I’m about as Midwest as you can get. I was born in small-town Indiana to a fourth-generation Hoosier farmer and my early childhood was spent playing “farm” with miniature International Harvesters. We traveled across miles of flourishing, flat cornfields to visit my grandparents and cousins on my mother’s side just outside Peoria, IL. When I was in high school my family moved to a Big Ten collegetown. We vacationed at a sandy, spring-fed lake in Michigan. For college I went to Chicago and majored in economics at one of the finest “freshwater” economics institutions. My wife’s parents live in the sprawling Chicagoland suburbia and we travel frequently to visit some of their family just south of Louisville, KY. I frequently visit my sister in Cincinnati and have extensive extended family from Minneapolis, MN to Lester, IA to Speer, IL. And if that doesn’t convince you, I learned to ski in Michigan and Wisconsin and enjoyed those modest hills dozens of times before I took my first trip out West.
So when I saw the opportunity to start a venture capital firm, it seemed like there was only one place to put it — my Midwest backyard!
What even is the “Midwest”? The US Census defines it with objective state borders. But Americans are more divided — some would include Montana, Oklahoma and West Virginia. So when I launched M25 nearly two years ago, I wanted to have clear, strict geographic investment boundaries that made strategic and practical sense. I thought about it, did some research, and landed on this:
Why take something inherently subjective and force a binary outcome? How did I select what’s in “my” Midwest? And why the Midwest focus at all? Let me explain…
It’s important to understand why we’re incredibly bullish on venture capital, particularly at the seed-stage, in the Midwest. We’ll start by simply pointing you to the well-written, equally-optimistic post by Chris Olsen of Drive Capital — it covers the hard numbers really well. But I’ll dig into our reasoning further to more specifically understand the reasons for M25’s intentional, concentrated and unrelenting Midwest seed focus.
First, a lesson in basic economics.
The earlier the startup, the more the funding is sourced from the immediate geography. Why? In general, the smaller the investment, the less likely a company will be able to source investment from outside their local networks, due to increasing transaction costs. If a founder or investor must travel significantly and expend great time, money and effort to complete an investment, the larger the investment must be to absorb those transaction costs. As most startup investing is a high-touch, personal procedure, most early-stage capital is sourced in the same city or state that the company is headquartered. These transaction costs effects are enhanced when factoring in a founder’s networks are often mostly local and that many early-stage investors aim to invest back into their communities.
Unfortunately for Midwestern entrepreneurs, local investors tend to be much more risk averse than their coastal peers which has no doubt contributed to the Midwest lagging behind Silicon Valley, New York, Boston and L.A. in venture investment. But a lack of venture investment doesn’t mean a lack of venture back-able startups. So what follows? A host of scrappy, often-bootstrapped, underfunded startups hungry for venture capital. M25 is here to respond to demand.
So why did we focus in on a rigidly defined map, excluding other neighboring states that likely have the same opportunities? There are many factors, which I’ve boiled down to culture, focus, the specific strengths of the Midwest, and transaction costs.
Culture: Humble, practical, resourceful, hard-working — having a common set of core values is crucial in rapidly building trust in an investment class where forming a relationship is crucial. Although remarkably diverse in many measures, there are broad regional values that are much stronger in the region we’ve outlined than with cities just outside. I’d argue that the people of Omaha, Kansas City, Cincinnati and Pittsburgh share more in common with each other than they would with any Denver, Austin, Atlanta or Philadelphia, let alone San Francisco, Phoenix, NYC or Boston.
Focus: We are a fund that invests broadly across various types of tech startups, and if we opened the geographic funnel too large, we would miss what’s right under our noses. Taken further, we need to be digging deep into the communities we target so that we can source the best dealflow and help our portfolio companies that are based there. Why spread ourselves thin when there is plenty of opportunity at home? And there is plenty of opportunity — last quarter we sourced nearly 300 startups, and at the rate we’re currently going we could easily surpass that.
Midwest Strengths: We believe there will be a plethora of huge tech companies growing up in the Midwest over the next several years, and we want to have a piece of those large exits. What will those companies look like? What are the Midwest’s competitive advantages? It’s tough to say — B2B SaaS has already been successful, but there are some highlights in obvious natural advantages like Agtech and Insuretech growing as well. Arguments can also be made that consumer-facing technologies can scale better in the Midwest as well — I mean, if it plays in Peoria it could play across the US and not just stagnate in early-adopt-anything Silicon Valley. Additionally, we’ve already bottomed-out and the Rust Belt hit it’s all-time low. Now there’s a huge, diverse economy with a packed pool of talent in a business-friendly environment — add some venture capital and this fireball explodes.
Transaction Costs: We invest smaller amounts in seed rounds. It doesn’t make sense for us to fly across the nation to meet a founder — the cost is prohibitive to the size of the deal. Rather, we’re investing in our (often drive-able) backyard, and have multiple investments in the same city and state to limit the expenses per deal. It also benefits us to have frequent contact with the startup ecosystems we are investing in, so we deploy a “hub and spoke” model with Chicago being our central hub and taking frequent trips to the various spokes.
Taking those specific reasons into consideration, it should be pretty easy to understand why we went with the Midwest borders we did:
- We started with the core US Census-defined Midwest, which exhibits all of the traits we focus on and has those core advantages cited.
- We added the western half of Pennsylvania, because culturally it behaves more like the Midwest, it’s still very removed from East Coast venture capital sources and the core economic/university structure mimics much of what we find in other regional hubs.
- We added Kentucky, because it’s a bit of a border state with no clear region, it’s low in transaction costs for us traveling around Indiana and Ohio, it’s completely underserved by venture capitalists and many amazing Cincinnati-area companies just so happen to put their HQ in tax-credit mecca Covington, KY…
So it should be pretty clear why M25 is investing in the Midwest. It isn’t only everything I am and know, but it’s a land brimming with tech opportunity and, as a practical Midwesterner, I’m simply responding to the obvious demand. We’ve been live for just over 18 months, but we’ve been swarming the regional capitals, university towns and mid-sized Rust Belt/agricultural cities, as you can see from my Google Timeline map of the past few years. But we’ve still got ground to cover — there are gaping holes and we are still cultivating deeper relationships in the ecosystems where we are already active. So you tell me — where should we go next? Even if it doesn’t make sense for us to schedule a specific trip out there, I might be able to stop by when I’m visiting my cousins’ farm or vacationing on the shores of one of these beautiful Great Lakes…
About the Author
Victor Gutwein, founder and managing partner of M25. A Kauffman Fellow (Class 22) and former leader in Hyde Park Angels, Victor founded M25 in 2015 and quickly grew it to become one of the most active venture firms in the region. Victor lives with his wife and daughter on the South Side of Chicago and loves staying active with running, biking, swimming, backpacking and any team sport you’ll let him join. If he can’t convince you to break a sweat 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.
Twitter: @lalayak
About M25
M25 is a Chicago-based Midwest-focused venture capital firm run by Victor Gutwein and Mike Asem. Since the firm’s inception in 2015, M25 has invested in over seventy early-stage tech startups in over 20 cities across 11 states in the Midwest. M25’s objective, analytical model and collaborative, forward-thinking approach creates a large portfolio spanning several industries across the entire region, allowing them to establish M25 as a key node in Midwest startup ecosystem.
