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From the American heartland, a startup boom

The US Midwest draws not just funding, but talent

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Image Credits: Nigel Sussman (opens in a new window)

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.”

The CEO described the situation as a good problem to have.

The sentiment that securing talent is more competitive than before was echoed by Mike Casper, co-founder and CEO of Azumo (Chicago-based, with somewhat limited public fundraising data). According to Casper, “​​not unlike other markets, the talent pool has been strained the past year in the Midwest.”

But there’s good news. Casper went on to write that before the COVID-19 pandemic and its impacts on the labor and startup worlds, “there was a herd mentality among global tech talent that only wanted to work for a Silicon Valley-based startup.” But now, he said, the “pandemic and shifts in working styles have broken that mentality and we’re seeing global talent much more willing to consider tech companies in the Midwest now.”

That willingness to work for Midwest companies is good; it could help solve a particular labor crisis that trailing startup scenes have long had to endure, namely that while local universities can supply a goodly flow of developer talent, the select operators with experience in, say, scaling go-to-market functions at a Series C startup have generally been concentrated in Silicon Valley and similar enclaves.

Perhaps the Midwest will find it easier to attract those particular individuals, even if they have to compete a bit more broadly with other locations for developer talent and related skill sets.

The Midwest has one final card up its sleeve in the talent wars: a lower cost of living than traditional U.S. startup hubs like Silicon Valley, New York City or the greater Boston area.

According to Francis Wang, the CEO of NanoGraf (a Chicago-based battery tech company with just under $25 million raised), “the Midwest not only has a deep talent pool with top universities and national labs, but is also quickly becoming a ‘quality of life’ alternative to the West Coast.”

According to the startup executive, the result of the quality-of-life conversation is that they are “increasingly seeing talent finishing their education in the Midwest and deciding to stay.”

Merely plugging the brain drain would shake up the local talent market for Midwest startups, who have historically endured startups in other geographies poaching their local human capital.

The capital explosion

On the subject of capital, it’s impossible to cover any collection of startups today without talking about money. Cash — the raw ingredient of startup growth, the very oxygen of business — is flying thick in the Midwest.

But beyond the superlative numbers that we discussed at the top of this piece, there’s more to note from an on-the-ground perspective.

Steven Hong, the co-founder and CEO of Oculii (based in Dayton, Ohio, around $76 million raised, focused on AI and radar), saw his company raise a $55 million Series B earlier this year.

“As a Midwest startup, having access to funding sources that have been traditionally more concentrated on the coasts has allowed us to grow our company significantly, [helping us make] big investments here in the Midwest where traditionally there are not nearly as many tech startups,” Hong said.

Frommeyer added that “just a few years ago,” rounds of $100 million or more were so “nonexistent” that raising “even $10 million was ultra-rare and a sign that your startup managed to raise really institutional capital since it wouldn’t be possible to cobble together that much capital from angel investors, small family offices or the small venture funds that did exist at the time” in the Midwest.

It’s a different world for fundraising in the Midwest today, and as the Zoom boom in investing doesn’t seem ready to abate any time soon — we base our perspective there on venture data since the start of the pandemic and conversations with various venture investors from around the globe — the Midwest should be able to continue posting venture capital totals above historical norms for some time.

Perhaps even more importantly, capital invested in the region may be recycling, a key factor for the longevity of any particular startup market; capital recycling allows for a single startup’s fundraising and growth success to filter back down into its ecosystem in the form of early-stage checks, seeding a new generation of startups.

After noting how large rounds have become more common in the Midwest in recent years, Frommeyer concluded that the “Midwest’s flywheel is turning, and COVID further leveled the playing field” for the region’s upstart tech companies.

Hub galore

Venture capital firm M25 is based in Chicago. But in a conversation about where the Midwest is seeing startup hubs form, Asem didn’t stop after naming the Windy City.

Instead, he embarked on a journey through the Midwest and its several hubs. This also aligns with M25’s take on the region, where it tracks no fewer than 59 cities as part of its “Best of the Midwest” startup city rankings.

The first city that Asem highlighted was Columbus, Ohio, which is home to companies like Root Insurance (which recently went public) and Loop Returns (which recently raised $65 million in a round led by CRV). The M25 GP predicted that more unicorns would be crowned there and also noted that it is home to Drive Capital, “the largest venture firm in the Midwest.”

Next up on Asem’s list were Ann Arbor, which has stood out in the cybersecurity space; Indianapolis, which has witnessed rippling effects in B2B SaaS and martech; and Minneapolis, which is also where Joe Welu’s startup Total Expert is based. The CEO underscored Minnesota’s “high educational attainment” and “consistent ranking as a top place to live” as key factors for attracting and retaining talent.

“The Midwest has an extremely fertile talent market in general and for our industry in particular — autonomous vehicle technology,” Oculii’s Hong said.

That’s perhaps in line with the image typically associated with the Midwest, but Asem also put the spotlight on online marketplace StockX and the fact that the unicorn is based in Detroit: “A lot of people don’t realize it’s a Midwest-headquartered company.”

In the same vein, St. Louis, Missouri, is gaining attention for companies as diverse as DTC brand Summersalt and telehealth company SteadyMD, while Asem named data startup Astronomer as one of several “pretty exciting companies” out of Cincinnati, Ohio.

This could be one of the Midwest’s promising evolutions: Going from marrying traditional industrial expertise with technology to gaining the ability to compete in any sector. “It’s a rewarding place to launch and grow,” Welu said.

On that note, we’ll leave the final word to Hong:

“It’s a tremendously exciting time because technology has made it ever more feasible to become a global company, and the Midwest has a fundamental advantage in rich talent, cost-effective standard of living, and proximity to many of the industrial segments that are being transformed today — that I expect to see even more great companies being built in the Midwest over the coming years.”

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