06.10.2018

Life in the Silicon Prairie: Tech’s great migration to the Midwest Cluster Spreads

Zachary Crockett

New Center of Innovation Growing in Midwest USA
Startups and investors are increasingly foregoing Silicon Valley for the Silicon Prairie — and with good reason.
BY Zachary Crockett
On a sunny afternoon in early June, I ask a few Silicon Valley tech workers in downtown Palo Alto what they picture when they think of Nebraska.
“Corn,” says a 26 year-old Python coder in an a16z t-shirt. “Just corn everywhere.”
“Tractors… farms… cows,” offers his friend. “And yeah, um, corn.”

In the San Francisco Bay Area — the global mecca for technology, innovation, and venture capital money — the Midwest doesn’t seem to get much love on the streets. After all, this is where the computer chip was born. It’s where Jobs and Woz built the first Apple machine in a garage, and Google was invented in a dorm room. Silicon Valley, the axiom goes, has an ambition and drive that can’t be replicated.

But change is a-brewing: Investors are flocking to Middle American cities like Omaha and Des Moines. Startups are forgoing the paradisiacal pastures of California for a little Midwestern mojo. And the “Silicon Prairie” — cornfields and all — is having a moment in the unrelenting sun.

“I’m a little over San Francisco…”

In early 2010, Mark Kvamme, a prominent venture capitalist at Sequoia Capital, took a 6-month leave of absence and left Silicon Valley to explore the Midwest.

When he was there, something strange happened. “I kind of fell in love with the place.” Kvamme told Forbes. “The opportunity that I saw in Ohio and the rest of the Midwest… I really felt like there was something happening here.” 

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He recruited Chris Olsen, also a VC at Sequoia, and made him a proposition: They’d leave California and start their own fund exclusively for Midwest companies.

In 2013, the duo set up shop in Columbus, Ohio, raised a $250m fund, and began to voraciously invest in local talent. It was so successful that they raised another $300m in 2016.

Kvamme hypothesizes that “90% of the future technology market capitalization will be created outside of Silicon Valley.”

“I think people will look back and say it was so obvious that the Midwest was about to emerge because the numbers had swung so far against it,” he says.

The “numbers” he’s referring to don’t lie: The Midwest is home to 150 Fortune 500 companies, 25% of all US computer science graduates, and 60% of the country’s manufacturing base. It is a large market (it makes up 19% of America’s GDP) and is rife with innovation (19% of all US patents) — yet it accounts for only 5% of all venture capital funding.

In Kvamme’s estimation, the Midwest is severely “undervalued.”

Despite its favorable stats, the Midwest attracts only 5% of all venture capital money

A growing number of disillusioned Silicon Valley VCs are starting to catch onto this, and are shifting their focus to overlooked Midwestern markets.

Steve Case (a co-founder of AOL), and J.D. Vance (author of the widely-read Hillbilly Elegy) recently launched ‘Rise to the Rest,’ a $150m Midwest startup fund backed by the likes of Jeff Bezos, Eric Schmidt, Howard Schultz, and Ray Dalio. 

VC firms and incubators — both locally-grown and transplanted — dot the prairies, from Rev1 Ventures in Columbus, to Cintrifuse in downtown Cincinnati.

And on so-called “Rust Belt safaris, coastal VCs flock to Midwestern cities like South Bend, Indiana by the luxury-busload, scouring local startups for investment opportunities.

“I’m a little over San Francisco,” one safari-goer told the New York Times, between bites of a vegan donut. “It’s so expensive, it’s so congested… It’s the worst part of the social network.”

Consider the Midwest

Traditionally, the vast majority of tech investors (and consequently, the vast majority of tech startups) have stayed entrenched in coastal America. As of 2017, 76% of all venture capital money was poured into just 3 states: California, New York, and Massachusetts.

But last year, total investment in Midwestern companies was up to an all-time high of $4.5B. And investors are seeing returns: in 2017, 37 companies in the region exited for a total value of $5.1B, up from $1.6B in 2016. CoverMyMeds, Ohio’s “first tech unicorn,” was sold for $1.1B, good for the biggest exit in the state’s history. 

Investors placing bets in the Midwest are enjoying increasingly lofty exits

Among VCs, boring-ass, business-forward companies are all the rage — and the Midwest has no shortage of them.

The companies sprouting up in the region are varied and diverse, ranging from Omaha-based WordPress hosting platform, Flywheel, to Wichita-based industrial supplier, Nitrade Solutions. As one might expect, there is a focus on manufacturing and agriculture, but industries span IoT, insurance, education, bioengineering, healthcare, and motorsports.

In a region desperately in need of growth, this boom is creating thousands of jobs, the majority of which are “mid tech,” or tech jobs that don’t require a college degree.

Christopher Miller, a 31 year-old living in St. Louis, is among the newly employed.

After graduating from high school, he worked various retail and construction jobs with an average salary of $22k per year. In 2016, he underwent a technical training program, and now makes $57k as a network specialist at a mid-size tech company.

“These kinds of opportunities weren’t even around 10 years ago,” he says. “It’s pretty surreal to see how much things have changed.”

The mythology of the Midwest’s inherent lameness — “It’s in the Rust Belt!”; “There’s no innovation there!”; “No capital!”; “No talent!”; “The rivers are all on fire!” — is dying out.

FireSpring, an integrated marketing startup in Lincoln, NE, has all the trappings of a young techie office, including a two-story slide. The company told the Lincoln Journal Star they wanted to create a “dynamic work environment that keeps 20-somethings interested” (via ADA Lincoln).

Stephanie Luebbe is executive director of the Nebraska Angels, a network of 60 angel investors who have invested $11m in local startups to date.

She clarifies it’s not so much that companies are moving to the Midwest as it is that Midwest startups are choosing to stay there, rather than relocate to places like San Francisco. In Nebraska, there is more capital to deploy than the number of companies ready to take it.

“There are a lot of reasons to invest here, or start a company here” she says. “The dollar goes further here than on the coast, run rates are longer, there’s a ton of affordable talent, and there’s the Midwest work ethic.”

In San Francisco, the average software engineer makes $124k (19% higher than the national average), with top talent frequently commanding two or three times that. In Ohama, the same job pays $84k (19% below average) — but the cost of living is about one-third of what it is in the Bay Area.

“I’m able to live in an apartment that’s bigger than a closet, for a quarter of the price” one programmer who recently moved from San Francisco to Ohio tells us. “And my grocery bill is, like, half [what it was].”

Dollar for dollar, the Midwest is a better deal for both employers and employees

There is certainly no shortage of talent to choose from. As Inc. notes, the Midwest has one of the most significant clusters of high-quality universities in the nation, with the University of Chicago, Notre Dame, Northwestern, Wisconsin, Michigan, Illinois, and Carnegie Mellon all within an hour’s flight.

In San Francisco, a large portion of capital goes also toward things that have nothing to do with innovation. With a lower cost of living, companies in the Midwest enjoy burn rates that are up to 50% lower than Silicon Valley’s, allowing them to “push toward breakeven and profitability” faster.

But perhaps the most important benefit of  launching a startup in the Midwest is a proximity to the core issues and customers at hand.

“A lot of companies on the coast are trying to solve problems that exist in Middle America,” says Luebbe. “Startups in the Midwest are better poised to tackle those problems.” She cites an Omaha-based company that creates data analytics for small rural hospitals, the majority of which are in the Midwest.

The Midwest is NOT the next Silicon Valley

One thing I hear over and over again from entrepreneurs, investors, and tech workers in the Midwest is that they don’t want to live in Silicon Valley’s shadow.

For years, pundits have proclaimed any place with a rising tech scene the “next Silicon Valley:” Boulder, Utah, D.C., Seattle — hell, even Sweden. But these comparisons are overwrought, and take away from the things that make each city unique.

“[There’s a] distinctly Midwestern approach to business,” says Zach Ferres, a CEO who got his start in the Ohio tech scene. “In that tech community, your word was your bond — anyone who reneged on a handshake promise was shunned. Successful people helped others learn and grow. Entrepreneurs from surrounding areas felt like part of one big family.”

The Midwest is special in its own way. Yeah, it’s got cornfields. And tractors. And its lakes occasionally catch on fire. But it’s also channeled its culture into a distinctive brand of entrepreneurship.

And as they say, the cows are coming home.