Midwest, Evolving Hub for Entrepreneurship

The giant is starting to wake up from its slumber.  From 1850-1900, the Midwest was extremely entrepreneurial.  Necessity is the mother of invention, and there were a lot of inventors here taking advantage of virgin opportunities.  It’s taken a long time, but according to this study put out by the University of Illinois, it’s happening again.

Innovation doesn’t fit nicely into holes envisioned by economic planners.  The best way to encourage innovation is just make sure the conditions are ripe for it, and see what happens.  The entrepreneurial wind in the Midwest has a lot of things blowing its way.  Here are some findings.

  • Students view Chicago as an “entrepreneurial city”, but noted the Midwest needs to enhance access to capital and entrepreneurial support networks — through initiatives like ThinkChicago — in order to entice more entrepreneurs to start companies in the region.
  • University, industry, and government collaboration is an effective means to better publicize and allocate resources to aid in tech transfer, commercialization, and the scalable growth of emerging firms. Initiatives such as the Digital Lab for Manufacturing and ChicagoNEXT are examples of approaches designed to positively impact new venture formation and accelerate the growth of established businesses in Chicago.  
  • Entrepreneurs noted difficulty in finding venture funding within advanced manufacturing, agriculture, and life sciences industries due to capital requirements and the timeline for return on investments.
  • Entrepreneurs and investors viewed term sheets within Chicago and the Midwest as more favorable to investors (e.g., emphasis on established revenue streams and commercialization plans vs. focus on growth potential).

The third point is particularly acute.  Governments need to change tax policy to incentivize behavior.  I don’t think we can rely on coastal VCs to spread money in the Midwest like they do in Silicon Valley, New York and Boston.  The bulk of the capital will have to be home grown.

Here is a summary of what the study says about capital in the Midwest

There is a demonstrated need for more sophisticated investors in industries dealing with advanced technologies, enhancing early seed and Series A funding. This is coupled with a need for a better understanding of business and investment models accompanying capital- intensive industries and advanced technologies. One theme heard from entrepreneurs was the difficulty in finding venture funding within industries such as advanced manufacturing, agriculture, and life sciences, particularly due to capital requirements as well as the timeline for return on investments. 

There is an opportunity for greater deal syndication across the Midwest, not only to promote the distribution of capital, but also to serve as a catalyst for the addition of venture funding into promising industries that have traditionally lacked large sums of funding.

Additionally, there was discontent expressed by entrepreneurs and investors outside of the Midwest over discontinuity in term sheet structure. In particular, both groups viewed term sheets from investors outside of the Midwest as being more equitable, whereas term sheets within Chicago and the Midwest tended to be more favorable to the investors, thus encouraging firms to seek investment and opportunities outside of the region. When seeking funding for Series A investments, many entrepreneurs and investors noted an emphasis on established revenue streams and commercialization plans in the Midwest while outside investors, particularly West Coast, focused more on growth potential.

Finally, despite an increasing amount of angel investment and established community for private equity / mezzanine levels of funding, there is a significant opportunity to bridge the funding gap at the mid-tier (Series A) levels. 

They are correct.  The Midwest is full of people that want to raise money for startups-but they don’t want to take any risk.  These aren’t traditional VCs, but brokers.  Brokers don’t build ecosystems.  Just like in the old days of commodity pits, brokers didn’t build the markets locals that took risk did.  Building a startup community is the same.

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