There’s an echo chamber within the startup space.
Inescapably, fledgling companies generate a lot of media attention: We all love gossip columns filled with stories of wild bets, high-flyers, and catastrophic failures. But not only do they blast out press coverage upon their successes — their teams also spin off talent with an appetite for entrepreneurship, not to mention new wealth to play with. These dreamers then go on to start other companies and venture capital firms, and media again sings the songs of their subsequent successes.
The cycle goes on and on, deepening and strengthening the network effects of establishing startups in an active venture area. Success, as they say, begets success.
We’ve seen this cycle play out on both coasts (and mainly in Silicon Valley and New York City) for years now. The sheer number of successful startups, entrepreneurial talent, and venture capital firms in these latitudes generates a cacophony of media noise that can drown out the signals sent from regions elsewhere.
Many hopeful entrepreneurs still flock to these regions in droves, but the cost of living, sky-high labor prices, and overcrowding have given other startup founders a moment of pause recently. The limitations posed by COVID-19 have also caused a reckoning among those living in coastal cities. Just this summer, for instance, vacancies among rental properties in highly populated urban areas (such as Manhattan) rose more than usual, and the number of adults under 30 and living with parents reached heights we haven’t seen since the Great Depression.
As a result, it appears entrepreneurs are now looking for greener pastures to stake their claim and build their companies in alternative startup hubs across the Midwest in the likes of Chicago, Minneapolis, St. Louis, Indianapolis, and so on.
Why Midwestern Startups Are Booming
Midwest startups have seen an upswing in investment activity over the last few years. In 2019 alone, Detroit’s Rivian added $1.3 billion in funding to its already sizeable haul. That same year, Minneapolis’ Bright Health raised $635 million in Series D funding. In Columbus, Ohio, Root Insurance secured $350 million in Series E funding from venture capital firms, bringing its funding grand total up to $523 million. The list goes on and on — and for good reason.
First off, Midwest startups often require much less capital to scale their operations. When coupled with more affordable real estate, the lower cost of living means Midwest venture capital goes further than in costlier markets. Furthermore, startups are already bound by shoestring budgets that largely go toward salaries and benefits packages. By sourcing or basing talent in the Midwest, operating costs can be reduced by 50% or more.
Making the area even more compelling to founders is its educational system. Many top-ranking universities in the area are producing tech talent that rivals the pool in even San Francisco. Midwest tech startups have no problem building top-notch teams, offering a wealth of career growth opportunities to recent graduates and talent that’s migrating to the Midwest from across the country.
Another factor is that the Midwest is home to many industrial hubs: Automotive (Detroit), geospatial (St. Louis), logistics (Chattanooga, Tennessee), and CPG (Cincinnati and Chicago) hubs are just a few of them. Being near these pockets can serve as a natural bridge for startups to establish partnerships with major industry players, providing access to massive markets quickly. Founders can work alongside players in the space to refine products, hone strategies, and drive innovation in order to scale more rapidly.
For example, Chicago has benefited from a recent increase in relocation and expansion efforts from Google, Salesforce, Uber, and other tech powerhouses. The possible local connections with these giants have led tech startups such as social media marketplace Cameo and e-commerce fulfillment platform ShipBob to headquarter their operations in the Windy City as well as maintain offices in California. And they are far from alone.
Also worth mentioning is the presence of existing Midwest venture capital needed to fund growth. Investors are cropping up in all areas of the country, building top venture capital firms in St. Louis, Milwaukee, Cleveland, and the like.
Does a Greater Migration Lie Ahead?
Although I don’t believe the tech migration to the Midwest is a fad, the recent trend shouldn’t be blindly trusted as evidence of a permanent shift away from the coastal states. Despite soaring housing prices, real estate costs, and salary requirements that could drain a budget quickly, the truth is that these are still appealing, vibrant places to live and work.
Perhaps what we’re seeing is a rise in options to live and work elsewhere — a sea change that provides much-needed relief from the socioeconomic and environmental stressors perpetuated on the coasts. However, that doesn’t mean VC activity will be subdued in the Midwest. In fact, its ecosystem is far more active than you’d think — outshining locations such as Texas or states in the Pacific Northwest.
If you’d like to learn more about the Midwest startup space and the top venture capital firms in St. Louis, I’d love to hear from you. Find a time to chat with our general partner here.
Image by Waldemar Brandt