Making the Case for Midwestern Startups
The Midwest is besieged by troubles of all sorts. States like Kentucky, Michigan, Wisconsin, Illinois, and my native Ohio are among those with the highest opioid-overdose rates in the country. Educated professionals and youth are leaving those same states at record paces, constituting a pattern of outmigration known as the “brain drain.” And Midwestern startups — the companies with the power to entice young professionals to stay — are chronically underrepresented in venture capital investment, two-thirds of which is concentrated in San Francisco, San Jose, and New York City alone.
Efforts led by Midwesterners themselves to reverse these trends are manifold, admirable, and necessary. A new venture capital firm is dedicating itself to fighting for investment in the region by leading business owners and entrepreneurs through the seed-stage and to market. Dundee Capital Management, assisted by the Kauffman Foundation Fellowship Program, aims to curb the region’s perennial lack of investment from venture capital. If successful, firms like Dundee can be essential components in stemming the region’s brain drain and bringing prosperity to post-industrial cities like Cleveland and Detroit.
In contemplating the extreme gap in capital investment Dundee and similar firms have identified, Chicago’s case can illuminate the depths of this disparity. The American poet Allen Ginsburg once described Chicago as the world’s butcher, toolmaker, and freight handler — an industrial powerhouse worthy of the world’s envy. Yet the Midwest’s industrial heyday has long since passed. The region, in the words of F. Scott Fitzgerald — a Midwesterner himself, from Minnesota — has become the country’s “ragged edge,” as the character Nick Carraway calls it in The Great Gatsby. And Chicago, today a resilient and inimitable city, has nonetheless shared in the Midwest’s fate: Its population is declining and its startups lack the capital concentrated on the coasts.
Indeed, despite being the nation’s third-largest metropolitan area, Chicago receives only 1.82% of U.S. venture capital investment. San Francisco’s metropolitan area, number twelve on the list, receives 34.13%, and Miami’s metropolitan area, the country’s seventh-largest, receives 1.89% of investment, a hair more than the Windy City. That is the reality for the Midwest’s largest city, and it clarifies how dire the circumstances are for smaller metros like Springfield, Fort Wayne, and Toledo.
Just as striking, of the 20 top metropolitan areas for venture capital-funded startups, only two are in the Midwest — Chicago, of course, and Minneapolis. Milwaukee, Detroit, Iowa City, and Columbus are barely even dots on the Martin Prosperity Institute’s graphic representation of these data. That Midwestern companies have been starved of the institutional capital required to help seed-stage startups is nowhere more evident than in the region’s companies being valued at half those on the coasts.
Some Midwestern states, such as Indiana and Illinois, have created capital funds — with overtly optimistic names like the “Illinois Growth Innovation Fund” and “Next Level Indiana Trust Fund” — to keep startups from moving shop to the coasts. Additionally, some analysts have urged policymakers and investors to create a funds-of-funds in the Great Lakes region. But these efforts run the risk of crowding out firms like Dundee.
In the age of the frontier, the Midwest was often portrayed as a severe region. In James R. Shortridge’s The Middle West, he writes that its harshness was “a way of winnowing out” the unworthy, but also facilitated, by necessity, “cooperative ventures.” The Midwest, certainly less harsh today than it was at the outset of settlement centuries ago, remains a region with serious challenges — a lack of capital being chief among them. Companies like Dundee are rising to this challenge.
But Dundee isn’t the first firm to focus on the Midwest. Indeed, other firms intent on leveraging the Midwest’s potential have encountered a myriad of difficulties. Yet the Midwest, or the “Mighty Middle,” as the Dundee team calls it, is ripe with all the talent startups need to succeed — including 35% of U.S. bachelor’s degree holders, 26% of U.S. corporate and university patents, among other factors reported by Brookings — except capital. Firms like Dundee are well-poised to leverage a trend of businesses moving to cities like Columbus, and in so doing help to retain young talent and contribute to economic growth in other cities.
On principle, some readers will reject the idea that venture capital should have a role in the region’s recovery. However, in lieu of a cure-all solution its various economic problems, investments from venture capital firms such as Dundee constitute solutions — if small in scale — to the problems of brain drain and slow economic growth that have plagued the Midwest.