How Indiana Became the Next Big Startup Tech Hub
A few big startup successes in the 90's has put Indiana on the cusp of rivaling other startup hubs like Boston and Silicon Valley
In the 1980s, venture capitalist Bob Compton used to run an experiment that he coined “the cocktail culture test.”
It was very simple. When he attended cocktail parties in Indiana, he would tell others what he did for work and then observe their response.
It might be hard to believe now, but when he told people that he was the chairman of a tech company or a venture capitalist, he said people would often drift away or change the subject.
“All of my friends in the VC world in Boston and Silicon Valley viewed the Midwest as an emergency landing strip in case the plane went down while traveling from coast to coast,” Compton said during a phone interview.
More than three decades later, things have changed.
Since Compton first ran his culture tests, the city of Indianapolis and the state of Indiana have become a powerhouse in the tech startup scene, producing many unicorns, drawing huge corporations and generating some serious venture capital activity.
While five big markets — San Francisco, New York, Boston, San Jose, and Los Angeles — still accounted for 77 percent of total capital invested into U.S. venture-backed companies in 2018, the city of Indianapolis has seen a higher compounded annual growth rate than these bigger hubs over the past five years, according to the National Venture Capital Association.
In the third quarter of 2019, Indiana startups raised more than $76.5 million through investments in 13 companies and grants to five other companies, according to TechPoint’s VC Report.
Seven Indiana tech companies were involved in mergers and acquisitions and 11 out-of-state VC firms took interest in Hoosier companies.
“It’s not been a fly-by-night thing; it’s actually been on a steady build through the last 35 years or so. We were homegrown,” said Mike Langellier, president and CEO of TechPoint, an Indianapolis-based organization that promotes the growth of Indiana’s tech community. “We have significantly more VC activity coming into the state than ever before and larger deal sizes than ever before.”
How Did This Happen?
How did a state known for agriculture and manufacturing become a tech hub? Compton traces the origins of the state’s tech scene back to the 1970s.
The Japanese auto industry had started to make inroads in the U.S. market, sending the Midwest, a large manufacturer in the auto industry, into a tough recession.
The business leaders in Indiana all came together to try and figure out a way they could jump-start the local and regional economy.
“They had all served in World War II and built their companies up, but they could see that in order for the Midwest, and particularly Indianapolis [and Indiana] to thrive, there needed to be a new generation of entrepreneurs and a new generation of growth stories,” said Compton.
The problem was there was no capital available to fuel these efforts.
The late John Fisher, the chairman and CEO of Ball Corporation, and the late Marion Dietrich, who at the time was head of sales at Cummins Engine Company, had an idea.
They approached then Indiana Gov. Bob Orr and pitched a venture capital firm in Indiana that would only invest in new Indiana tech companies.
The idea gained traction and the Indiana state legislature would eventually pass an act that said anyone who invested in this new state-supported VC firm would be eligible for a nice 20 percent tax break.
Even with the incentive, tech was not big in the late 1970s and there still was not a lot of interest.
“They had to twist a lot of arms,” recalls Compton. “It was a hard sell. It was really visionary to realize the scarce resource that capital was to build these companies.”
It took some time, but eventually, the fund pulled together 53 investors to create an $11 million fund.
In 1981, Indiana’s first venture capital fund, the Corporation for Innovation and Development (CID), was born, and it would play a big part in the creation of Indiana’s now bustling tech scene.
If they made a movie about the rise of Indiana’s startup scene, then its main character would likely be a man by the name of Don Brown.
Brown was an extremely intelligent fella.
While attending medical school at the Indiana University School of Medicine, a friend of Brown’s who ran several car dealerships with his father asked if he could write a financial software program for car dealers.
Brown agreed and on his own was able to put together an algorithm that would form the basis of his first company called Dealership Programming, which he co-founded with his longtime friend and business partner Joe Adams.
Not too long after, General Motors acquired Dealership Programming for $12.5 million.
That deal was one of the first software acquisitions in the state of Indiana.
Hot off the success and with money in their pockets, Brown and Adams were intrigued by their newfound success in the software industry.
They wheeled around and launched another startup called Software Artistry, which developed and marketed scalable, enterprise-wide software for problem tracking and resolution.
They didn’t know it at the time, but Software Artistry would do for Indiana what Intel had done for Silicon Valley.
It was at this time that the company’s journey would intertwine with Compton’s.
Compton, a Harvard Business School graduate, had launched his career in the world of VC in Boston at a Chicago-based fund. He moved to Chicago when the firm switched its model to leveraged buyouts but soon realized that world wasn’t for him.
He then moved to Indianapolis and in 1988 became a partner at what had become CID Venture Partners after the firm raised a second $27 million fund.
Indianapolis was a bit different from the venture investing scene in Boston or Chicago. There wasn’t a ton going on, but at least Compton had zero competition in those days.
He took a liking to Brown’s company Software Artistry and invested a quarter of a million dollars.
“Bob became a close collaborator and really pulled up his sleeves. He was a very hands-on investor and was a key asset for me as a young guy with no business experience whatsoever,” said Brown. “I was more of an academician than a business person so Bob really helped me learn the ropes.”
Software Artistry ran out of cash multiple times and Compton could not get another venture firm to invest in the company. But CID continued to put more money into the company whenever it was in a bind.
Eventually, the investment would pay off.
The company went public in the mid 1990s — the first software IPO in Indiana — and a few years later, IBM acquired Software Artistry for $230 million.
Compton’s $1.8 million total investment in the company all of a sudden turned into a $30 million-plus return.
But Software Artistry was much more than just a nice return — it served as the initial spark for the state’s tech startup ecosystem.
“It was the first software company to ever go public so it kind of showed people locally that it was possible even in Indiana where it had never happened before,” said Brown. “It also generated a lot of wealth. Most people there had stock options and so they made some money and the expertise they gained provided a strong executive nucleus for lots and lots of companies that then started around the area.”
The Snowball Effect
Compton’s belief in Software Artistry would be the beginning of a very successful venture career.
There are many stories to tell of his success, but one in particular sticks out.
He came across a company in Warsaw, Indiana, which is now the global center for orthopedics, called Warsaw Orthopedic. The company was licensing the technology for a small implant during spinal surgery, and at the time had less than $1 million in sales.
Compton liked the company, which had been unable to raise capital, and decided to invest.
When he pitched the idea to another investor in Silicon Valley, he was told, “This looks like something I could buy at a hardware store. We would never do this deal.”
CID Venture Partners invested a little under $2 million in the company.
Warsaw Orthopedic then merged with a company called Danek. The company went public in the early 1990s and then acquired a European competitor and became Sofamor Danek.
By 1999, Sofamor Danek had grown substantially, with sales exceeding $400 million. That same year, Medtronic acquired the company for $3.7 billion.
And what happened to the founding father Don Brown?
He left Software Artistry right before it went public to launch another company called Interactive Intelligence, a call center and communication technologies company that enabled businesses to improve customer service and productivity.
Brown put in $10 million of his own money and grew it to more than 2,200 people with offices around the world. In 2016, Brown sold the venture to Genesys for $1.4 billion.
“It was a good run,” he says.
Brown has not slowed down. He’s still launching and running startups in Indianapolis this very day.
His current venture is LifeOmic, a software company that leverages the cloud, machine learning and mobile devices to offer disruptive solutions to healthcare providers. Adams would eventually join Brown at Interactive Intelligence and LifeOmic in various senior leadership capacities.
Brown has put in about $20 million of his own money into LifeOmic and in three years has already grown it to more than 70 employees.
Brown and Compton, however, were just the tipping point.
Perhaps the even more impressive result of Software Artistry is all of the children it has spawned.
Now equipped with their own capital, experience at a successful startup and a lot of confidence from being a part of the first software IPO in Indiana and then a big acquisition, the children each went their perspective ways.
Compton estimates that employees from Software Artistry went on to found eight or nine other big startups in Indiana.
Bill Godfrey, who had been hired as an intern at Software Artistry while attending business school at Notre Dame, and eventually rose to vice president, went off and bootstrapped a marketing automation company called Aprimo.
Eventually, Aprimo would attract venture funding from firms in Chicago and Boston. After making several acquisitions of its own, the company was eventually acquired by Teradata for $525 million.
There were plenty of other successful Software Artistry alumni as well.
Mike Robbins founded Mezzia, a web-based capital spending management software for the healthcare market that was acquired by Boston-based VFA, Inc in 2006.
Steve Erlich founded the company PolicyStat, which was acquired by New Jersey-based iContracts in 2017. Pam Hynes is now the COO at Sharpen. Doug Stevens founded the company LifeShare Technologies, which was acquired earlier this year by Spectrio.
While all of this was happening, other big companies began to emerge in Indiana around the turn of the century.
William Oesterle, originally a partner at CID Venture Partners in the mid-1990s, went on to found Angie’s List.
And an entrepreneur named Scott Dorsey started a digital marketing automation company called ExactTarget, which another Software Artistry alumni named Scott McCorkle would eventually become president of.
ExactTarget would turn into another big breakthrough for the Indiana startup scene.
Having grown up in northeast Ohio, attended college at Indiana University and gone on to obtain an MBA from Northwestern, Dorsey was a Midwest guy through and through.
In late 2000, he teamed up with Chris Baggott and Peter McCormick to co-found ExactTarget, a provider of digital marketing automation and analytics software and services.
The company would raise more than $160 million in an IPO and eventually get acquired by Salesforce in 2012 for $2.5 billion. The company would become what is known today as the Salesforce marketing cloud.
“The sale of ExactTarget to Salesforce opened a lot of eyes and brought a lot of wealth in,” said Brown. “Lots of people learned a lot from that.”
Not only was there a new group of multi-millionaires on the block, but Salesforce took a liking to Indianapolis in a way that no outside corporate giant had before.
The company essentially made Indy it’s secondary headquarters behind Silicon Valley.
It added 800 jobs in the city, acquired the naming rights for the tallest building in Indianapolis and turned it into the Salesforce tower, and also had a venture arm that began investing in Indiana companies.
“We were building our own thing,” said TechPoint’s Langellier, referring to the startup community. “And then Salesforce came and caused other companies to come as well.”
How Indiana Continues To Push Forward
Compton says Indy finally has all four pillars that make an entrepreneurial community successful — talent, technology, capital, and culture.
In addition to founding companies, many of those in that first batch of Indiana entrepreneurs like Brown and Dorsey have become angel investors or launched their own venture funds.
But with Indiana and its capital Indianapolis starting to receive national attention, now is not the time to ease off the gas pedal.
A few years ago, the Indiana Legislature allocated $250 million in revenue they had collected from a toll road lease for the investment in Hoosier-founded startups.
“This $250 million fund will invest into VC firms to invest into startups and early-stage companies, as a means to catalyze the creation of new VC firms, and create a honey pot to attract more VC firms in other parts of the country to spend more time here,” said Langellier.
Furthermore, organizations like TechPoint have continued to place a hard emphasis on developing and retaining tech talent, which is critical to growing an entrepreneurial ecosystem.
After all, it was an internship program from CID Venture Partners that paired Bill Godfrey with Don Brown over at Software Artistry.
Indiana is home to many great engineering and business schools such as Purdue, Notre Dame, Indiana University, Butler, Ball State University and the Rose-Hulman Institute of Technology, not to mention other neighboring Big 10 schools like the University of Illinois, University of Michigan and Ohio State.
But as any rising startup ecosystem knows, students will flock to bigger and more glamorous cities if you don’t actively recruit them.
To ensure that Indiana had plenty of tech talent to go around, TechPoint started a program called Xtern.
The program selects and brings to Indianapolis over 200 students or recent graduates from all over the country for a job or internship at a company or startup in the city.
The students stay together in apartments leased by TechPoint, do professional development and social events together, get to learn the city and work in a unique summer experience.
For the summer of 2020, the program has already received 1,900 applicants from 45 states and 212 universities all over the country. Eighty percent of those selected will be software engineers, data scientists or cybersecurity or IT students.
Employers select from Xtern applicants through an event called Finalist Day.
Through a software application, TechPoint matches the appropriate students with the appropriate companies for interviews. By the end of Draft Day, the event will have run 800 interviews and placed all of the participating students in internships or jobs for the summer.
“That’s an example of very programmatic efforts we are taking to do better than say, ‘Hey, good news you are close to university talent,’” said Langellier. “No, we are literally going to create an in-demand pipeline to bring these students here and create great opportunities for young people.”
Another thing that Indy business leaders do when trying to lure talent to the Midwest is to focus on the area’s strengths.
Instead of trying to be Silicon Valley, leaders emphasize just how different the state is, and focus on some of the not-so-appealing qualities of Silicon Valley like the crazy amount of turnover at tech companies — the average employee tenure at Uber is 1.8 years.
“I think there is a tremendous advantage in Indianapolis with that sort of mentality, the loyalty, and just really realistic expectations that we’re not trying to build the next Instagram in six months,” said Brown. “People don’t mind a five- or 10-year plan and I think that allows us to really take on more ambitious sorts of long term projects.”
Tech leaders have also found success in recruiting slightly older talent.
This pool of talent may have grown up in Indiana and then moved away, but now are in their early- or mid-30s and have children or are thinking about starting a family.
They might now realize they don’t want or can’t afford a house in Silicon Valley. But they can move back to Indiana, get a house with a backyard in a safe neighborhood, and still work at a great tech company and have a high quality of life that is affordable.
“There is a ridiculous lack of sustainability in places like the Bay Area and Seattle and Austin, where things have gotten so congested that prices are shooting through the roof,” said Langellier. “The churn of talent is unsustainable there. There is a lot of pain-causing the companies typically in the Silicon Valley bubble to say, ‘I’ve got to figure something else out.’ But many don’t know there could be a better option here in Indy. Couple that with the opportunity Industry 4.0 trends create in the Midwest and the fertile field of Indy’s robust tech scene and that creates a pretty winning recipe.”
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