In August, Midwest VC firm M25 released its first version of the Best of the Midwest rankings, an in-depth analysis of 20 weighted variables across an exhaustive 54 Midwest cities to determine which regional tech ecosystems were the best place to launch and scale a startup. You can read more about the methodology here or check out the full rankings here.

In this post, we asked M25 Managing Director Victor Gutwein to break down how and why Minneapolis came in at #2.

Victor Gutwein

In the M25 Group’s Best of the Midwest rankings, Minneapolis (which includes St. Paul and the broader metropolitan area) came in at #2 overall and outperformed peers St. Louis, Pittsburgh, Cleveland, Detroit, Indianapolis, Columbus and Cleveland (placing just behind Chicago).

While snagging the second overall spot is impressive, it’s important to note what elements caused Minneapolis to perform so well, and what aspects were particularly weak. As we go through, I’ll try to use insights from my numerous trips to the Twin Cities as well as my experience gained investing locally to compare significant trends to our broader knowledge of various Midwest ecosystems.

Different Types of Tech

The Twin Cities have a lot of startup activity, but it’s not all software – much of it falls under the “life sciences” category. This isn’t bad, but in my experience these founders and their companies aren’t as “loud and proud” as tech/software/digital startups. The natural demographics (PhDs, professors and the like) as well as the IP-heavy development promotes a more secretive, less obvious form of innovation and entrepreneurship. This may sometimes cause the Twin Cities to be overlooked even though it is clearly a hotbed for tech in the region.

Incredibly Vibrant, Smart Community

Even given the heavy life sciences bent, the Twin Cities turn up for the startup scene, which may be easily apparent to residents but not obvious to the tech community outside of the Twin Cities (who often have a more subdued image of the Minnesota stereotype). Beta.MN events are absolutely packed and the MinneDemo pitches were better attended and more lively (perhaps due in part to the beer…) than any Chicago Technori event. For rising tech cities, the importance of a supportive community cannot be easily measured but is undoubtedly a key ingredient to the success of emerging startups. Additionally, the local population is among the highest educated and the metro area hosts an enormous number of patents. The quality of the talent and the high level of ideas being generated boost startup success in numerous ways.

Accelerating Accelerator Activity

While Chicago, St. Louis, Kansas City and Cincinnati all have more accelerator activity than Minneapolis, this is rapidly changing. The 2nd year of Techstars Retail and the brand-new Gener8tor Minneapolis promise some amazing cohorts and have strong community backing. Activating large corporations like Target and Land O’ Lakes have been key to their development, as the government has been less active in directly supporting startups than in other states. Which brings me to my next point…

Weakening Government Support

Minnesota had one of the best angel tax credits in the Midwest – but it isn’t being renewed after this year. While it may not be apparent to most, these credits were one of the few ways to engage a typically apathetic high-net-worth Midwest angel community – a critical ingredient for initial funding in our region. And a lack of major state loans, grants or direct/indirect venture investment programs falls short of the efforts of states like Wisconsin, Indiana, Ohio, Nebraska, Missouri or even cash-strapped Illinois.

Tough Business Economics

Taxes, labor costs and the cost of living are all significantly higher in the Twin Cities than most regional peers. Minnesota is the fifth-worst state in the US (by far the lowest in the Midwest) when it comes to business taxes. While it could be a sign of a healthy economy, high labor and living costs significantly increase burn rates, which lower a startup’s margin of error, increase the need for capital (difficult to find throughout our region) and increase founder dilution.

On balance, it is clear that the Twin Cities have become a great area for startups to launch, scale and thrive, becoming a beacon of innovation for the Midwest and beyond. While there are still ways to improve, I’m optimistic about the metro’s future and am excited to continue to visit, collaborate and invest here.

(Image via Wiki Commons)