Venture capitalists went on a Midwest tour recently that was described by The New York Times as a “Rust Belt safari.” Lost in the discussion were the actual Midwestern entrepreneurs.
Two weeks ago I joined Akron Mayor Dan Horrigan, whom I advise on topics of innovation, when his city hosted a Midwestern bus trip led by Congressmen Tim Ryan (D-OH) and Ro Khanna (D-CA). Dubbed the Comeback Cities Tour, the congressmen brought along a dozen venture capitalists and investors. Most of them were from Silicon Valley, including representatives from big funds like General Catalyst and Softbank.
Their 48-hour itinerary was impressively full, with stops in Youngstown, Flint, Detroit, and South Bend in addition to Akron. I can’t speak to the group’s activities in other cities, but during their five hours in Akron they visited Bounce, the city’s new open innovation hub, and met with public officials and entrepreneurs before joining a group of civic leaders for an informal dinner. To a person, the investors I met were thoughtful and engaged. One was full of questions about potential solutions to the opioid crisis, asking how local entrepreneurs were addressing it.
The group met with dozens of Midwestern startups, but you wouldn’t know that from the The New York Times. The newspaper’s coverage described the tour as a “Rust Belt safari” with participants catching “the heartland bug” as they “gawk at the availability of cheap homes…and fantasize about relocating there.” Not a single Midwestern entrepreneur was mentioned in the article.
That’s a shame, both because the stated intent of the tour was to find investable local ventures, and because the growth of entrepreneurial communities in cities like Akron relies on the startups that are already there. If participants of the Comeback Cities tour really want to help the heartland, there is a simple, critical action they can take—and it isn’t moving their family to Flint. It’s making an investment. Because for all the talk of the Rise of the Rest and startups in the American interior, the vast majority of venture capital dollars remain limited to the Bay Area, Boston, and New York.
According to SSTI a full 76.3% of the $58.6 billion invested by venture capitalists in 2016 went to ventures in California (53.3%), Massachusetts (10.3%), and New York (12.7%). Despite news stories about investors flocking to secondary cities, the share of VC dollars flowing to those three states has actually risen since 2010, when they accounted for 67.2%. Without available funding, promising startups will struggle to hire the talent and develop the products they need to scale.
The critical issue of funding is top of mind for local entrepreneurs in Ohio, which attracted 0.4% of national VC investment dollars in 2016. “Early stage capital is what we’re most lacking,” says Blake Squires, an Akronite and serial entrepreneur who attended some of the Comeback City Tour activities. “Local entrepreneurs are trying to bootstrap their startups, and they don’t have enough money to focus on building products that reflect what customers most want.” Ed Buchholz, a three-time founder based in Northeast Ohio, claims that funding is especially hard to find for visionary startups that haven’t yet shown substantial revenue. “The profile of our local investor base is less risk-loving than in the bigger markets,“ he says.
It’s not as though the only investable startups are on the coasts. Cleveland and Columbus-based CoverMyMeds recently exited for over $1 billion to McKesson, and Akron-based RVshare raised $50 million last month. But venture capitalists have historically preferred to invest close to home, where they can minimize travel and keep a close eye on their investments. Buchhholz recalls pitching one prominent venture capitalist in New York City who told him, “I won’t invest because I have no other investments in Northeast Ohio, and the odds of me making another one are low—so I probably won’t take a plane to attend your board meetings.” Visits like the Comeback Cities Tour can be especially helpful if they show coastal venture capitalists that there are more investible startups in the Midwest than they had assumed.
Can the heartland benefit from Silicon Valley’s attention in ways that go beyond making investments? Definitely. “Why not invite their portfolio companies to set up offices in Akron?” suggests Squires. And VC’s could provide enormously helpful guidance about commercializing research to schools like the University of Akron or Youngstown State. But, as the saying goes, money talks.
If participants from the Comeback Cities Tour relocate to a heartland city like Akron, I congratulate them. The quality of life is indeed wonderful, and homes are affordable. But there’s a simpler way to show their belief in the ecosystems they visited: Write a check to fund a worthy startup that’s already there.