CORTADO VENTURES
The Advantages of Venture Capital in the Midcontinent
Why the region is ripe for innovation and how funders and founders are capitalizing
With a record $128 billion raised by venture capital (VC) funds in 2021, startups have more access to venture capital than ever before. While more than 70% of U.S. venture capital goes to California, New York, and Massachusetts, the current economic downturn is drawing investors from the coasts to take a fresh look at the advantages the Midcontinent has to offer.
VC funds in the Midcontinent — particularly those that focus on legacy sectors — are outperforming prominent VC funds on the coasts. In fact, Cortado Ventures is performing in the top 10 percent of all VC funds in the nation, according to data from Pitchbook. According to Crunchbase, we are the #1 emerging firm in our region, and #6 overall.
The Midcontinent is a region which primarily includes Oklahoma, Missouri, North Texas, Arkansas, Colorado, and Kansas; the term “Midcontinent” has historically been used to describe a prolific region for the oil & gas industry, but we’re repurposing the term to describe our unique region’s growing tech sector. Midcontinent economies have largely been built on legacy industries. This long history uniquely positions Midcontinent venture funds to be great partners for B2B startups in legacy sectors, such as logistics, transportation, aerospace, and energy. Here are just a few of the advantages of venture capital in the Midcontinent that investors are seeing:
Legacy Industries
Historically, legacy industries — such as energy, logistics, agriculture, and healthcare — have been underfunded and overlooked by VC firms on the coasts. These sectors are ripe for innovation and have a significant impact on real communities through the creation of jobs, efficient supply chains, sustainable food sources and leading healthcare research. However, innovating these sectors is technically challenging, which requires leadership, significant industry experience and a mindset to build profitable, enduring companies.
Entrepreneurs in the Midcontinent bring a deep level of knowledge and expertise in legacy sectors by providing real solutions for the world’s most pressing problems. Charu Thomas, the Forbes 30 Under 30 CEO and founder of Ox Fulfillment Solutions (Ox), leveraged her experience working for the contractor that handled supply chain for McDonald’s North America to start her Northwest Arkansas-based company. Charu has utilized her experience in augmented reality for Ox to maximize order picking and fulfillment for industry-leading Fortune 500 retailers. Charu is one of numerous entrepreneurs that presents a significant opportunity for investors to capitalize on innovation in these foundational industries.
Right-Sized Valuations
According to data from Pitchbook, 2021 was a record year in venture capital for deal-making, exit, and fundraising dollars, but recently that bubble has started to deflate on the coasts. However, the Midcontinent hasn’t experienced the unsustainable growth and outsized valuations as coastal VCs. Investors in the Midcontinent favor more conservative valuations and have been less willing to bite on big fluctuations in the market. This not only protects the investor, but saves the company from the risk of overpromising and under delivering in the next investment round, and even protects founders from excessive dilution by right-sizing rounds with milestones.
Talent is well-distributed, but capital is not. The Midcontinent is vastly undercapitalized, which bolsters against inflation and creates an arbitrage opportunity: better starting valuations but the exits are the same.
Building Profitability the Right Way
Cortado Ventures looks at unit economics, pathways to profitability, and operational excellence, indicated by our built-in, nationally recognized, free-to-founders executive coaching and strategic planning. We invest early when valuations are low and build companies offering practical solutions to transform foundational industries. By building solid companies from the start, they earn their higher valuations and create a more stable and sustainable ecosystem for VC investors.
In addition, our leadership team — myself, David Woods, and Mike Moradi — has all founded or grown companies in Oklahoma in the region’s legacy sectors. We leverage that experience to add value for our portfolio companies with executive mentorship, leadership training, and connection to our professional networks. In the Midcontinent, we know what works and leverage this experience with our founders and startups. We provide value by approaching every deal with the thesis of Midcontinent culture: a personal, dedicated, and data-driven relationship with our founders and startups.
Innovation That’s Built to Last
There is plenty of opportunity for technology to innovate legacy sectors, including energy, life sciences, logistics, aerospace, agriculture, and finance. Innovators in the Midcontinent build companies to last, not just for growth’s sake or vanity metrics, but to solve real problems for the long-term.
In recent years, Oklahoma and the Midcontinent region have made great strides to support startups, attract and retain tech talent. Recently enacted laws have opened up opportunities for the venture capital ecosystem in Oklahoma, including the Software/Cybersecurity Workforce Tax Credit for software engineers, equity investment tax credit for investors and the Invest in Oklahoma Program, allowing public entities to invest up to 5% of their portfolio into direct investments like venture capital. Along with typical small business credits, startups in the region have a prime opportunity to leverage capital, talent and growth that is economically friendly for investors and their workforce alike. The Midcontinent’s low cost of living also incentivizes more entrepreneurs to establish tech startups in the region, creating more opportunities for investment than ever before.
Supply and Demand Problem
Major market coastal VC firms have a supply and demand problem. They have more capital than anywhere else in the country, but fewer great companies in which to deploy it as tech talent becomes more mobile and innovation is spreading to other regions. While the Midwest hosts roughly 10% of all US-based VC-backed startups, it consistently receives less than 5% of all VC funding. As we saw with the recent shutdown of Fast, funding is only one piece of the puzzle. There also needs to be thorough due diligence, a strong business model, and product market fit in order for startup funding to drive substantial returns.
In the Midcontinent, capital is relatively scarce, yet great investment opportunities increasingly abound, which means that Cortado can maintain a high level of discipline and back only the best opportunities.
At Cortado Ventures, we invest in pre-seed and seed stage startups with a focus on energy, logistics, life sciences, and the future of work. If you are a Midcontinent startup or looking to invest in these startups, contact us to learn more.
