Best of the Midwest Startup Cities: Collegetowns
In the heart of college football season, desperate fans will look to anything to stoke a rivalry. US News & World Report rankings, party schools, “colleges that pay you back” — so what about best collegetown tech hubs? So I decided to dig into the Best of the Midwest rankings by MidwestStartups.com to see where Midwest collegetowns stack up, sprinkling in Pitchbook’s 2017 University Report rankings as well. Spoiler alert: Gridiron success and startup greatness are only loosely correlated.
Let me quickly clarify what my definition of collegetown is — A city in which population, economy and culture significantly depend on a large, reputable university. I only used collegetowns that were included in the Best of the Midwest rankings (and therefore had measurable startup activity) and there were some close calls — I included Lincoln, Lexington, Ann Arbor and Madison, which have larger populations and some significant independent industries (two of which are state capitals). They have even been designated “University Cities” in some circles. Even larger cities with impressive universities like Columbus (Ohio State), Minneapolis (Minnesota) and Chicago (Northwestern / UChicago) were not included due to a completely independent economy/culture and a low student population to overall population ratio. Ultimately it is a bit subjective, and if you make a good case for something to change I can update these rankings ;)
So, here they are:
What stood out? What makes some so successful and others fall behind? Why is my alma mater behind Wisconsin, which seems to win at everything right now? Let me dive in.
The Big Ten Dominates
This should be obvious to everyone, but Midwest college towns are primarily in the Big Ten Conference. Larger enrollment, longer histories, robust communities dependent on them and a lot of state money pouring into these signature research, often land-grant universities. The benefits are clear, though the Big Ten stamp is likely primarily correlation (vs causation) as recent entrants like Nebraska were already strong.
More to an Ecosystem than University Rankings
When M25 went through and ranked the top Midwest startup cities, the quality of the university was only one factor of many. There are several factors outside of the university — such as local funding resources, government friendliness and raw quantity of startup activity — that explains why relative US News heavyweights Notre Dame, Penn State and Purdue don’t lift South Bend, Lafayette and State College above some of their peers. And conversely, Lincoln’s and Lexington’s tech scenes are clearly buoyed by more than just a large state university.
Leaking Talent — Penn State, Indiana and Purdue
While there were only six Midwest collegetowns with universities registering on Pitchbook’s list of the top 50 undergraduate programs for VC-backed entrepreneurs, three (Purdue, Indiana and Penn State) stood out for doing so despite more modest local startup ecosystems. This seems like a missed opportunity, as these communities clearly have backable, scaleable talent (for at least a 4-year period) but don’t seem able to retain them locally. And while it may be able to point at Madison (640K MSA) and Ann Arbor (344K MSA and very near Detroit) being relatively metropolises, Champaign topping this list (231K MSA) should demonstrate it can be done in modest MSAs of ~200K.
Mustelidae > Felidae
Or more specifically, Badgers and Wolverines (Mustelidae family of animals) crush Wildcats, Bobcats, Nittany Lions and Tigers (Felidae family of animals). Mustelidae are a family of carnivorous mammals, and they just so happen to represent collegetowns that are clearly a level above the rest (coming in at #10 and #11 in the overall rankings, outperforming much larger cities like Kansas City, Detroit, Omaha and Louisville). Sure, they are larger cities on average than our typical collegetown, but there are other factors: These are high-quality educational programs with an exceptional emphasis on commercializing hard tech and a history of building corporate relationships. These have created startup- and patent-dense atmospheres that almost force VCs to pay attention and visit — or stay (the number of VCs with an office in Ann Arbor probably sets the US record for VCs per capita outside Silicon Valley).
For the record, I cheer for the Boilermakers, which is the scientific name for “top of the food chain”.
Amongst Midwest startup cities, collegetowns tend to have a highly educated workforce, a relatively high startup density, a low cost of living and a decent amount government programs/incentives. Nearly half the population in these collegetowns have a bachelor’s degree, compared to a third for Midwest cities overall, and the number of startups per capita is 24% higher. This creates a hotbed of talent and business creation. But to scale those same businesses in those actual ecosystems can be challenging, primarily as the appetite for customers, capital and talent grows. These same collegetowns tend to have lower populations, a lack of local investors (VCs, angels and accelerators), a dearth of large corporate clients and are low on the raw quantity of startups based there. The average Midwest collegetown has 70% fewer large companies to do business with, 43% fewer VCs to raise money from, has 60% fewer startups in their tech community and has a 46% lower population to hire from than the average for Midwest cities. A textbook example of this trend of collegetown startups feeling the need to move to larger regional cities is our own portfolio company Mimir, which made the tough decision this summer to move to Indianapolis (from Lafayette, where they had attended Purdue) as the need to quickly add employees increased.
Special “thank you” to Abhinaya Konduru for her help creating the data visualizations in this piece.
About the Author
Victor Gutwein is the managing director of M25 Group, a VC firm he founded in 2015. Victor has a passionate history with startups and venture capital, including being a Kauffman Fellow (Class 22), founding a vending machine business and kick scooter company and joining the inaugural board of the University of Chicago’s first student-run venture fund. Previously he has worked in corporate strategy in retail & ecommerce, and was a leader in portfolio theory and consumer investing at Hyde Park Angels.
Victor lives with his wife on the South Side of Chicago and loves staying active with backpacking, running, biking and most water sports. If he can’t convince you to workout with him though, he’ll usually succeed in getting you to try out a Euro-style board game (like Settlers of Catan) with his friends.
M25 Group is one of the most active venture capital firms focused solely on early-stage investments in the Midwest. Their objective, analytical approach has helped support their thesis and craft what is known as an ‘index fund of Midwest startups.’ M25 has already invested in over fifty companies since their inception in 2015, and continues to invest in over twenty companies each year. Their collaborative, forward-thinking style and diverse array of investments across industries and business models throughout the region has quickly established them as a key node in the Midwest startup ecosystem.
Originally published at blog.midweststartups.com on November 6, 2017.