In a multiyear shift that could portend a long-term trend, billions have flowed into startups founded in the middle of the country.
For middle America, the 25 states that sit between the Rockies and the East Coast, easy access to venture capital has long been a dream just out of reach. Traditionally, venture capital funds have largely ignored this section of the country in favor of startups on the coasts.
No more. According to a new report, “State of the Mighty Middle Report,” from Crunchbase and Dundee Venture Capital, over the past decade investments grew to $20 billion in 2019 from $5.8 billion, a 13% compounded annual growth rate (CAGR). Even with the COVID-19 economic lockdown in full swing, first quarter 2020 investment was $2.5 billion. As would be expected, this is down from the fourth-quarter of 2019 where investors poured $4.7B in early- and late-stage companies in the heartland. Year-over-year investment also is down 34% because of the pandemic.
“We tracked it over a decade and we have seen funding increase at every stage,” said Crunchbase Data Evangelist Gené Teare. “Part of the reason venture capital is expanding into the Mighty Middle is tech is expanding … and impacting all businesses. What you see is tech is moving into traditional industries. Tech is moving into everything.”
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That fact is attracting dollars as startups, looking to leverage the large pools of engineering and entrepreneurial talent mid-America has to offer, develop products that solve a broad spectrum of business and manufacturing challenges.
“What has changed is tech being focused on … things that are more meaningful like healthcare, energy, robotics, manufacturing,” said Teare. “So the whole thesis of tech has shifted to things that are more fundamental to our lives.”
Over the last decade, investors poured more than $92 billion into startups in the middle of the country, the report said. Of that money, $10 billion went to fund very early-stage companies with seed money. This is an important metric to track because it indicates an active angel investor community that is willing to fund early, idea-stage companies, said Teare. The remaining funds went to late-stage companies raising series C rounds of capital.
“Large technology exits from the Mighty Middle over the past decade have shown that
valuable technology businesses can be built and grown outside of the most well-known
startup ecosystems,” the report said.
“In 2019, 26 funding rounds of over $100 million occurred. These 2019 primarily late-stage megadeals were led in part by automotive, energy and insurance companies—three sectors that have been long-standing regional stalwarts. Together, $100 million-plus late-stage rounds represented $11.1 billion in total invested dollars in the region.”
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Chicago, Austin, and Denver lead the area with most investments. Startups in these cities raised more than $1 billion in seed capital over the last decade. The states with the highest total VC investments over the decade were Texas, Illinois, Colorado, Pennsylvania (specifically Pittsburgh), and Michigan. The 10 leading states, which also include Minnesota, Ohio, Tennessee, Missouri, and Indiana account for 90% of total dollars invested.
“Founders and investors in the Mighty Middle have long focused on building solid companies with an eye toward profitability and aiming to scale beyond their local markets, something that has likely become increasingly valuable in the current investing climate,” the report said. “Venture capital firms have raised record amounts in the last two years, and will continue to deploy capital into growing businesses–the dollars show that is increasingly happening in the Midwest.”
What impact COVID-19 will have on VC funding long term is unknown. What is known, is that as companies struggle to re-orientate themselves to a new normal, they are increasingly dependent on technology to fill in the gaps. Whether that turns into more dollars flowing into tech firms will have to be seen.
“For a lot of tech companies the whole landscape has changed overnight,” said Teare. “So the impact of COVID is huge on the economy and huge on the tech landscape. The main insight is a lot of the digitalization strategies have shifted online.”