Why was the Midwest left behind as Silicon Valley surged?
A conversation with Lea Boreland and Kyla Scanlon, authors of Midwest Arbitrage.
This week, I sat down with Lea Boreland and Kyla Scanlon to discuss Midwest Arbitrage, their article about how and why the Midwest was left behind as Silicon Valley rocketed into the innovation stratosphere.
As a native Minnesotan, this is a topic near and dear to my heart — and in an occasional dark night of the soul, I’ve even often wondered whether the Midwestern culture is even compatible with West-Coast entrepreneurship. Luckily, Lea and Kyla strongly disagreed with my pessimism.
I’ve published the entire conversation below.
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Tell me a little bit about yourselves: past, present, and future. Where are you from, and where are you headed?
Kyla:
I am from Kentucky, and I stayed there for university. That gave me an opportunity to explore a variety of ideas, and allowed me “safe” growth. Upon graduation, I wanted to leave Kentucky (which I had never really done) and moved to Los Angeles, CA for a career in asset management.
I am passionate about elevating the profile of the South — there’s a lot of work to be done. For now, I spend a lot of time thinking about how nature and business connect, how we can be better humans, and what building really means.
Lea:
I’m originally from Michigan , and I played sports for my whole life. To this day, I still feel like there is nothing more fun than being on a team, and that’s probably why I like startups so much.
In college, and mostly by accident, I came across an internship at a great DC-based startup. I had no idea what it was when I first joined — I literally remember reading the word SaaS for the first time and being like “huh, weird.” What resonated about the experience is that I got to hang out with a bunch of funny and cool young people trying to figure out how to bring something of value into the world. After that summer, I came back to school and saw all my friends in the Midwest applying to consulting jobs and I thought: wait, have you heard of startups? And no one really had. So I started writing about it.
Over time, what’s fascinated me is: What are the invisible generative forces begetting these new startups into existence? How do things grow on their own? How do industries create their own next innovations? And being from the Midwest and seeing factory carcasses everywhere, the next question is I ask is: how do they die? That’s what I’m trying to learn about in my writing.
What was your inspiration for Midwest Arbitrage?
Lea:
Right off the bat, I think we both felt that the narrative of innovation doesn’t often encompass the Michigan’s and Kentucky’s of the world, but it’d be a lot more interesting if it did. A long time ago, these places were hotbeds for what were basically 19th century startups. The vestiges of their moonshot ideas are everywhere around us, like the innovation of snow plowing or the discovery of tie-shut envelopes, and so forth. We both wanted to tell the stories of those places and things, to fit the stories of growth in Silicon Valley and the rest of America together.
This is useful because when you look at the long arc of innovation across industrial revolutions, you get a completely different picture than if you just look at growth and startups since the invention of the semiconductors. You get a sense of the role of different actors in the system, and a sense of how systems of growth tend to behave.
Kyla:
Totally agree with everything Lea said. Kentucky straddles the Southern / Midwest label, and I am incredibly devoted to elevating the story of the middle of the country, as is Lea! This was an awesome opportunity to think about VC deeply and how it can build and grow.
I was particularly struck by the chart showing the Top 100 YC Companies, and how more than 90 of them are from the Western US.
At which stage to you think Midwest companies are dropping out of the funnel? (Are Midwesterners just starting fewer startups? Are fewer getting funded? Are fewer becoming successful after being funded?)
Lea:
It isn’t just a supply side problem of capital availability. Potential companies are “dropping out” of the funnel at the very beginning: they just aren’t being founded. Young people in the Midwest aren’t really told that startups exist, they don’t know they have permission — much less incentive — to go explore a crazy idea and try to request millions of dollars from other folks to bring it to life… they maybe also don’t identify with the Harvard dropout founder trope. Whereas Silicon Valley has proliferated the learned audacity to go start a company.
I would like to rent a hundred billboards in metro Detroit that just say “YOU SHOULD START A SOFTWARE COMPANY.”
Kyla:
Yes to all of the above. Anecdotally, I had no idea VC was a thing. People told me I was crazy to leave KY for a job at a corporation in Los Angeles. Imagine if I told them I was moving for a startup that might not exist in a few years? People on the coasts tend to have a weird representation of Midwesterners and Southerners in their heads, which broadly translates into a disconnect in funding — the Coast is sort of it’s own breathing, living thing and thus, the Midwest gets pushed down a bit. I also think proximity is big — SF VC’s are more likely to invest in things close to them. It’s just how it is.
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That’s exactly it — “it’s just how it is.” It’s a super tough question, and because I’m lucky enough to be interviewing here, I get to cop out and just ask it: why? Why are startups more likely to be from the West, and why are VCs more likely to fund Western startups?
Lea:
It also just comes down to path dependence and culture. One thing we write about is that the first and second industrial revolutions happened in the East and Midwest. The West coast was barely populated at the time. Just past the zenith of that era, the Great Depression ravages conventional industry, the post-war era sends Americans to the Suburbs, and industrial cities like Detroit are devastated. Around this time, the semiconductor arrives; California at the time is still something of a blank slate. Growth finds and continues down the path of least resistance, or highest margin.
Can you say more about the “path dependence” idea?
Lea:
A good analogy is to think about path dependence like the process of constructing a building: first, you build a foundation, then floor 1, floor 2, etc. Each layer that you put down limits your possibilities for the future. If you build a foundation for a ranch house, it’s going to take a lot of work to turn that into the groundwork for a skyscraper. It’s not impossible to overcome that barrier and rebuild, but it is a lot of work. If you can, it’s often cheaper to start from a place where you don’t have to rebuild. For example, I think of all the vacant industrial lots in the Detroit area that will require huge amounts of clean-up from their pollutive former tenants in order to build there.
In economic development, this results in “leapfrogging;” late arrivers get the advantage of starting from the foundation of the newest tech. The West leapfrogged the Midwest. In many ways, China is leapfrogging the US. There’s an interesting book that just came out called Blockchain Chicken Farm about how China is growing and industrializing right alongside these wild new concepts like the blockchain, and embedding those technologies into things we would consider to be orthogonal to that tech, like chicken farming.
So point being, it’s possible and even likely that the state that the Midwest is actually an advantage for some type of future growth. One example of this would be leveraging applied industrial knowledge in the Midwest to create imaginative vertical SaaS companies.
The pessimistic part of me wonders if fighting the status quo of cultural norms will even work. There are plenty of things that are adaptive in the startup world but have delightfully folksy, derogatory phrases in the Midwest — like “tooting your own horn.” Could the cultures just be too different to reconcile?
Kyla:
I would totally disagree with your pessimism. The Midwest and the South are culturally compatible with entrepreneurship — building is inherently human. In fact, the Midwest was once the “West,” when the most entrepreneurial people migrated there in the 19th century. It’s this narrative that the Midwest/South can’t build like the West that is incredibly harmful. Today, the Midwest doesn’t have the efficiencies of the West — the ecosystem, the infrastructure — and the Midwest isn’t focusing on tech. But the answer isn’t for the Midwest to change itself and start pretending to be the West. We don’t need Silicon Valleys all over the country. Maybe we need different Valleys for different things!
Lea:
Exactly. We don’t want a monoculture of innovation hubs. That stifles innovation. I think we should focus more on finding and nurturing an idea of entrepreneurship that is distinctly Midwestern.
During our research, for example, Kyla and I had a fascinating call with a Midwestern VC who mentioned the cultural compatibility between the hardy Midwestern mentality and enterprise SaaS.
That’s a fascinating idea — that the Midwest doesn’t need to copy the West to be more entrepreneurial. It just needs to discover its own brand of entrepreneurship, and that might look really different from what Silicon Valley looks like today.
Alright, this was awesome. I have just one final question for both of you — opening it way back up: what’s something you learned recently that genuinely surprised you?
Kyla:
If Newton hadn’t invented calculus, someone else would have. Gottfried Leibniz actually ‘discovered’ it the same time that Newton had. But even if neither of them had “thought of it” someone else would have come up with it, around the same time. The way that conversations were going, the level of intellectual thought leadership on math at the time, the path of mathematics to that point — all of it was leading to calculus. Genius doesn’t exist in a silo. And maybe that’s how we think about VC. It doesn’t exist in a silo.
Lea:
I loved Kyla’s tweet thread on all this calculus drama and would highly recommend it.
After our work on the Midwest, one thing I’ve kept asking myself was “what is the role of cities — and regions — or other chunks of land — in a world where we can work remotely and we don’t need to physically congregate in hubs of economic opportunity?” One great work that answers this question (or maybe complicates it) is Jane Jacobs The Economy of Cities. It creates this vision by which local idiosyncrasies produce curious, exciting solutions that actually grow to solve problems larger than those faced proximally. Those solutions become exports. Along which lines do local idiosyncrasies develop if local is a non-geographic concept? Along the lines of reddit communities? This kinda goes along with your idea of leveraging cultural differences to produce innovations that couldn’t be conceived of elsewhere.
You can check out Lea and Kyla’s “Midwest Arbitrage” here. If you want to follow Lea and Kyla, check out Lea’s Twitter, Lea’s newsletter, Kyla’s Twitter, and Kyla’s blog.
If you want to learn more about startups, follow Silicon Valley Outsider, my weekly newsletter written for prospective entrepreneurs and investors folks who live outside the SF Bay Area.
