Startup Boom in the American Heartland

A Rising Tide: The Midwest Startup Boom

The initial public offering of Sprout Social felt like a significant milestone for the Chicago startup ecosystem. The city has consistently been a prominent player within the broader Midwest market.

The company’s performance following its IPO has been remarkable. Initially priced at $17 per share in late 2019, its value has since surged to over $123 per share.

Sprout Social has successfully built a company valued at $6.6 billion, largely independent of the typical Silicon Valley spotlight. However, its success isn't isolated.

Rather, Sprout’s IPO signaled the beginning of a substantial increase in investment within the region. Data collected by a Midwest venture capital firm reveals that capital investment has effectively doubled.

Specifically, investment rose from approximately $10 billion in the 12-month periods ending in June 2019 and 2020, to $20 billion in the year concluding June 2021.

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Recent IPO Successes

Other notable companies have also experienced success recently. Duolingo’s IPO earlier this year brought the Pittsburgh-based edtech firm to the public market with a current valuation exceeding $7 billion.

The current year has proven particularly fruitful for Midwest-based startups. Several key data points illustrate this trend.

According to CB Insights venture data through the third quarter of this year, startups located in Denver have secured approximately $3.1 billion in total venture capital funding.

For comparison, the total for all of 2020 was $2.7 billion, and this year’s figures are still incomplete.

Chicago mirrors this pattern, having raised $4.9 billion through Q3 2021, as reported by CB Insights, compared to $3.1 billion raised throughout all of 2020.

Midwest cities are significantly surpassing their 2020 venture capital totals, which were already at or near record levels.

Understanding the Boom

The Exchange has previously examined the Midwest startup landscape throughout 2021, highlighting various venture capital and startup achievements as they occurred.

However, given the overall strength of the year, we aimed to deepen our understanding of not only the factors driving the increased funding activity, but also the effects this influx of capital is having on startups in the region.

We sought perspectives from several startup CEOs – including those from Beam Dental, Azumo, NanoGraf, Total Expert, and Oculii – and from Midwest-focused venture capitalist Mike Asem.

Our inquiries focused on how the pandemic has reshaped the domestic startup talent market and related issues.

The insights gathered suggest that the recent momentum in attracting capital to regional startups may be sustainable.

A Shift in Perspective

For the Midwest, historically a region often overlooked in terms of startup activity, the future may hold sustained success at current levels.

If this prediction holds true, the Midwest will transition from a region simply flown over to one actively engaged with via virtual platforms.

However, it’s important to acknowledge that every benefit comes with potential drawbacks. The factors enabling the Midwest to achieve greater success may also present challenges.

Further exploration of these dynamics is warranted.

The Intensifying Competition for Skilled Professionals

The notion of a competitive landscape for talent is a frequently discussed topic, and the rise of remote work facilitated by platforms like Zoom has fundamentally altered investment strategies for venture capitalists. This shift benefits startups not only in India but also in regions of the U.S. such as the Midwest, as investors are now more inclined to explore opportunities beyond their immediate geographic locations.

A parallel transformation is occurring within the talent market itself. The ability to hire remotely, enabled by technologies like Zoom, has broadened the scope of the competition for skilled workers, making it a truly global endeavor.

Alex Frommeyer, CEO and co-founder of Beam Dental – a company headquartered in Columbus, Ohio, and having secured over $168 million in funding according to Crunchbase – explained via email that the domestic talent market has “significantly evolved since the onset of COVID-19.” He notes that companies traditionally based on the coasts are now actively competing for top talent in the Midwest through remote positions.

Frommeyer further stated that he strategically located his company in Columbus to gain “access to a specific talent profile, specifically a blend of expertise in both insurance and technology.” However, he also acknowledges that the city has “become more competitive” in terms of talent acquisition, as the local startup ecosystem appears to be expanding at an even faster rate than the city itself.

The CEO views this increased competition as a positive development.

Mike Casper, co-founder and CEO of Chicago-based Azumo (with limited publicly available fundraising information), echoed this sentiment. He observed that, “similar to other regions, the talent pool in the Midwest has been under pressure over the past year.”

However, Casper also highlighted encouraging trends. Prior to the COVID-19 pandemic and its subsequent impact on the labor market and the startup world, there was a prevailing belief among global tech professionals that the only desirable employment opportunities were with startups located in Silicon Valley. Now, he asserts that the “pandemic and evolving work arrangements have dismantled this mindset,” leading to a greater willingness among global talent to consider tech companies in the Midwest.

This increased openness to working for Midwest companies is a welcome change. It has the potential to alleviate a long-standing challenge faced by emerging startup hubs: the ability of local universities to produce a steady stream of developer talent, while experienced professionals capable of scaling go-to-market strategies at the Series C stage have historically been concentrated in Silicon Valley and similar areas.

The Midwest may now be better positioned to attract these seasoned individuals, even while facing increased competition for developer talent and related skills.

The Midwest possesses a key advantage in the competition for talent: a significantly lower cost of living compared to established U.S. startup centers like Silicon Valley, New York City, and the Boston metropolitan area.

Francis Wang, CEO of NanoGraf – a Chicago-based battery technology company that has raised nearly $25 million – stated that the Midwest “boasts a robust talent pool, supported by leading universities and national laboratories, and is rapidly emerging as a ‘quality of life’ alternative to the West Coast.”

Wang explained that this emphasis on quality of life is resulting in a trend where “we are seeing an increasing number of individuals completing their education in the Midwest and choosing to remain in the region.”

Successfully stemming the outflow of skilled workers would significantly impact the local talent market for Midwest startups, which have historically experienced the challenge of having their local human capital recruited by companies in other geographic locations.

Capital Investment Surge in the Midwest

When discussing startups today, the topic of capital is unavoidable. Funding – the essential element for startup expansion, the lifeblood of business – is currently abundant throughout the Midwestern United States.

Beyond the impressive figures previously mentioned, a closer look reveals important developments from a regional viewpoint.

Steven Hong, co-founder and CEO of Oculii, a Dayton, Ohio-based company specializing in AI and radar technology with approximately $76 million in funding secured, successfully raised a $55 million Series B round earlier this year.

Hong stated that access to funding sources, historically focused on the coastal regions, has enabled significant growth for his Midwest-based startup. This has facilitated substantial investments within the Midwest, an area traditionally lacking in numerous tech startups.

Frommeyer observed that only a few years ago, funding rounds exceeding $100 million were virtually unheard of. Even securing $10 million was considered exceptional, indicating a startup’s ability to attract significant institutional investment.

The fundraising landscape in the Midwest has undergone a dramatic transformation. With the continued prevalence of remote investing – evidenced by venture data since the pandemic’s onset and discussions with global venture investors – the Midwest is poised to maintain venture capital totals exceeding historical levels for the foreseeable future.

Crucially, capital within the region appears to be recirculating. This recycling of funds is a vital component for the sustained health of any startup ecosystem. Successful fundraising and growth by one startup can then provide early-stage funding for a new wave of companies.

Frommeyer concluded that the “Midwest’s flywheel is in motion,” and the COVID-19 pandemic has further created a more equitable environment for the region’s emerging tech businesses, after observing the increasing frequency of larger funding rounds in recent years.

A Flourishing Ecosystem of Innovation

Chicago serves as the base of operations for the venture capital firm, M25. However, when discussing the emergence of startup hubs throughout the Midwest, Asem extended the conversation beyond just the Windy City.

He proceeded to outline a comprehensive overview of the region’s numerous hubs, a perspective that aligns with M25’s extensive tracking of 59 cities within its “Best of the Midwest” startup rankings.

Columbus, Ohio, was the first city Asem highlighted. It’s the location of companies such as Root Insurance, which recently became a publicly traded entity, and Loop Returns, which secured $65 million in funding during a round led by CRV. The M25 General Partner anticipates further unicorn designations originating from Columbus, and also pointed to Drive Capital as “the largest venture firm in the Midwest.”

Following Columbus, Asem mentioned Ann Arbor, recognized for its advancements in cybersecurity; Indianapolis, experiencing growth in B2B SaaS and martech; and Minneapolis, the headquarters of Joe Welu’s startup, Total Expert. The CEO emphasized Minnesota’s “high educational attainment” and its “consistent ranking as a desirable place to live” as crucial elements for attracting and retaining skilled professionals.

“The Midwest generally possesses a highly productive talent pool, particularly within our industry,” stated Hong of Oculii. “This is especially true for autonomous vehicle technology.”

This observation resonates with the conventional perception of the Midwest, but Asem also drew attention to StockX, an online marketplace, and its Detroit headquarters. He noted, “Many are unaware that this unicorn company is based in the Midwest.”

Similarly, St. Louis, Missouri, is attracting attention with diverse companies like the direct-to-consumer brand Summersalt and the telehealth provider SteadyMD. Asem also identified data startup Astronomer as one of several “particularly promising companies” emerging from Cincinnati, Ohio.

This represents a potentially significant evolution for the Midwest: a transition from combining established industrial expertise with technology to achieving competitiveness across all sectors. Welu commented, “It’s a beneficial location for launching and scaling a business.”

Finally, we’ll conclude with Hong’s perspective:

“This is a remarkably opportune moment, as technology has increasingly enabled the creation of global companies. The Midwest offers a fundamental advantage with its abundant talent, affordable cost of living, and close proximity to the industrial sectors currently undergoing transformation—leading me to expect even more innovative companies to be established in the Midwest in the years ahead.”