The Midwest Is Different

Was talking to a couple of people yesterday about the differences between the Midwest and the coasts.  One person said, “You never hear about a lot of big fundings ever in the Midwest.”

He is right.  “You never read how someone raised $50M at some lofty valuation.”  It happens, but it’s rare.

There are reasons for that.  I think the primary reason is there is a lack of seed stage venture capital in the Midwest compared to the coasts.  This has always been true.  In the old days, Midwestern entrepreneurs would leave and go to the coasts to build their companies.  Then, many would come back and raise their families here.

Others like Max Levchin and Marc Andreessen to name two of the most famous stayed away.

Today, with virtual capital it’s a bit easier to raise that seed round.  There are more active angel groups, and there is a small cadre of investors that will do some seed.  But, it’s not like the coasts at all.

I have seen a lot of blog posts recently about the proliferation of “micro vc funds”.  These are funds that are less than $100M.  In the Midwest, almost all the funds are less than $100M!   It’s a minority that is above $100M.  That forces big changes at seed level and in the behavior of entrepreneurs.

There are more than one or two companies I know of with a $1M+ ARR that have taken no venture capital and virtually no angel money.  The entrepreneur created a business.  They had a business model that was based on revenue and customer acquisition costs were less than the lifetime value of customers. The plowed their net income back into the business, and grew off cash flow.

Growing off cash flow is a significantly slower way to grow a business.  But, because a lot of Midwestern businesses are boring belt and suspender businesses, there is less competition.  The next sexy startup that everyone checks their phone to see isn’t going to be coming out of the Rust Belt.  That startup that works behind the scene in B2B processes does grow up and succeed here.  They typically take VC in later rounds when they want to put the pedal to the metal.

It also means that if the Midwest wants to grow platform companies, there needs to be a significant influx of seed stage capital. For every 10,000 firms that are funded, there is a chance that one or two could become a platform company.  If I were going to pick companies that could become platform companies in the Midwest, I’d look at an industry like agriculture, or light manufacturing, or fin tech.

You won’t see big rounds in the Midwest until way later stage.  In order to get into those rounds, it’s better to be on the ground here.  There is enough later stage capital, and plenty of Private Equity capital that will look at later stage deals.