3 Reasons More Investors Are Turning to the Midwest

by Emily Brungard - Marketing Analyst

We’re currently in the middle of the longest bull run market in history, meaning investors have more money to invest than ever before. Starting a business has never been more affordable, and founders are confident in the markets too. The Midwest has seen investment activity rise steadily over the last several years, growing from $2.7 billion in 2016 up to $4.3 billion in 2018. It’s clear that interest in the Midwest is growing — and there are countless reasons why. Below I’ve dug into three specific areas that I believe are driving the trend.

Existing Industries Drive Innovation

The Midwest startup ecosystem has had consistent success in many industries with long histories. Startups are bringing new ideas to industries like cybersecurity, healthcare and pharma, insurance, automotive, and manufacturing. Startups in the Midwest are in close proximity to established companies, making it easier to build bridges that drive innovation. And these corporations are searching for startups to help them.

In a world where industry disruption is the norm, almost no company can ignore the need to innovate.

When corporations look to partner with startups, “they’re thinking about startups in a way that is really underpinned by the idea of, ‘How do we gain share? How do we win customers, find new markets? How do we move faster?’ Often, they do talk about disrupting the core business.”

Startups Scale For Less

Companies in the Midwest require less capital to scale operations. Real estate is less expensive and the cost of living requires fewer dollars. There’s also plenty of talent in the Midwest — the region generates:

  • 26% of the nation’s corporate and university patents
  • 31% of U.S. university-based research and development, including 34% of highly competitive National Institutes of Health (NIH) research funding, the key to creating new drugs and medical technologies
  • 35% of the nation’s total bachelor’s degree holders
  • 33% of its STEM graduates
  • 32% of all higher education degrees awarded in the United States

In Indiana alone, the state has mandated computer science classes for every grade from K-12 in public schools. The state also has created a $250 million fund-of-funds to invest in venture funds that will commit capital to companies that will bring jobs to the state. Indiana also passed a law to forego collecting sales tax on SaaS companies that are developing and selling products and services in the state.

A recent Detroit salary study showed that tech employees take home an average of $21,000 more in salary than they do on the coasts when cost of living is factored in. When you consider office space, the cost benefits of the Midwest become even more apparent: in San Francisco, the average price per square foot of office space is $72.26. In Chicago, the average is $29.75 per square foot. In Cincinnati, the average cost per square foot is $18.36. All of these factors — the price of real estate, access to education, cost of living ratios — make the Midwest an attractive place to start a company.

Even tech giants on the west coast are recognizing what’s happening between the coasts. “There is a large selection of relatively undervalued businesses in the heartland between the coasts, some of which can scale quickly,” Eric Schmidt, former chairman of Google’s parent company Alphabet told TechCrunch.

Returns Are the Best in the Country

When you compare the Midwest ecosystem to other major ecosystems in the country (exempting the Bay Area), the Midwest competes with Boston, New York, and Los Angeles. Dollars invested in the Midwest surpass those invested in the Pacific Northwest and Texas. Investor returns, however, are what set the Midwest apart.

According to PwC’s quarterly MoneyTree report, 106 Midwest companies closed out the second quarter of 2019 with a combined $1.2 billion in funding, making an average deal size of about $11 million. This is more than double the amount of funding received by Midwest companies in Q1 2017. In 2018, the Midwest saw several billion-dollar exits, including Ceridian, Duo Security, and Cresco Labs.

Source: Crunchbase

Chicago, the largest city in the Midwest, surpasses every other major tech city’s multiple on invested capital (MOIC), including the Bay Area. Chicago’s median MOIC is 5.6x, whereas the Bay Area’s is 4.2x. Seattle’s MOIC is 4.8x, LA’s is 4.7x, New York’s is 4.4x, Boston’s is 3.6x, and Austin’s is 3.3x. Despite having fewer exits as a whole, the Midwest often produces larger exits than those on the coasts and are continuing to drive more and more inbound capital outside the Midwest — a trend we believe will only continue.