Nationally, there is some concern that we’ve got too many VC firms.
Particularly, the sentiment is that a general weariness of new funds and the difficulty for them to get an edge / differentiate could make it very hard for less-established VCs to raise a fund. And that’s probably true – in mature, saturated markets. But in the Midwest, I’m seeing a different trend: continuous growth in VC fund formation.
Over the past few years, we’ve seen a steady increase in the number of Midwest-focused funds. Everybody probably knows about Drive Capital and Rise of the Rest. But there are a host of others demonstrating recent fundraising success:
|4490 Ventures||$49M Fund I (1st Close)||2018|
|Rise of the Rest||$150M Fund I||2017|
|Origin Ventures||$80M Fund IV||2017|
|Drive Capital||$300M Fund II||2016|
|Lewis & Clark Ventures||$104M Fund I||2016|
|Chicago Ventures||$66M Fund II||2016|
|Hyde Park Venture Partners||$65M Fund II||2016|
And we’re seeing a host of smaller funds take off all over the region, from Cultivation Capital’s Spirit of St. Louis Fund, to Dundee Ventures in Omaha, to Birchmere Ventures in Pittsburgh to Serra Ventures in Champaign. While most are still technically ‘micro-VCs’ (funds under $100M), many have doubled in size from fund to fund. So why is Midwest VC activity healthy while the rest of the country shows signs of stopping?
I think it’s a combination of 3 trends:
More liquidity/exits recently
There were 37 Midwest exits creating $5.1B in exit value in 2017 (more than 3 times 2016’s total) and it doesn’t look like it’ll let up. This matters because liquidity allows a virtuous cycle, with the few investors that took the risk on Midwest deals reaping rewards and reinvesting, and validating the opportunity for great startups occurring “off-coast” for a second wave of capital. Additionally, the quality of the average Midwest startup is increasing now that there is experienced talent being recycled into the market to build new startups.
Capital supply ≠ demand (still…)
The fastest people to realize that you can build a tech company anywhere are founders themselves. It takes capital a lot longer to organize, meaning there is a disconnect between the amount of quality startups seeking investment (demand) and the available capital willing to invest in these startups (supply). This creates a competitive environment for early-stage valuations; the opposite effect can easily be seen in the Bay Area. Check out the data by geography on AngelList.
Midwest is an increasing percentage of deals
We aren’t just seeing the activity grow because the tech industry is growing nationally – rather, the Midwest is becoming a more important piece of tech comparatively. Less than 4% of all US venture deals were from the Midwest in 2002 – now that number is above 7%, nearly double. Tech economies have grown everywhere, but they are accelerating faster here. Makes sense that investors would want to add exposure to a part of the market that’s becoming increasingly important.
So I’m not surprised by the steady uptick in fundraising activity for regional VCs – given the context, it seems like a completely rational and economically sound response to incentives. In fact, when I put it into context it actually might seem like too slow of a pace and too small of an amount. Raise on!