Where Investors Are Missing Startup Opportunities in America
It's time to stop ignoring the entrepreneurs in "flyover country."
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Venture capitalists and other startup investors regularly jet from coast to coast in search of the next big deal, routinely referring to everything in between as "flyover country." While there has recently been more attention given to the heartland in terms of investing -- such as AOL co-founder Steve Case's new Rise of the Rest fund -- there is still undeniably very little awareness of just how strong the entrepreneurial markets are in the middle of the country.
Related: The Majority of Startup Tech Companies Should Not Be in the Bay Area
The entrepreneurial activity in the Midwest and Plains states -- the middle of America, broadly speaking -- may not be as concentrated as the mega-agglomeration economies of California's Silicon Valley or Boston's Route 128 region or New York's quickly expanding borough clusters.
The activity is more spread out and it doesn't hit you square in the face after leaving the airport, driving to and from appointments, past corporate parks adorned with the signs of famous tech companies and VC firms. But, it's there in places like Kansas City, St. Louis, Omaha, Minneapolis-St. Paul, Indianapolis, Detroit, Cleveland and other cities with growing clusters of startups involved in a wide range of tech activities.
Some of the startups, like Farmobile in Overland Park, Kan., are, unsurprisingly, focusing on technology tied to industries traditionally associated with the heartland, such as agriculture and manufacturing. In the case of Farmobile, it's developing products to store, share and sell agronomic and manufacturing machine data.
But, there are other young and dynamic companies involved with technologies that have little or nothing to do with agriculture and manufacturing, such as Kansas City's Zoloz (previously known as EyeVerify), maker of identification management technology for mobile devices. It was the first U.S. company acquired by China's Alibaba Group.
Related: 5 U.S. Cities Luring Tech Talent Away From Silicon Valley
In America, entrepreneurs are increasingly starting to play to their respective region's particular economic strengths.
In particular, we happen to know about the growing startup cultures in Kansas, Missouri and Nebraska because of our involvement in Pipeline Inc., a nonprofit founded in 2006 and dedicated to fostering an innovation ecosystem for talented high-growth entrepreneurs who enjoy living in the heartland and don't want to move to more crowded and expensive regions of the country. Among them are the respective founders of the previously mentioned Farmobile and Zoloz, Jason Tatge and Toby Rush, both of whom have gone through the Pipeline Entrepreneurial Fellowship program and remain active in the organization as they exit and start new companies -- and help others doing the same.
Pipeline Inc. expanded to a multistate organization due to a major donation from the Kansas City-based Ewing Marion Kauffman Foundation, the world's largest foundation dedicated to entrepreneurship. Although the Kauffman Foundation recently awarded a third grant to support Pipeline's expansion, it's important to note that an increasing percentage of Pipeline's funding comes from its own entrepreneurs, angel investors, universities and community advocates all dedicated to nurturing startup ecosystems that take advantage of the region's economic strengths and abundance of talent.
This is key to understand: The foundation for successful tech clusters is already in place across much of the Midwest and Plains states.
Related: 3 Myths About Starting a Company in the Midwest
First, the region has a substantial number of wealthy individuals and families, whose fortunes are tied to past and current corporate and innovative success stories, and whose wealth they dearly want to invest in promising ventures. Second, the Midwest and Plains states really do deserve their image as a place of dreamers, tinkerers and titans, whether it's the Wright Brothers in aeronautics (Ohio), Henry Ford in automobiles (Detroit), John Atanasoff in computers (Iowa), Philo Taylor Farnsworth in television (Indiana) or Neal Patterson, Paul Gorup and Cliff Illing in health-care IT (Kansas).
While the foundation is all there, from native investors to native entrepreneurs, it hasn't, yet attracted the funding and attention that is seen in the coastal areas.
In order for promising non-coastal startups to succeed, they need access to this capital. While we are starting to see local and regional funds begin to proliferate in the Midwest, we are lacking investments from the larger and more established VC and private equity firms.
What's also needed, arguably just as important as capital, is for more corporate partnerships, joint ventures and experienced entrepreneurs serving on the boards of startup firms in America. A true tech ecosystem is so much more than just picking and choosing which firms will get dollars. It's also about a network of experienced entrepreneurs, corporate veterans and others guiding, overseeing and even partnering with young firms.
Related: 4 Benefits and 2 Challenges to Running a Tech Startup in the Heartland
Case, co-founder of AOL, and J.D. Vance, author of Hillbilly Elegy, which chronicled the rise and (partial) decline of the industrialized Midwest, seem to get it. The two recently launched a new investment fund called Rise of the Rest with the goal of investing in promising startups in America.
Some of Rise of the Rest's seed investors are true titans of the tech and financial world, including Jeff Bezos, founder of Amazon, Eric Schmidt, chair of Google parent company Alphabet, and Henry Kravis, co-founder of KKR. Rise of the Rest's investors also include those with strong ties to the region, including members of the Walton, Koch and Pritzger families, according to published reports. While many in the Midwest remark that the amount of this new fund is a "drop in the bucket" of what the area needs, it is a significant step in the right direction.
In the end, we're convinced that many traditional startup investors are missing the boat by not focusing more on the potential of entrepreneurs in the Midwest and Plains states. There's real opportunity in the middle of the country -- as investors will find if they take the time to stop over and look.
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