When Carisa Miklusak launched AI-enabled staffing platform Tilr two years ago, she and her two cofounders decided on Cincinnati, Ohio as their company’s headquarters, thanks to the city’s large concentration of Fortune 500 companies. The decision was met with skepticism by some of her friends and former colleagues in New York City.
They said, “Your backyard is the largest backyard …why would you silo yourself like that?” Miklusak told VentureBeat. That skepticism was echoed by investors she and her team met with.
Today, Miklusak says that private equity firms she meets with, and even some venture capital firms, see the Midwest as a hot new area for investment.
Miklusak’s experience indicates that some coastal investors are having second thoughts about focusing only on startups in major tech hubs, and activity reports bear this out. On Monday, the New York Times reported that AOL cofounder and venture capitalist Steve Case — who has been leading tours across the U.S. for the past three years to highlight startup activity in underserved areas — has raised a new $150 million seed fund to invest in startups outside major tech hubs. The investors in this fund are a "bevy of billionaires,” as Forbes put it — people like Jeff Bezos, Eric Schmidt, Sara Blakely, and Sean Parker.
“All told, it may be the greatest concentration of American wealth and power in one investment fund,” the Times‘ Andrew Ross Sorkin wrote, while acknowledging that the $150 million fund was “pocket money for most of the investors.”
This year, other pledges to invest more in Heartland tech include Apple, which created a $1 billion fund in January to invest in advanced manufacturing startups in the US. There’s also Microsoft, which recently launched an initiative called Tech Spark, designed to “foster greater economic opportunity and job creation in six communities across the United States.” As part of one of its first Tech Spark initiatives, Microsoft announced that it would be donating $5 million to fund the creation of an accelerator and an early-stage VC firm in northeastern Wisconsin
Some of the high-profile investors in Case’s latest fund told the Times that while they hoped their investments would create more jobs, the main reason they wanted to invest in companies outside of Silicon Valley is because those startups are a good deal. They’re likely undervalued, given that they’re not able to raise capital as quickly as companies in the Valley, and they are also able to scale at a lower cost.
Given the name recognition of these investors, it’s likely that other coastal investors will start to follow suit and invest in startups in “Flyover Country.” However, it’s worth noting that an injection of capital alone won’t create a tech ecosystem on the same level as Silicon Valley, or even Austin and Seattle.
How a tech hub gets made
First, it’s helpful to understand how Silicon Valley’s ecosystem came to be. The origin of modern-day Silicon Valley can be traced back to the creation of Fairchild Semiconductor in 1957. What was notable about the company was that it led to dozens of spin-off companies — former employees of Fairchild went on to create Intel, AMD, and venture capital fund Kleiner Perkins. Fairchild exemplified the sort of outcome that ecosystem builders in cities across the U.S. hope for. The idea isn’t simply that a company will go public or get acquired for upwards of $1 billion — it’s that once a company goes public or gets acquired, its employees will go on to create startups of their own or to invest in other startups.
Of all the ingredients necessary for a healthy startup ecosystem — universities to recruit from, experienced talent, venture capital, customers, favorable business climate, corporations to partner with — a scarcity of venture capital is the one that plagues Middle America the most. Seventy-five percent of venture capital money goes to just three states — California, New York, and Massachusetts.
But pockets of Middle America are displaying encouraging signs of progress. Ian Hathaway, research director for the Center for American Entrepreneurship, notes that when Silicon Valley is excluded, the Midwest — which includes Illinois, Missouri, Indiana, Kentucky, Ohio, Michigan, and western Pennsylvania, as defined by PwC MoneyTree — has seen an increase in the number of seed and early stage investments in the past several years, relative to the rest of the nation.
“There’s a lot going on already [in the Midwest], and we need to acknowledge that,” Hathaway told VentureBeat.
Thus, for many entrepreneurial ecosystems, finding ways to help businesses scale has proved the most challenging. The density of startups within Silicon Valley increases the likelihood that entrepreneurs are within a 50-mile radius of all the people and resources they’ll need at various stages of their company’s life cycle. These might include engineers as the company grows beyond 10 employees, an experienced chief financial officer, more investors, and other companies that a startup might acquire or be acquired by later down the line.
That’s not to say that startups in Middle America can’t find talent and money. It just might take them longer to do so.
The network density problem is one that Case’s latest fund is designed to help chip away at. JD Vance, who will be managing the Rise of the Rest fund, told VentureBeat that what’s important is not the amount of money a group of investors has given, but the connections that they will be able to make.
“Certainly, the hope is that either directly through the fund or some of its participants, there will be follow-on investing, coming from the broader Rise of the Rest network,” Vance told VentureBeat in a phone interview. The Rise of the Rest fund will make initial investments of up to $1 million and will look to regional investors to lead rounds.
The problem is, given that Silicon Valley has been able to build upon 60 years of startup successes, it’s going to take a lot of follow-on investments for Heartland cities to catch up.
Mark Muro, a senior fellow at the Brookings Institution, told VentureBeat in a phone interview that cities shouldn’t wait until they have a few startup successes to begin thinking about ways to bring in some of the additional resources entrepreneurs will need. He cited the low concentration of highly skilled digital workers in non-coastal cities as a concern. This is a problem that plagued some of the startups that moved to or opened offices in Las Vegas around 2013 to take advantage of Zappos CEO Tony Hsieh’s $350 million investment in the city.
“The places that have begun to get traction have a Research I-level university and are building deep pools of tech talent,” Muro said, citing Nashville, Pittsburgh, Columbus, and Indianapolis as examples. “You can’t hang everything on entrepreneurship.”
Muro pointed to LaunchCode, a nonprofit organization created by Square cofounder Jim McKelvey, as an example of the types of organizations the private sector can fund to help foster the development of tech talent in a city. LaunchCode, based in St. Louis, runs an apprenticeship program that has partnered with 500 employer organizations in the city.
Creating a rising tide
None of this is to say that investors should create nonprofits instead of venture capital funds. But investors who are interested in investing in the Heartland should be prepared to do two things. First is to come in with realistic expectations about what investing in Heartland startups will and won’t do. Venture capital will enable entrepreneurs to begin the process of scaling a business — but it won’t endow a city with a bevy of tech talent and additional VC firms overnight. Investors should look for entrepreneurs who are prepared to talk about how they will address challenges in their particular market.
Second, investors should take stock of what ecosystem-building efforts are already underway in a particular city and think about ways to assist by partnering with regional investors, local accelerators, and talent development programs. Another option is to create a fund like Case’s that is designed to help entrepreneurs access resources when they’re ready to scale — in this case, follow-on capital.
Plenty of tech startups have already found success in Heartland markets — Indianapolis’ ExactTarget and Columbus’ CoberMyMeds have both been acquired for more than $1 billion in the last several years. Ann Arbor’s Duo Security recently raised a $70 million series D round to become the city’s first unicorn. And identifying ways to help companies get the resources they need to grow more quickly will go a long way toward creating more of these success stories.