The Midwest Startup Formula Will Change The Status Quo For Building Businesses

In the age of unicorns and record-level private-market valuations, there are those who warn that the dreaded startup bubble is bearing down upon us again. That’s understandable. In recent years, many highly anticipated tech IPOs hit their peak… just before going public. Since 2011, almost half of those highly valued companies are now trading either flat or below their initial public offering share prices.

As Silicon Valley startups continue chasing private valuations, entrepreneurs in the Midwest are following an entirely different approach. Our goal is the same — to build world-class businesses based on innovative technologies that create new wealth — but our approach is entirely different.

We are proving that startup success comes from validating a real market need, then building a new company that resolves that need with a solution for which real customers will pay.

Here are the ways the Midwest model of entrepreneurship creates solutions that attract early paying customers that lead to sustainable companies.

Focus On Connecting Regional Innovation Sources With Local Entrepreneurs

The Midwest is home to internationally recognized public and private research institutions that connect R&D to commercialization and entrepreneurship.

Known for interdisciplinary initiatives in nanoscience and energy, the University of Michigan (with $1.3 billion in research expenditures) has been ranked the No. 1 U.S. public research university by the National Science Foundation. Northwestern University has 90 school-based research centers, as well as strong collaborative relationships with Argonne National Laboratory and Fermi National Laboratory. The School of Pharmacy at the University of Kansas ranked second among all pharmacy schools for NIH research funding.

The Midwest is home to many of the largest and finest state universities in the U.S.

The University of Illinois’ Research Park is home to more than 50 startup companies that are commercializing technology, and more than 90 established companies that employ more than 1,400 people and more than 450 interns. More than 30 percent of all Purdue undergraduates have at least one research experience while attending.

Startups have licensed spinout technologies from The Ohio State University at a rapid pace, with more than 30 startups since 2013 alone, with the focus to create solutions with an emphasis on the Midwest’s main industries. For example, automotive and agriculture. Simple-Fill is building a compressor that will enable the energy industry to create a fuel that goes farther for less. 3Bar Biologics is commercializing an Ohio State technology that will help farmers increase crop yields.

Get Corporate Involvement From The Beginning

There are 268 Fortune 1000 companies in the Midwest. Most are companies that make or distribute something. Michigan, northern Ohio, and Indiana build automobiles. Ohio has a concentration of retail and insurance. The entire region farms. Corporations within these industries have problems they need to solve and budgets to purchase solutions.

In the 1980s, the Midwest learned the hard way what can happen when industries don’t innovate in the face of off-shore competition: They collapse under their own weight. We’ve gone to high-value, high-performance manufacturing.

Companies in traditional industries that are thriving have created a culture that drives a high rate of new products and new processes. To achieve that, there’s a willingness on the part of Midwest corporations to seek innovation from many directions, including young inventive companies.

This creates a virtuous circle for startups here. Not only is there expanding corporate awareness about young companies’ products, there’s an open-minded willingness to write checks — as early adopters and investors.

There’s no better way to validate products or road test a startup’s business plan than with real paying customers.

Do More With Less

There isn’t enough investment capital for all the fundable startup opportunities in the Midwest. That requires these startups to focus on capital efficiency with smaller investment.

The Midwest is a melting pot and a natural test market.

The good news is that in the Midwest, founding teams are good at the fundamentals. They know how to manage cash. They make a dollar spend like a dime. They don’t necessarily expect early adopters to pay full price, but they do expect them to pay something — either in fees, development funding or capital investment.

Embrace Diversity

The Midwest is a melting pot and a natural test market. Five of the top 10 MSAs that most resemble the U.S. are in the Midwest. That gives us the opportunity to exploit from the ground up all the benefits diversity provides. It’s organic and built-in from the beginning.

In our specific region, out of 350 companies we evaluated over the last year, roughly 20 percent were led by women and 20 percent by minorities. More importantly, these percentages don’t change as entrepreneurs move through our engagement, diligence and investment processes.

Leverage Homegrown Talent And Resources

The Midwest is home to many of the largest and finest state universities in the U.S. Every year, these fine schools graduate thousands of students who want well-paying jobs they like. These graduates are seeking reasonable rents and starter homes they can afford. They want to raise families and to connect and make friends in communities where they fit in. That describes the Midwest to a tee.

In recent study by SmartAsset of the best U.S. large cities for college graduates, based on well-paying jobs, affordability and fun (concentration of young professionals and things to do), the Midwest dominated, with six of the top 10 cities. Three of WalletHub’s Top 10 Most Educated Cities are in Michigan and Wisconsin.

The Midwest learned the hard way what can happen when industries don’t innovate.

And we’re leveraging the powerful resources of Venture for America (VFA) in St. Louis, Detroit and in Ohio’s three largest cities to attract outstanding graduates from other parts of the U.S. As Louisa Lee, a VFA fellow and graduate of Williams College, told us when she moved to Columbus, “I’m looking forward to making a life here. The other fellows and I want to make Columbus a target city for new Venture for America Fellows.”

The Midwest approach to entrepreneurship leverages our unique strengths — innovation, corporate connections, diversity, efficiency and talent.

In cities like Columbus, Cincinnati, Madison, Detroit and St. Louis we are creating our own unique startup landscape with long-term growth potential.

More than 900 Midwest companies claimed positions on the 2015 Inc. 5000 list. Chicago, with its 1871 business incubator fostering 425 companies and 1,600 clients, ranks second in Inc.’s top cities for fast-growing companies.

By starting with market and specific customer needs, the Midwest has developed a foundation for sustainable economic impact from new business creation. Consequently, this region is less likely to feel the effects if/when the next tech bubble does burst.