For Tech Investors, The Midwest Is Flyover Country No More

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These days, Midwestern entrepreneurs and investors are seeding more than just fields.

A resurgent U.S. technology industry, propelled by strong initial public offerings and a healthy M&A market, as well as the launch of technology infrastructure services from companies like Amazon and Microsoft, has meant that entrepreneurs across the Rust Belt and Farm Belt are starting new technology companies in addition to more traditional manufacturing.

“There’s a ton of different factors that are coming into play,” said David Knox, the chief marketing officer at the digital marketing company Rockfish and a mentor at the Cincinnati-based startup accelerator The Brandery. “At the very top of things is a trend that is very clear to everyone — the cost of launching a startup continues to go down and the barriers of entry to it continue to evolve.”

New technology incubators, accelerators, and early-stage investment firms have formed in cities like Detroit, Columbus, Ohio, Madison, Wis., Cincinnati, Chicago, Kansas City, Indianapolis and even Fargo, N.D.  — often with support from local governments looking to rejuvenate moribund manufacturing centers or spur new job growth.

Last week, Sprint admitted a clutch of 10 mobile-health related startups to its accelerator program based in Kansas City, and earlier in the month, the Digital Sandbox KC said it had helped graduates from its accelerator program raise $7 million in follow-on funding.

“In the last five years there have been 52 companies [from the Midwest] that have either gone public or been acquired for north of $1 billion,” said Mark Kvamme, a co-founder of the Midwest’s largest — and most recent — venture investment firm, Drive Capital.

Kvamme started Drive with fellow Sequoia Capital alumnus and Ohio native Chris Olsen as a way to take advantage of the flurry of startup activity the two men saw coming from the region. In part, investors can thank exits like the Groupon public offering for Chicago-based firms and entrepreneurs; ExactTarget’s multi-billion dollar acquisition and the Angie’s List public offering from Indianapolis; and a slew of acquisitions and public offerings from Wisconsin. The firm managed to raise $250 million to devote to investments across the Midwest.

“ExactTarget has spun out 25 or 30 companies, [and] it’s a similar story with Chicago and Groupon,” said Olsen.

Even Detroit is turning to startups as a way to rebuild the economic engine of the Motor City. “It has gone from no startups in Detroit to over 40 and at least 10 investors in Detroit,” said Ted Serbinski, a partner with Detroit Venture Partners.

One of the more active hubs for investment activity in the Midwest is actually Cincinnati, which has two very active startup accelerator and investment shops in The Brandery, which was deemed one of the nation’s best accelerators, and CincyTech, an early-stage investment group.

“You have latent entrepreneurial energy in the big companies and now people are saying ‘Wait a second! I don’t have to uproot myself,'” said Mike Venerable, a managing director at CincyTech.”The more digital the economy becomes the more people have to address these technologies and the more aware companies become about them. You just need to do deals and if you do that, the community wakes up and the entrepreneurial talent will come out of the big buildings.”

It seems that the Midwestern states’ policies of seeding venture funds and offering investment matches at the early stage is paying off. “If you can do a better job early on of funding a company and can get a pipeline and show those companies getting to scale and getting traction in the marketplace, then venture investors will come,” said one limited partner at a large Midwestern pension fund.

Even with venture investors increasingly willing to come in from the coasts to look at deals, there’s still a need for local capital to seed innovation, according to Michael Wetta of the Omaha-based venture fund Dundee Venture Capital. “The pattern we see emerging is that larger funds want a sponsor within driving distance of a deal. Investment funds in the Midwest are providing that in Omaha, Kansas City, and Minneapolis.”

Image via Flickr user the.urbanophile