From the American heartland, a startup boom

The US Midwest draws not just funding, but talent

It felt like something of a coming-of-age party for the Chicago startup scene, a city that has long held a leading position in the larger Midwest market, when Sprout Social went public.

The company would go on to become a breakout IPO success, pricing at $17 per share in the closing days of 2019 to a value of more than $123 per share today.

Sprout has put together a $6.6 billion company, mostly outside of the normal Silicon Valley headline mill. But its success is not singular. Instead, Sprout’s IPO was more akin to the opening shot of a starter pistol.

Since 2019, according to data compiled by a Midwest venture capital firm, capital invested in the region has effectively doubled, from around $10 billion in the 12-month periods ending June 2019 and 2020 to $20 billion in the year concluding June 2021.

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Other notable successes have cropped up more recently, including Duolingo’s IPO this year, taking the Pittsburgh-based edtech company public at a valuation that now just tips past the $7 billion mark.

This year has proved lucrative for Midwest startups. A few data points make the trends clear. Per CB Insights venture data through Q3 of this year, Denver-based startups have raised about $3.1 billion in total venture capital. In all of 2020, that figure was $2.7 billion, and we still have a full quarter of data missing from this year’s tally.

Chicago is a similar story, with $4.9 billion raised through Q3 2021, per CB Insights, compared to $3.1 billion raised in all of 2020. Midwest cities are crushing their 2020 venture capital tallies, results that were at times already at or near record highs.

The Exchange has checked in on the Midwest here and there in 2021, noting certain venture capital and startup results as they came in. Today, however, given how strong the year is shaping up in general terms, we wanted to advance our understanding not of what is merely driving the boom in funding activity for Midwest startups, but what impacts the rush of capital is having on startups in the region.

We put questions to a number of area startup CEOs (from Beam Dental, Azumo, NanoGraf, Total Expert and Oculii) and Midwest-focused venture capitalist Mike Asem, asking how the pandemic has shuffled the domestic startup talent market and more.

The resulting picture is one that could indicate that recent strength in the region in terms of attracting capital to fund local upstarts may have the momentum to continue.

For the Midwest, then, long a somewhat overlooked region of startup activity, the future could be one of sustained results at present levels. If that comes to pass, the Midwest would no longer be a place to fly over, but a location to Zoom into. But as we’ll see; not every blessing is without costs, and what’s allowing the Midwest to put up more points may at times be a double-edged sword.

Let’s explore.

The talent wars

Sticking to the double-edged concept, it’s a well-worn trope by now that investing over Zoom has changed where many venture capitalists put their dollars to work. That means good things for India’s startups, as well as those in the U.S. Midwest, as investors not traditionally located in those areas may now be more open to investing afield from their IRL HQ.

The talent market is undergoing similar changes. With Zoom and related technologies allowing for more remote hiring, the global war for talent is now just that: global.

Alex Frommeyer, co-founder and CEO of Beam Dental (more than $168 million raised, per Crunchbase, with its headquarters in Columbus, Ohio), said in an email that the national talent market has “changed a lot since COVID, as more coastal companies have started to compete for top Midwestern talent for the first time with remote positions.”

After noting that he moved his company to Columbus to secure “access to a specific profile of talent, namely the mix of insurance and tech talent,” Frommeyer added that the city has “gotten more competitive” from a talent perspective, as “arguably the startup scene is growing even faster than the city.”