The statistics are all too familiar to those involved in the Midwestern venture ecosystem.
The Midwest is home to over 20% of the nations’ top research universities, research and development expenditures, defined benefit pension fund assets, and GDP.
Its undergraduate programs graduate 20% of the founders backed by venture capital investments that attract almost 20% of the money invested by such firms.
Yet venture capital investments in the region represented less than 5% of the national total in 2015, which leads to the conclusion of many that all that is needed is money.
The environment for capital availability for these firms is beginning to change, but it will remain a problem until the venture capital gap begins to close.
With the emergence of new accelerators, angel investment groups, and smaller early stage funds, the building blocks for creating new enterprises, and positioning them for scalable investment, are falling into place across the region.
The formation of Drive Capital has helped the investment community in the nation’s money centers to become more comfortable with the notion that effective venture capital investments can be made in the Midwest.
My partner Barry Adams and I founded Prairie Crest Capital in Des Moines, Iowa, because we believe that the foundation has been laid by the efforts of many throughout the region for it to become a center of development for scalable new enterprises that solve big problems. The need for venture capital investment and the opportunity to close the regional venture capital gap is timely.
A lack of consequential VCs
This venture capital gap is not, as many logically conclude, a mere funding or financing gap for emerging firms.
It is the relative absence of in-region venture capital firms that have the critical mass, the resources to be effective partners for the founders in which they invest, and that deploy connected capital that leverages their early stage commitments.
There are simply too few professional venture capital firms in the Midwest that have the ability to assist founders that are truly solving big problems achieve scale to become meaningful solutions or even survive.
Venture capital firms with critical mass are vitally important for early stage investments, and throughout the funding cycle, in high potential new firms. Only a few venture capital firms in the Midwest manage funds larger than $50 million.
This problem is particularly acute for early stage investments. Without consequential capital, VC firms cannot deploy resources sufficient to be an optimized partner to founders of young growth companies. They cannot attract world class talent with expertise in sales, marketing, finance, operations and technology to properly aid the companies in which they invest.
The VC firms also lack the gravitas to lead follow on rounds and protect both their founder partners and investments.
Finally, smaller funds lack the ability to diversify their investments and again participate fully in follow on rounds to optimize their returns, a critical element in maintaining a healthy venture capital investment ecosystem.
Too little connected capital
The number of funds based in the Midwest that have the resources, experience and networks sufficient to partner with founders in the growth of their enterprises is remarkably few.
Yet creators of new technologies, and firms to commercialize them, need substantial assistance to commercialize their ideas and develop their companies to scale, which results in positive liquidity events for investors.
In our research to develop Prairie Crest Capital we encountered scores of companies that either sub-optimized their concept, were surpassed by competing firms in traditional venture capital centers with more comprehensive backing, whose investors were frustrated by illiquidity, or had to relocate to attract appropriate investors with the experience and talent pool to provide guidance throughout their development cycle.
Having sufficient capital to deploy enables a professional venture capital firm to become partners throughout the life of the company through many rounds, not just the seed funding.
Finally, professional venture capital firms provide what I like to call “connected capital.” Their managers have access to a broad range of resources and partners. They provide connections for technology development, customer access, talent acquisition, and, critically important in the Midwest, later stage investors with both the money and resources for founders solving big problems that are needed to reach scale rapidly enough for competitive survival.
Uber is a perfect example of a ground-breaking concept, married with rapid technological deployment that would have failed to reach its potential without investing partners. These investment partners assist with capital and expertise, allowing the company to rapidly scale the enterprise and dominate a market, leveraging their innovation to solve new problems they had not imagined their technology could affect.
Thinking beyond cash flow
The combination of these attributes – critical mass, founder partnership capability, and connected capital – also helps address a recurrent theme among Midwestern start-up enterprises: an over reliance on organic capital, which stunts growth of the most promising concepts.
While traveling through the region’s startup communities, I am always struck by the perceptions of founders and the criteria of investors that emphasize early revenue and cash flow as a critical component of their growth and capital plans.
While this framework is appropriate for lifestyle, niche and non-scalable businesses, it both constrains and threatens the survival of businesses with expansive potential and globally adaptable solutions.
That is not to say that the proliferation of smaller Midwest focused venture firms, angel networks and independent investment firms are not vitally important elements of creating a more robust venture development ecosystem. They are, and have been, necessary to the wide array of emerging new enterprises in the Midwest.
They are, however, insufficient to provide a reliable platform for development of both the scalability of firms established in the region and repeatability of the process. The presence of larger firms in the ecosystem provides the ability for those firms to co-invest with other investors of all types, to pool their talents and efforts.
All of the elements of a healthy and vibrant venture capital ecosystem are important. On the funding side that includes incubators, shared work spaces, accelerators, angel investors, angel groups, and venture capital firms both large and small, narrowly and broadly focused.
With the foundation laid, however, more meaningful venture capital is being raised and deployed in the Midwest, as many professionals, from the Midwest and outside the region, are recognizing the Midwestern Venture Capital Gap, and beginning to address it.
Drive Capital’s recent announcement of a new $300 million tech fund for the region, the ongoing efforts of the Pritzker Group and plans for new venture capital firms, all of which combine those three necessary attributes, are indications that the venture capital ecosystem in the region is rapidly evolving.
We started Prairie Crest Capital to be a driving force in this solution. It is something about which we are passionate, while also recognizing that we are only one piece of the puzzle.
Mark White is a Founding and Managing Partner of Prairie Crest Capital, LLC, a Midwest-based venture capital firm focused on early stage investments in promising, transformational agriculture and technology innovation. Prior to co-founding Prairie Crest Capital, LLC, Mr. White was CEO of Gooi Global, Inc., a publicly traded firm that provides business solutions to mid-sized financial institutions. He joined Gooi Global, Inc. when it was known as Domikow, Inc. and restructured the financing of the insolvent internet marketing company, in part, by unwinding several layers of toxic financing arrangements, repositioning the company as a holding company investing in financial services businesses and developing two subsidiaries to support its new strategic direction.
Mr. White has over 30 years of financial, private equity, investment, management, turnaround and entrepreneurial experience. His entrepreneurial experience includes a variety of ventures in the consumer goods, alternative energy and technology sectors (e.g., a vertically integrated headphone consumer business; Fermatech, Inc., a fermentation enhancement technology in the Ethanol and Distilled Spirits industries; GN Hosting, a provider of specialty hosting and data center solutions to the internet gaming industry; and Glen Arbor Furniture, Inc., a high-end furniture manufacturing firm, which was a joint venture between Mr. White and a Chinese publicly traded company). In addition to Gooi Global, Mr. White has also been involved in a number of business turnaround projects, including Steelworks, Inc., a manufacturer of home office furniture and products. In each of his engagements, Mr. White has led financial or strategic initiatives worldwide, with particularly wide experience in China. Mr. White is a native of Detroit, Michigan and holds a Bachelor’s Degree in Economics, with Honors, from the University of Michigan in Ann Arbor.
Barry Adams is a Founding and Managing Partner of Prairie Crest Capital, LLC, which is a Midwest-based venture capital firm focused on early stage investments in promising, transformational agriculture and technology innovation. Prior to co-founding Prairie Crest Capital, LLC, Mr. Adams was COO of GooiGlobal, Inc., a publicly traded firm that provides business solutions to mid-sized financial institutions. He joined Gooi Global, Inc. to assist with the financial and strategic restructuring of this previously insolvent internet marketing firm, which was recently completed successfully.
Prior to joining Gooi Global, Mr. Adams was a Principal at ColBridge Capital Management, LLC, an event driven hedge fund. Prior to joining ColBridge Capital Management, LLC, Mr. Adams served as President at Grant Park Capital Partners, LLC, a start-up, event driven fund of hedge funds. Prior to Grant Park Capital Partners, LLC, Mr. Adams was a Senior Vice President at U.S. Trust Company where he was responsible for the delivery of asset management, alternative investments and capital market solutions as well as placement of “Master Class Hedge Funds,” primarily to family offices. Prior to U.S. Trust Company, Mr. Adams was at Bankers Trust Company, where he was a leading sales executive for derivatives and alternative investments (hedge fund trade replication products and options). Mr. Adams began his finance career as a Principal (Series 24 registered) at Private Capital Investing, a wholly-owned subsidiary of Chemical Bank, N.A. Mr. Adams holds B.A. in Economics from Northwestern University and an M.B.A. from Columbia Business School.