Heartland startups finally strike back

A year ago the Midwest seemed on the cusp of a renaissance. Small towns and cities from Pittsburgh to Omaha had perfected the YC model of accelerator creation and low-cost/high-impact funding. The ecosystems have cropped up everywhere there is a coffee shop or an artisanal sandwich truck and the idea of “doing a startup” vs. going to work for some corporate behemoth is a well-worn path for many students. Even as the startup era dies in the Valley it is exploding in the heartland.

That’s right: as SV wanes, the Midwest waxes. Jon Evans makes the point best in his post this weekend although I think he’s missing what’s happening on the periphery:

Hordes of engineering and business graduates secretly dream of building the new Facebook, the new Uber, the new Airbnb. Almost every big city now boasts one or more startup accelerators, modeled after Paul Graham’s now-legendary Y Combinator. Throngs of technology entrepreneurs are reshaping, “disrupting,” every aspect of our economy. Today’s big businesses are arthritic dinosaurs soon devoured by these nimble, fast-growing mammals with sharp teeth. Right?

Er, actually, no. That was last decade. We live in a new world now, and it favors the big, not the small. The pendulum has already begun to swing back. Big businesses and executives, rather than startups and entrepreneurs, will own the next decade; today’s graduates are much more likely to work for Mark Zuckerberg than follow in his footsteps.

The Valley has always been a magnet for those who were just a signing bonus away from working for Google. Most entrepreneurs I’ve met who have failed at startups in SF eventually wend their way to someone with deeper pockets and it is only the absolutely dedicated who are able truly escape the cubicle. The opposite has always been true of the Midwest. You moved to Indianapolis or Columbus not to work for an exciting media startup but to take a respectable 9-to-5 at a corporation. That is changing.

First, let’s look at the Kauffman Foundation Growth Entrepreneurship Index. This points to a few trends but still reflects the relative dearth of startups in places like Nashville, DC, and Columbus. While population growth and startup growth are both rising in many metro areas, what is really happening is that these startup ecosystems, moribund a few years ago, are finally coming into their own.

The numbers don’t lie. We see the usual suspects appearing high on the list including Texas which dropped from the number one spot a year ago. What’s more interesting is who makes up the middle of the pack. Places like Michigan and DC, for example, are inching up the rankings while places like Chicago are stagnant.

To what can we attribute this growth? First, native sons and daughters are coming home from the coasts to build businesses where things are cheaper, they can have a back yard, and the people are ostensibly friendlier. Guys like J.D. Vance and Steve Case are having solid luck paying attention to those who felt they were left out of the past decade of startup growth. While some of the politics of these new barnstormers are a bit right of the Valley’s, that anyone is paying attention to Cleveland or St. Louis at all is a miracle.

Further, coastal VCs and accelerators are finally spreading inland. For example, the Cleveland Clinic and Plug and Play are working together on a new accelerator “focused on biotech and digital health innovation in downtown Cleveland’s Global Center for Health Innovation.” These moves, primarily instigated by Midwestern partners who are seeing an absolute dearth of tech talent at home and see the value of importing it through the carrot of easy access to capital. Everyone from Quicken Loans to Comcast are pouring money into accelerators in places like Detroit and Philadelphia to keep things churning. Accelerators like TechStars learned that becoming the biggest fish in a small pond is the way to true change. Thus these small ponds are now seeing increased interest.

What does the midwest need to do? First, it needs competent outreach. The midwestern startup attitude is at once humble and full of itself. The coasts are derided as bastions of bad ideas and good money chasing after bad ideas while the entrepreneurs are unable to tell a coherent story of why they deserve attention.

Second, it needs to understand and accept risk. Accelerators pick the best of the best and fail to supply them with seed capital. Local investors – usually professionals with a little cash to burn – run ridiculous angel groups that require busy entrepreneurs to jump through hoops just to get a meeting with a room full of bored dentists. Corporate CTOs refuse to take part in local ecosystems because it exposes them to ridicule. State-run VC organizations usually reward their friends and relations over minorities and women. Small-mindedness is still the curse of the midwestern entrepreneurial class.

I paint the midwest with a broad brush because it is a broad canvas. As the coasts, Asia, and Europe concentrate their power the Midwest is finally learning how to wield it. There are reasons to want these places to win and reasons, including backward politics, the average SF investor should give them a pass. But, if we’re making a Pascal’s Wager on the benefit of supporting a massive market and growing the next generation of entrepreneurs, many of whom will be ready to take places of power once the current trend toward consolidation takes hold, then it pays to bet on places where the cost of living is low, the food is fresh, and the country highways wind into places where the future is brewing.