TechCrunch spends time each quarter covering the startup markets of the world. We look at aggregate numbers and dig in more closely to areas like Latin America, Asia, Europe, Africa and more.
But sometimes key data points are lost in even those more specific venture capital data dives. For example, while it’s good to consider Europe’s venture capital and startup tallies each quarter, we also need to compare, say, France and Germany to truly understand what is driving results on the continent.
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The same is true in some countries as well when we more closely consider local venture activity. The North American market is perhaps the most active startup region in the world. But if we simply take a look at its largest single input — venture capital funding of American startups — we’d miss critical nuance. So we have to go inside the United States to fully grok its activity. Is the Boston area’s software-and-biotech focus doing better than, say, the Bay Area’s startup machine?
It turns out that the American startup market is sufficiently large as to warrant coverage to the city level in certain cases. But not every city is large enough to command its own coverage. Happily, regional VCs at times pick up the slack for us and do enough data work that we can get a better perspective of how things are going on a city-by-city basis. The Midwest is one such region.
M25, a venture capital firm with a Midwest focus that TechCrunch has covered from time to time, compiles a yearly dataset, ranking Midwest cities across a number of data points, including the pace of startup activity, venture activity, and the “business climate” of the conurbation in question.
We’re taking a look at the data today, parsing the Midwest with some help from M25 co-founder and investor Victor Gutwein. Whether you are a booster of the region or not, this should be a fun digression from our more global research.
Why do we care?
Briefly, why do we care about this data? Apart from the simple fact that we want to understand and cover global startup activity as closely as possible, there’s another good reason for the work. Namely that startup types can, at times, find common geographical roots.
For example, Ohio is a key locus of insurtech activity in the United States, home to companies like Root (venture-backed, later public), Branch (nearly a quarter-billion raised) and Beam (nearly $170 million raised). To understand insurtech in the United States, you have to understand the Ohio startup scene. And that means we care about how Columbus, Cincinnati and Cleveland are performing.
It’s also important because the Midwest has long been a less well-known startup market that, despite some household-name venture successes like Groupon, never reached the top echelon of American regions. But it has grown in the last few years, meaning that its absolute size is around all-time highs, despite its comparative size when stacked against, for example, the Bay Area. How the Midwest fares during this putative venture slowdown could help us understand the durability of the 2021 startup boom when it comes to less well-developed regions.
In short, to understand startup activity and venture temperature, we have to get into the nitty-gritty, or we’re not doing our job. Let’s dig into the data.
Cities on the rise
You don’t have to look beyond the top five cities in M25’s ranking to know that some things have changed. Yes, Chicago and Minneapolis still own the two top spots. But there’s a surprise in the third position: Indianapolis overtook Pittsburgh, now ranked fourth, followed by St. Louis.
That Indianapolis rose so high was somewhat of a surprise to M25’s team, but also one that they could easily explain. Gutwein “didn’t know it would happen this year,” but suspected that the city could “eventually surpass Pittsburgh.” And that story seems to be much more about Indy’s progress than about the state of Pittsburgh’s tech scene. Why? Because in Gutwein’s book, Indianapolis has “laid the groundwork” for a growing startup scene.
Understanding what’s going on with Indianapolis requires a closer look. “There wasn’t ‘signature’ major fundraise or exit or new fund announced” in the city in the last few months, but a lot of smaller things add up — a “grand slam of incentives” that jointly explain how Indy jumped from the eighth position in M25’s 2017 ranking to its current spot in the top three.
It is also worth looking beyond the top five or even the top 10. It is a great way to know about up-and-comers, such as Kansas City, Missouri, and Louisville, Kentucky. Respectively in the 11th and 13th positions, Kansas City and the Louisville area have made impressive progress over the years.
Reading the whole list, not just the top 10, also helps spot which states have multiple tech hubs that are doing well. Ohio is a prime example of this: It has two cities in the top 10 — Columbus and Cincinnati. But it also has more cities among the region’s top 20.
In a blog post commenting on the ranking, Gutwein highlighted that “#19 Akron (+5), #27 Dayton (+4) and #34 Athens (+14) all saw strong positive momentum to bring Ohio’s depth chart into play.” This added up to the state’s momentum, which isn’t limited to insurtech; for instance, Cincinnati-based data analytics company Astronomer raised a $213 million Series C round of funding earlier this year.
As for things that haven’t changed, Chicago and Minneapolis have been holding the top two spots every year since M25’s first ranking in 2017.
Chicago’s reign
Chicago is the leading Midwest startup city by a number of metrics, including its sheer number of upstart tech companies and unicorns — startups with valuations of $1 billion or greater — to pick examples. Looking at the most recent M25 data, it doesn’t appear that Chicago is in any danger of being supplanted from its position atop the Midwest startup charts by rival cities. So from our perspective, it matters more as a success story than a potential target for ranking usurpation.
What can we learn from Chicago about building large, likely resilient startup ecosystems? That success begets success. It took Chicago a long while to get a hit. Back when Alex lived there, talking about the $100 million Feedburner exit was still in vogue. Groupon changed the local dynamic, proving that a company in the area could generate a massive exit while driving national attention. From that time other companies were seeded, including Sprout Social, which is now public.
That final example is something that Gutwein also noted in conversation with TechCrunch, explaining that its CTO is an active angel in the city. Capital recycling is active in Chicago, per Gutwein, leading to a strong flywheel effect in the city. This means that the city is now making its own magic, building off of early wins.
The lesson, then, is that cities on the rise recently in the Midwest region need to retain winnings locally, ensuring the next generations of founder talent have an even greater chance at success than those who came before them. (Utah is another example of capital recycling leading to successive generations of startup founders building new cohorts of startups.)
For now, the key question in front of numerous Midwest cities is not whether they can knock Chicago off its perch as the leading city in their region, but how many will be able to imitate the megacity’s hard-won success. It took the Windy City a long while to reach self-sufficiency; how many of its regional peers will manage the same?