How Midwest Startups Beat Silicon Valley at their Own Game

They Play Moneyball

Brian Laegeler
Aug 18, 2019 · 4 min read
Image for post
Image for post
Image: Shutterstock

In his book Moneyball, Michael Lewis popularized the story of the 2002 Oakland A’s reaching the playoffs despite having one of the lowest budgets in Major League Baseball. Last spring, our friends at Hyde Park Angels (“HPA”) updated their Midwest Startup & Venture Capital Market Analysis and concluded that today’s Midwest region is a venture capital desert, having received only 4% of U.S. investment. Yet during the last decade, Midwest startups generated the highest financial returns in the U.S., with an average multiple on invested capital (MOIC) of 5.6x versus a range of 3.3x-4.8x for other major metros. The Midwest outperformed the Bay Area by 33%.

Image for post
Image for post
Source: HPA Midwest Startup & Venture Capital Markets Analysis, 2019

This return advantage is not fully explained by the Midwest’s lower cost of living or “investor mindset.” HPA’s analysis shows that Austin, Texas underperformed other metros despite having a similar cost of living to Chicago. Further, the Midwest’s reputation for a conservative investor mindset is moot, as outsiders are setting valuations — according to Pitchbook, between 2016 and 2019, 84% of the venture capital received by Midwest startups had a lead investor from outside the region.

Image for post
Image for post
Source: HPA Midwest Startup & Venture Capital Markets Analysis, 2019

The 2002 A’s team succeeded by assembling a more efficient offense with scarce resources. Likewise, Midwest founders who generated high returns intentionally allocated capital more efficiently than Silicon Valley:

“We’re building a different kind of business, one that actually likes to make money, which may be foreign to some of the companies out in the valley”

– Jon Oberhide, Co-Founder of Duo Security (Ann Arbor, MI) July 2017

“For us, it has just been slow and steady growth sustained through reliable sales and returning customers rather than trying to be the biggest player by stealing market share with expensive marketing campaigns that require multiple rounds of financing or going public”

– Rich DeNardis, Chief Revenue Officer, Home Chef (Chicago, IL) January 2018

Duo Security and Home Chef played Moneyball in the way they approached the marketplace, favoring consistent singles and doubles over swinging for the fences, and these weren’t isolated examples. During an era when 90% of venture-backed companies lost money at the time of IPO, the top four Midwest exits — Ceridian, Duo Security, Cresco Labs, and Home Chef, were profitable at the time of IPO or acquisition.

“Most companies in Chicago are cash-flow focused, which, despite resulting in much fewer deals, is a big reason why they have the highest VC returns in the country”

– Yazin Akkawi, Founder, MSTQ (Chicago, IL) May 2017

Some see the Midwest as a victim in this scenario — that it is somehow “missing out” on its fair share of venture capital despite producing 25%-33% of the nation’s R&D, new patents, and top tech talent. On the surface, Midwest valuations have been roughly half that of their coastal counterparts. This tradeoff between profitability and sales growth impacts valuations, but the strategy has worked while unicorn returns have declined over the last five years. The Midwest’s “respect” for cash flow also boosts a startup’s survival rate, which is double the national average in places like Ann Arbor, Michigan.

Image for post
Image for post
Source: HPA Midwest Startup & Venture Capital Markets Analysis, 2019

Of course, there are examples of Midwest startups that swing for the fences, and the Silicon Valley model has its place. It has worked well for putting large amounts of capital to work and for startups that are in “winner-take-all” markets like Facebook, Google, and Uber. But if Midwest startups have proven anything, it’s that a pragmatic approach to capital allocation can work equally well or even better for investors on a percentage returns basis.

Brian Laegeler is a Principal at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs.

Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by Touchdown or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from independent sources, is believed to be accurate, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Investing involves the risk of loss of some or all of an investment. Past performance is no guarantee of future results.

Risky Business

Thoughts on corporate VC from the team at Touchdown…

Thanks to Scott Lenet

Brian Laegeler

Written by

Principal @ Touchdown Ventures (Chicago, IL)

Risky Business

Thoughts on corporate VC from the team at Touchdown Ventures, the leading provider of managed venture capital for corporations.

Brian Laegeler

Written by

Principal @ Touchdown Ventures (Chicago, IL)

Risky Business

Thoughts on corporate VC from the team at Touchdown Ventures, the leading provider of managed venture capital for corporations.

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store