Entrepreneurship in the heartland may well edge out Silicon Valley’s efforts

While I moved eight times by the time I went to college, I consider myself a Midwesterner and Cleveland my home, and I love what I consider to be the common sense view of the world typically found in the Midwest.

People in the Midwest don’t usually get too high on themselves or any one idea and usually take the inevitable trough in stride.

That is why I think this relatively new interest in venture capital investing in the Midwest is such a good idea.

The lure of the heartland

I recently read an article from the May issue of Forbes entitled “Top venture capitalists leave Silicon Valley, bet their careers on Midwest.” The article was about Mark Kvamme and Chris Olsen, two alums from the ultra-successful and Silicon Valley-based Sequoia Capital and how they decided to found Drive Capital in Columbus, Ohio, not in California.

One of the data points the Drive Capital partners cited was that the Midwest makes up 19 percent of the country’s gross domestic product and comes up with 19 percent of its patents, yet the region draws only 5 percent of America’s venture capital.

The article goes on to say that this discrepancy suggests that Midwestern entrepreneurs are starting fewer businesses, not because they don’t have good ideas, but because they don’t have access to the people who fund good ideas. There is no doubt that the coasts have a disproportionate concentration of not only dollars, but people talent that is required to get ideas off the ground.

But I think this is an unfortunate bias. Evolution Capital Partners, the private equity fund I co-founded with my partner Brendan Anderson, has invested in two software businesses, one in Dallas and one in Pittsburgh.

The reaction we have received from many is, “Why is this business not in California?” as if there was something wrong with it that they had not figured out because our companies have strong cash flow, quality people and good growth prospects. Surely there was some risk they were not seeing.

Smarter and leaner

I believe that part of what made our businesses so good was that they had to be smarter and leaner because they did not have access to the luxuries the coasts had to offer.

Prominent California-based venture capitalist Bill Gurley lamented in a September 2014 article in the Wall Street Journal and his blog Above the Crowd that there was “irrational exuberance” and “discounting risk” going on in Silicon Valley. He is using his “discounted risk of employer profitability” theory that is essentially this: What percentage of employees in Silicon Valley are working at profitless companies? The answer: Many.

John Hoesley, a Chicago-based managing director at Silicon Valley Bank, gave some credence to the Midwest movement when he said that there are as many early stage businesses in the Midwest as there are in California.

I bet that those companies are more lean, mean and sensible, and therefore more fundable, because they have done more with less since inception in the “lifeless” Midwest than the luxury-laden coasts.