Blair Garrou is the co-founder of Mercury Fund, an early-stage venture capital firm based in Houston, Texas, with an active investment portfolio across the Midwest region. SPN spoke with Garrou over the phone.

SPN: As Mercury Fund, what’s attractive about companies in the Midwest?

BG: Our core strategy is really investing in companies that aren’t on the coast. We started back in 2005, predominantly as a fund focused on Texas and the Southwest. After a few years we started getting pulled into the Midwest, where we saw even larger opportunity–meaning no competition for the capital that we were looking to put to work.

We have a concept called a commercialization gap, where we look at all the states in the US and divide R&D dollars by the amount of seed money spent in the state. Some of the largest commercialization gaps are all through the Midwest.

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SPN: So why do you think others aren’t investing in the Midwest?

BG: Well, I think they are. We really started investing in the Midwest in 2007-2008. If you think about the recession environment then, that’s when I believe (as do a lot of others) that a lot of people left their day jobs and looked at entrepreneurship more seriously. That’s when you started to see a number of accelerators, coworking centers, the infrastructure that allows companies to do well in cities like Des Moines, Kansas City, Cincinnati, Madison.

The main reason people invest in the middle is if [they see] you have a great company with a reason to be where you’ve launched. You may be a vertical SaaS solution, but you’re leveraging something else about the industrial economy from where you came.

It’s also just more attractive pricing. The middle of the country just doesn’t go through boom and bust periods the way like San Francisco and New York do.

SPN: It’s a common refrain among Midwest entrepreneurs that there’s not enough venture capital. What’s your advice to entrepreneurs trying to get more visibility?

BG: I’ve given a talk in a number of cities called “Top 10 Ways for Startups to Thrive and Survive in the Middle of the Country.” It’s amazing how many entrepreneurs don’t follow those tips. The first one is, be unique. A lot of companies may be the best local deal, but they aren’t the best deal in their category. VCs want to find companies that are special compared to all their peers.

What we see throughout the middle of the country is a lot of “me too” deals that won’t attract venture, but they attract angel capital. If you’re unique, you will attract venture money.

The other thing we constantly emphasize is that entrepreneurs need to be capital efficient, almost to a fault. A lot of startups that go out and raise seed money have a tendency to invest in the wrong people and the wrong infrastructure. VCs want to see very leans teams, and when the data is telling them to scale, then they go out and raise venture capital.

A lot of companies may be the best local deal, but they aren’t the best deal in their category

But the number one complaint I hear from VCs from the coast when they talk to startups in the middle is they don’t know their competition. No matter who you’re speaking to, you have to know more about your competition than the VC on the other end.

I’ve heard time after time when a VC is interested in a startup in the middle, where they have that preliminary call, they impress them with the growth, and the next question is, “What’s the competition?” If that founder knows about the competition on the coasts, that tends to impress the VC, and they get pretty excited.

Another thing startups can do is around the “halo effect” theory. If you’re a local startup in Omaha, you’ve hopefully been able to attract the best local talent, best customers, best investors. So we have relationships with people like Arthur Ventures, Dundee Venture Capital, and others. Startups should’ve gone to those first, and those investors should have something to say about them or already have invested in them.

SPN: A lot of founders talk about the gap between the seed round and the Series A. What’s your advice to startups stuck in that stage?

BG: It’s real. It’s not imagined. There’s a massive Series A crunch going on in the middle of the country. I think it’s more prevalent [there] than the coasts, mostly because entrepreneurs tend to raise the same amount of seed capital no matter if they’re coming out of an accelerator or as a stand-alone. But the seed round people are raising these days isn’t enough to get them over the hump where people are really excited about their growth trajectory.

If a startup raises $500K to $1 million, and they still aren’t mature enough, we’re telling people to do what many are calling a “Seed Plus” round. The coastal investors don’t tend to want to travel or take a close look until the company (if it’s a software company) is anywhere from $3 to $5 million in annual recurring revenue. That’s really the yardstick these days.

Getting involved before that stage tends to have a lot more hand-to-hand combat where the VC is expected to do a lot more of the heavy lifting. For people on the coast that’s just too much travel.

SPN: What are some of the most interesting trends that you see in the Midwest that people should be watching in the next 3-5 years?

BG: One of the trends I’m seeing is that startups are much more comfortable opening up secondary offices. For years people have said you should have your team located in one place. There’s a lot of us out there who just think that’s no longer relevant anymore. Maybe if you’re in Chicago, maybe if you’re in Austin, but in other places it’s difficult. I think more and more entrepreneurs are doing it to show they have a level of sophistication and risk mitigation.

I think the other trend is that we are in a bubble right now, and it will correct. And when it corrects I think it’s going to be really devastating on the coasts. But I don’t think the companies in the middle of the country are even going to feel the reverberations from that. I think they will continue to have their heads down, building capital-efficient businesses, and the ones with truly unique companies will survive. And the VCs that have more capital to put to work will put even more into the middle of the country. I think there will be a great leveling effect over the next 3-5 years.