominated industries, there is significant value to being near your customers.

• 20 of the world’s top research institutions and 31% of university R&D

  • Research from these institutions can be commercialized by startups.  Many great startups and venture firms have solved meaningful market problems by commercializing university developed technologies.  There is something to be said for taking advantage of the billions of dollars that go into universities from the federal government.  (That’s non-dilutive funding folks.)   Also, these universities and research institutions possess significant technological talent.  

• 35% of US bachelor’s degree holders and 33% of STEM graduates 

  • This one is simple.  You have to have talented, hard-working people to build great companies.  The Midwest has plenty in that regard.  (Side note: There are many extremely talented and successful people that never went to college.  Our society needs to do better at recognizing that.  That said, universities are still great talent sources.). 

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

  • Again, more population means more potential talent.  However, that also means you have a large consumer base to deal with for B2C oriented startups.  

• $2.7 trillion in GDP

  • This is one of my favorite statistics regarding the potential of the Midwest.  If you stack our GDP against that of the top 5 GDP’s in the world, we rank 4th.  That’s not too shabby.  (This is based on data taken directly from the US Bureau of Economic Analysis and the World Economic Forum.)

Those data points are real and provide tangible evidence as to why the Midwest is an attractive place for startups and venture. This is just the beginning of the story.  

Fundaments

The Midwest is a region rooted in fundamentals.  Our entrepreneurs are far less likely to spend money frivolously or scale a business when the unit economics don’t work (cough WeWork cough).  As someone that grew up here, people in the Midwest tend to be very grounded in reality.  While sometimes this makes us too cautious, being grounded and focused on fundamentals is also an advantage for our startups over those in other parts of the world.  Many of our startups originate from real problems experienced by practitioners.  For instance, a Midwest startup is much more likely to solve a problem they’ve experienced first-hand than to build a social media app.  Despite the beliefs of some in the startup community, fundamentals matter and should matter from the very beginning.  The public market’s recent skepticism over several tech IPO’s proves this point.   

Cost of Living and Operating

This year San Francisco became the most expensive city in the United States.  Other top tech cities like New York and Boston weren’t far behind. Even in tier 2 startup hubs like Austin, Seattle, and Los Angeles, the costs of living/operating are high compared to national averages.  A recent study by The Hustle, a media company in San Francisco, showed that salaries on an actual comparison are much better in many midwestern cities.  For instance, in Columbus, Ohio, housing is 79% lower than San Francisco, utilities 32% lower, and groceries 21% lower.  In those three categories, the broader Midwest was 73%, 18%, and 20% lower.  The equivalent average software programmer salary in Columbus, Ohio versus San Francisco based on buying-power adjustments was $180,000 versus $124,000.  

The same is true for operational costs.  I’ve had some personal connections at seed-stage venture firms in Silicon Valley tell me that most of their portfolio companies are seeing about 20% of their pre-seed and seed-rounds go to their landlords.  There are considerable savings to operating in the Midwest.  

Talent

We already touched on talent earlier so I won’t belabor the point, but there is one thing that needs to be said.  As a society, we need to stop putting talent and where it can come from in a box.  A talented entrepreneur that learned to code on his own without going to college could be just as capable of building a great tech company as the latest Stanford dropout.  Not only is venture capital funding predominantly allocated to white men, it predominantly goes to white men from Ivy League colleges.  There’s a lot of great talent at these schools.  I don’t think dollars should stop going to these types of founders.  What I do believe, is that more investment dollars need to go to untraditional founders of all types including women, minorities, and people of all kinds that are Stanford/Harvard dropouts.  There is talent everywhere and from many backgrounds.  Venture investors need to recognize this and place their capital accordingly.    

Proximity to Certain Industries and Customers 

There is no doubting that the Midwest has access to a host of Fortune 500 companies and a significant portion of national GDP.  We’ve already touched on that.  However, there are certain industries that we have competitive advantages in compared to our coastal peers.  For the sake of brevity in this post, I’m just going to list some examples below. Keep in mind that this is not an exhaustive list and each of these industries could be explored deeply in separate posts.  

• Insurance 

• Agriculture 

• Healthcare

• Commodities

• Logistics 

• Utilities/Renewable Energy

• Manufacturing/Robotics

Central Locations

If you look at the map of the US, many Midwestern cities are centrally located to the rest of the United States and Canada.  We have strong globally connected logistical hubs, major airports, great interstates, and Class I railroads.  

From a distribution perspective, Midwest is an ideal place to launch your startup.  This matters for D2C/consumer product startups.  For the many software startups tackling problems in the logistics business, you’ll be close to your customers.  

As someone that lives in Columbus, I’ve seen how useful our central location is.  Need to go meet an entrepreneur, investor, inventor, or customer in Cincinnati, Pittsburgh, Chicago, Cleveland, Detroit, Philadelphia, Nashville, Louisville, etc.?  You’re easily within a reasonable drive of these places and many others.  That’s a big deal for startups trying to control their burn rate.  Proximity isn’t everything, but it is valuable.  

Excellent Test Markets

Something that people in tech hubs like Silicon Valley don’t always appreciate is the value of having a great test market for your consumer product.  Sure, your tasty, trendy $20 Kale breakfast bars might be loved by all of your tech friends in San Francisco, but what will the broader market think?  Can you achieve venture scale returns?  You’ll get a much better idea of that in the cities of Ohio, Kentucky, Indiana, or Illinois than in Silicon Valley.  For example, Starbucks has long used Columbus as a place to test new drink flavors.  A recent market research study by Drive Research ranked Columbus, Ohio and Indianapolis, Indiana as the 2 and 3 best cities for test marketing a new product in 2017.  This NPR podcast goes in-depth on what makes places like Columbus a great test market in this podcast episode.  

The Midwest is a great place.  I love cities like Chicago, Columbus, Cincinnati, and Indianapolis.  This isn’t to say that other places are all terrible.  I think New York, San Francisco, Boston, and other coastal hubs are great places to live and launch startups.  I also believe that the Midwest is more than “flyover country.” I believe that more entrepreneurs should stay in the region and more capital should be deployed here.  For those that disagree, I ask that you come visit the Midwest. See what these cities have to offer. Meet the people here.  Look at the data. You might just change your mind about America’s heartland.  

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.