Venture funds based in the U.S. saw record fundraising in the first half of this year, but some regions saw little to none of that LP capital.
The Midwest took a huge fundraising hit in H1 2022, no matter which states you choose to include in the region. According to PitchBook data — we are combining the Great Lakes and Midwest regions for a broader view — $3.4 billion was raised across 20 funds. This shows that the region is not on track to match last year’s total of $9.7 billion across 81 funds.
In July, Chicago-based MATH Venture partners announced it would not be raising a third fund because it could not secure enough investor interest. This is despite 50 of the firm’s 72 investments remaining active and 10 exits under its belt.
This creates a disconnect because while LPs are shying away from the region, VCs are not.
Many investors are eager to put money behind the companies based in the Midwest because most opted out of the bonkers rounds of 2021. They now look like significantly safer bets than their coastal counterparts.
For Mike Asem, a founding partner at Chicago-based M25, business is largely operating as usual. The firm is looking for new startups to invest in because many of its current portfolio companies came into the downturn with at least 12, if not 18, months of runway.
“Historically, companies in the Midwest have been seen as a little more conservative,” Asem told TechCrunch. “Whether that’s true or not, the majority of our portfolio companies have a decent burn rate. They have significant runway and they are a little more capital-efficient. They didn’t raise so far out that we are worried about them obtaining or growing into those multiples for the next round.”
Adrian Fortino, a Michigan-based managing director for Houston-based Mercury Fund, agreed. He said that a lot of entrepreneurs in the Midwest are first-time founders that aren’t expecting to have an easy time raising venture capital, so they build their companies to be efficient, which makes many of them more resilient to today’s market conditions.
“That’s a reasonably distinct profile,” he said. “You also see a lot of founders that come from the industry that they are building a startup in, which gives them a very unique expertise and a strong advantage. We have seen that play out really well.”
If a Midwest-based startup is looking to raise this year, they are likely going to run into less trouble than their peers on the coasts, too. Both Asem and Fortino mentioned that because these companies traditionally raised at lower multiples, they don’t have to take a drastic haircut like some of their coastal counterparts.
While Fortino has noticed a pullback among coastal investors at the later stages, Asem has seen the opposite at the early stages because investors are looking to back good companies without a high price tag. He added that regardless of where market conditions head, these well-valued early-stage companies will become more attractive as they grow because they will have been priced right from the beginning.
So, it seems like some LPs may be getting their fair share of Midwestern stakes after all, but if they are looking for a safer place to invest this year, they may want to lean in further.
“We expect we will continue to see a recessionary environment, but that being said, we are actively looking for opportunities to partner with, and invest in, great companies and are seeing awesome companies continue through the pipeline,” Fortino said. “A lot of funds are in this paralysis state but there is no reason to stop in our view; it’s a great opportunity to dive in.”