Why There’s A Startup Boom In The US Midwest

The Midwest has emerged as one of the great centres of entrepreneurship in the country. The region is experiencing a startup renaissance, with the formation of Midwest startups on the rise and funding growing at historic rates. We can trace the Midwest’s renaissance to Sprout Social’s successful initial public offering (IPO), which saw the company debut on public markets at a price of $17 per share and rise to over $120 per share today. Today, Sprout is a $6.6 billion company and has built up this valuation outside the Silicon Valley scene. This year, Duolingo went public and has earned a $7 billion valuation. Since Sprout’s IPO, according to Midwest+startups, capital invested in the Midwest has doubled, from nearly $10 billion in the twelve trailing months ending June 2019 and Jube 2020 to $20 billion in the year ending June 2021.

 

Growing Venture Capital Activity

This has been a phenomenal year for Midwest startups. CB Insights crunched some numbers and found that In the year through the Q3, Denver-based startups raised around $3.1 billion in venture capital, compared to just $2.7 billion for the whole of 2020. With a quarter left, there is lots of scope to go even further past 2020’s high water mark.

Chicago has experienced a similar venture capital boom. In the year through to Q3, the city’s startups raised $4.9 billion, compared to $3.1 billion for the whole of 2020. All across the Midwest, venture capital is being raised at historic rates, crushing what were previously high points in many cities. 

The number of venture capital deals in the Midwest rose 11.7% year-over-year in 2020, from 861 in 2019 to 962 in 2021. The amount of venture capital raised nearly doubled from $9.8 billion in the 2018-2019 period to $10.1 billion in the 2019-2020 period, to $19.8 billion in the 2020-2021 period. Across the Midwest, regional champions have risen. Pittsburgh has Duololingo, Columbia, MO has Equipment share, Madison has fetch Rewards, and Kansas City has Backlot Cars. Ann Arbor, Columbus, Detroit, and Minneapolis have continued their rich vein of form, spitting out Midwest startups and raising venture capital at insane rates.

Throughout the year, we have observed the success of Midwestern cities and their startups in raising venture capital. This year has been unbelievable. So much has gone right for the industry and it goes to show how one successful IPO can bring focus to a region. We often assume that capital goes where it’s needed and can deliver the most returns, but the industry sometimes needs a trigger for it to recognize the as-yet unheralded excellence of a region. The region is rich in talent, and a lot of fundamentals are just right, suggesting that there is still a massive runway of growth ahead.

Historically, the Midwest has been largely overlooked as a source of venture capital returns. The Midwest is a place that venture capitalists have flown over, but seldom a place that they have stopped to find Midwest startups to invest in.

Chicago’s Story

Many ecosystems produce one great startup and then struggle to create a sustainable pipeline. Chicago, the region’s number one startup ecosystem, has evolved from the city that had nothing beyond Grubhub and Groupon, to a city which has major funding rounds, big SPAC deals, or new funds created, nearly every week. The number of new Chicago funds is at an all time high. The mayor’s office has even taken to regularly issuing “Congratulations to Chicago’s newest unicorn” banners. 

Chicago has found success across an array of industries. Bringg, P44 and ShipBob are great logistics startups; ActiveCampaign is a breakout star among business software companies; Nature’s Fynd is doing well in the food space; Amount is a fintech innovator; and Chicago even has a consumer app in Cameo. The city has been building a thriving startup ecosystem to rival Austin, Denver, Miami and Toronto.

The Global Fight for Talent

Remote work has dislocated the relationship between where a person lives and where they work. What is often ignored is that it has also changed the nature of venture capital. In a world of Zoom, the difference between Silicon valley and a Midwest startups disappears, because so much of the engagement between founders and venture capitalists occurs through video conferencing platforms. The degree of home bias has eroded somewhat, although it still exists. 

This phenomenon has meant that an Indian or Midwest startup is more likely to get attention and receive venture capital. A venture capitalist can’t think, “That’s so far”, or, “I don’t want to go there”, because for the most part, communications will be remote anyway. A certain objectivity has been brought to the field. 

Similarly, the fight for global talent has gone global. The national labor market has evolved since the pandemic. Coastal companies are increasingly entering the fray and fighting for Midwestern talent. They understand that with the emergence of remote work, they can compete globally for talent, rather than restricting their hiring to their operational geography. 

The effect of this has been felt within the region. The Midwest has a rich and deep talent pool. It’s drawn founders to start their businesses there, and it’s attracted firms from other regions who compete for talent for remote positions. This has made the region much more competitive in terms of getting the right talent. The competition for talent is strengthened by the explosive growth in startups.

Conclusion

The Midwest’s rise as a great startup region is built on fundamentals. The region’s entrepreneurs have emerged in a culture that prizes fiscal prudence and capital allocation discipline. It’s hard to imagine a startup like WeWork coming out of the Midwest. People in the Midwest are not dreamers, they are very practical people. The numbers have to make sense for them. These values make the region a place where good decisions are made based on the best available evidence. The culture is very different from that of Silicon Valley. It’s more cautious, but it’s also much more sensible. 
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