The Rise of Midwest Venture Capital
Many of my friends, when introducing me to someone, invariably say that I am from Chicago, Houston or Pittsburgh because they have heard me say that I lived in those cities before moving to Cleveland. The fact is that I moved eight times by the time I went to college and in a way feel fortunate that I have seen a great deal of the country. I laugh at times that I should work for the CIA because my early roots are a mystery to many, including good friends. But today, I consider myself a Midwesterner and Cleveland my home. I think a lot of that kinship comes from the fact that I love what I consider to be the common sense view of the world typically found in the Midwest. People in the Midwest don’t usually get too high on themselves or any one idea and usually take the inevitable trough in stride. That is why I think this relatively new interest in venture capital investing in the Midwest is such a good idea.
In a Forbes article entitled Top Venture Capitalists Leave Silicon Valley, Bet Their Careers on Midwest, Mark Kvamme and Chris Olsen, two alums from the ultra-successful and Silicon Valley-based Sequoia Capital discuss how they decided to found Drive Capital in Columbus, Ohio, not in California. One of the data points the Drive Capital partners sited was that the Midwest makes up 19% of the country’s GDP and comes up with 19% of its patents, yet the region draws only 5% of America’s venture capital. The article goes on to say that this discrepancy suggests that Midwestern entrepreneurs are starting fewer businesses, not because they don’t have good ideas, but because they don’t have access to the people who fund good ideas. There is no doubt that the coasts have a disproportionate concentration of not only dollars, but people talent that is required to get ideas off the ground. But I think this is an unfortunate bias.
At Evolution, we have invested in two software businesses, Axiom in Dallas and Knowledge Center in Pittsburgh. The reaction we have received from many is, “Why are these businesses not in California?” They ask as if there was something wrong with the company that they had not figured out because our companies have strong cash flow, quality people and good growth prospects. Surely there was some risk they were not seeing and that had to be why the “smart money” on the coasts had not lured them away. But what I believe is that part of what made our partner companies so good was that they had to be smarter and leaner because they did not have access to the luxuries the coasts had to offer.
Bill Gurley, a prominent California-based venture capitalist, lamented in a Wall Street Journal article that there was “irrational exuberance” and “discounting risk” going on in Silicon Valley and he is using his “discounted risk of employer profitability” theory which is essentially what percentage of employees in Silicon Valley are working at profitless companies? The answer: MANY. John Hoesley, a Chicago-based Managing Director at Silicon Valley Bank, and a guest on The Second Stage, gave some credence to the Midwest movement when he said that there are as many early stage businesses in the Midwest as there are in California. And I bet that those companies are more lean, mean, and sensible, and therefore more fundable, because they have done more with less since inception in the “lifeless” Midwest than the luxury-laden coasts.