Venture Capital Beyond Silicon Valley: Exploring the Potential of the Heartland
Venture capital has long been recognized as a driving force behind the growth of innovation and entrepreneurial activity in the United States. A study conducted at the University of Illinois revealed that while venture capital funding for startups accounts for only about 0.2% of the US GDP, it results in over 21% of GDP in revenues generated by VC-backed businesses. With the potential for significant growth and financial returns, venture capital plays an integral role in facilitating growth in the innovation ecosystem. However, these funds are highly concentrated in a few regions of the country, with 75 percent of venture capital dollars invested in California, New York, and Massachusetts. This clustering effect was reinforced by Sequoia in the 1980s, when it set the tone for the technology investing industry with a Silicon Valley-first mantra: “if we can’t ride a bicycle to it, we won’t invest.” But by clinging to a motto of convenience, VC firms are missing out on a big opportunity.
The Heartland region (which is defined by Heartland Forward as the 20 states in the middle of the US), is often overlooked when it comes to venture capital investment, despite having a wealth of resources and potential for innovation in the following areas:
Fortune 500 companies: The Heartland is home to over 200 Fortune 500 companies, including major players in industries; Northwest Arkansas is home to Walmart, Tyson Foods, J.B. Hunt Transport Services and Murphy USA and Tulsa is the headquarters for QuikTrip, Williams Companies, and ONEOK. These companies have the potential to serve as anchor clients or strategic partners for startups in the region.
University R&D: The Heartland region accounts for 31% of university research and development spending in the United States. This indicates a strong commitment to innovation and provides a pipeline of potential intellectual property and talent for startups.
Skilled workforce: With 35% of US bachelor’s degree holders and 33% of STEM graduates, the Heartland has a highly skilled workforce that is well-equipped to drive innovation.
Cost of living: The cost of doing business is less in the Heartland compared to the coastal areas — from rent, to labor, to lower employee turnover. A salary study conducted in Detroit revealed that on average, tech employees earn $21,000 more in salary when adjusted for the cost-of-living, compared to their counterparts on the coasts. This is a significant incentive for startups to choose the Heartland over other areas.
Despite these advantages, the Heartland region has only 98 venture capital funds, which is a relatively small number compared to other regions like the West Coast or the Northeast. This means that there is a significant untapped potential for investment in the region. Firms that do not receive funding due to a thin local venture market may not be able to realize sufficient economies of scale, limiting their potential contribution to regional economic growth and employment. According to Ian McClure, the executive director of technology commercialization at the University of Kentucky, innovation industry workers in innovation clusters generate an average of over one hundred thousand dollars per year more than their counterparts who work outside of these clusters. This means that by expanding venture capital investment in the Heartland, there is significant potential to drive economic growth and innovation in the region.
While the majority of venture capital remains entrenched in legacy innovation hubs, in recent years, the Heartland has seen steadily increasing venture investment. VC funding in the heartland has grown from $2.7 billion in 2016 to $3.8 billion in 2017, and then $4.3 billion in 2019. With the advent of the pandemic in 2020, interest in venture capital accelerated through the country with specific emphasis in the Heartland. As the nation’s legacy innovation clusters are reaching saturation points in terms of congestion and affordability, investors are turning towards the Heartland for investment opportunities. This is obvious in the east coast where New York-based VC firms have invested over $10 billion in early-stage capital outside of major ecosystems in 2021, which is 26.7% more than the previous year’s investment of $8.5 billion. In 2011, the investment figure was only slightly above $1 billion, indicating that the number of investments made by New York firms in ecosystems outside the state has increased over seven times in the last decade. This trend is likely to continue in a post-COVID era, as remote work will enable startups to establish and sustain themselves in any region of the country.
Between 2011 and 2021, 1,445 new venture firms were founded in smaller ecosystems around the country. Austin is a prime example and the city is now widely recognized as a leading tech hub. The doubling of venture capital investments to a staggering $6.6B in 2021 is a testament to Austin’s innovation ecosystem maturation.
New VC firms in smaller ecosystems are likely to invest more of their dollars on local — or at least regional — startups. For example, in recent years, Oklahoma has seen a growing venture capital climate, with an increasing number of startups and a supportive ecosystem that nurtures innovation and entrepreneurship. The state’s commitment to economic development and job creation has led to the formation of numerous funds and organizations that provide early-stage funding and support to promising startups. Furthermore, the presence of prestigious universities such as the University of Tulsa, the University of Oklahoma, and Oklahoma State University has produced a pipeline of talented graduates and cutting-edge research that is attracting investment and attention from venture capitalists. The state’s focus on technology, healthcare, and energy has also created opportunities for startups in these sectors to thrive. Overall, Oklahoma’s venture capital climate is gaining momentum, and the future looks bright for the state’s entrepreneurial community
While venture capital has been a driving force behind innovation and entrepreneurial activity in the United States, the Heartland region has been largely overlooked. However, VC in the heartland is on the rise as investors are realizing the wealth of resources and potential for innovation the region offers. And while it’s no longer true that startups need to be within biking distance of their investors, it doesn’t hurt that smaller ecosystems like those in the Heartland have local investors who intimately know their areas. Increased VC investment in the region could unlock its potential to contribute to the country’s economic growth and employment while providing significant returns for investors.
