If businesses in the Midwest have one thing in common, it's the lack of a bright spotlight on what they're up to, says Chris Olsen, co-founder of Drive Capital, a venture capital firm targeting the region and headquartered in Columbus, Ohio. Blame it on the humility common to Midwesterners, who are uncomfortable touting their own triumphs.
But make no mistake, the 12 states in the area offer much to be celebrated, as shown by the 2020 Inc. 5000 Series: Midwest list, a ranking of the fastest-growing companies in the region. Collectively, the 250 companies on Inc.'s list grew their annual revenue 360 percent, on average, between 2016 and 2018. Their total revenue in 2018 alone amounted to $9.5 billion.
Several key billion-dollar acquisitions have done much to bolster the entrepreneurial ecosystem. In 2013, the sale of email marketing company ExactTarget for $2.5 billion to Salesforce broke Indianapolis's record for a tech company exit. At the time, the deal both chuffed and worried the local business community, who were concerned the SaaS giant would spirit away its prize to Silicon Valley.
Instead, ExactTarget remained in Indianapolis. One co-founder, Scott Dorsey, created High Alpha, a venture fund focused on enterprise cloud startups. Another, Chris Baggot, launched the waggishly named food delivery service ClusterTruck.
Similarly, when CoverMyMeds, an electronic prior-authorization provider, sold to health care giant McKesson Corporation in 2017 for $1.1 billion, co-founder Matt Scantland began advising startups in the company's hometown Columbus. Employees of both companies started their own ventures.
"There are all these companies founded in the Midwest that have grown into big successes," and that's helping other local startups, says Olsen. "The flywheel is turning. I see no reason why it wouldn't accelerate."
Startups launched or funded by people exiting homegrown heroes like ExactTarget, CoverMyMeds, and others provide opportunities for the region's abundant engineering talent. Of course, there's more to the Midwest than a few giant acquisitions. If you're thinking of starting or growing your company in the region, here's what you need to know.
1. The Midwest remains less entrepreneurial than some other parts of the country.
Nine of the 12 states in the region are below the national average for percentage of the population starting businesses, according to the Kauffman Foundation. All except Missouri are on the sparse side of job creation by startups. That finding is confirmed by Inc.'s Midwest list. Ranked employers added just over 15,500 jobs from 2016 to 2018. That's well below the number added by fast-growing companies in each of the other four regions Inc. examined.
The Midwest economy, meanwhile, recently dipped below its historical average growth for the third time since the end of the recession, according to the Federal Reserve Bank of Chicago.
2. Although the situation is improving, funding remains a problem.
In 2006,14 of the top regional VC firms collectively had less than $1 billion in assets under management. According to Drive Capital, that figure is now close to $4 billion. Still "the Midwest desperately needs capital," says Jeff Carter, co-founder of West Loop Ventures, an early-stage investor in fintech companies, based in Chicago. "We have a lot of family office money but not a lot of classic limited partner funds that are big, like they have in the Valley and New York."
3. Some cities are courting business better than others.
Like most of the country, Midwest cities with major research institutions, such as Ann Arbor, Michigan, Columbus, and Madison, Wisconsin, have spun off or attracted numerous startups in specialized disciplines. St. Louis is home to more than 1,000 tech-related companies and 50 entrepreneurship organizations, according to Dennis Lowe, until recently president of the Cortex the nonprofit behind the city's major innovation district.
Several Midwest cities are also building entrepreneur-friendly neighborhoods in opportunity zones, a designation created by the 2017 law that offers tax advantages to investors in lower-income communities. "The Midwest has always been spread out, but these new developments create the kinds of density that communities need where you have entrepreneurs sitting beside investors in restaurants and coffee shops," says Jeff Slobotski, founder of Router Ventures, a seed-stage fund in Omaha, Nebraska.
4. Proximity to customers and would-be talent is a selling point.
Chicago is the Midwest's most dynamic regional hub, with the number of new startups increasing 270 percent between 2008 and 2018, according to the New York City-based think tank Center for an Urban Future. Ambitious accelerators like Techstars Chicago and 1871 are churning out ventures. The area also abounds with potential customers. "Chicago is the only world-class city" in the region," says Carter. "Startups need customers to get going. And there are just not enough of them in the other places."
That is starting to change. Olsen points to more than two-dozen, billion-dollar-plus companies with offices in the Midwest, many outside Chicago, as well as large insurance and consumer-products companies headquartered in Ohio. Eight of Drive Capital's portfolio companies relocated to the Midwest from the West Coast, in part for proximity to customers. The other big draw is talent. "You can scale up to hundreds of engineers without having to pay crazy salaries," says Olsen. "And they are not going to leave at the end of the year."