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The Midwest doesn’t have enough early-stage capital – here’s one (radical) solution

Every founder, funder, and entrepreneurial support organization in the Midwest says the exact same thing: There just isn’t enough early-stage capital. Even a city with a relatively well-developed (by non-Silicon Valley standards) venture capital scene, like St. Louis, still faces a severe shortage of seed and pre-seed funding.

That problem led several organizations to create the $5 million Spirit of St. Louis fund, which focuses on the lack of early-stage funding in the St. Louis metro area.

The Spirit of St. Louis fund is great, but $5 million in one city does not solve the systemic lack of early-stage capital plaguing every startup scene in Middle America. However, the role the St. Louis Regional Chamber played in helping to create Spirit of St. Louis fund speaks to an important fact: The lack of early-stage money isn’t a problem that is going to be solved simply by the natural migration of capital to opportunities that are likely to get the highest return. If this problem is going to be solved, it will take leadership from outside of the venture capital world.

In other words, creating good jobs and strengthening local economies aren’t the jobs of venture capital firms. Yes, VC firms here in the Midwest seem to be very community-minded, and job creation is hopefully a byproduct of a successful investment—but the purpose of venture capital is to return the highest possible profit to the fund’s investors, not reinvent local economies.

That’s why addressing the lack of early-stage funding in startup ecosystems outside of the coasts may require the federal government to get involved.

It isn’t as crazy as it sounds.

Politicians from both parties have told us for the past several decades that entrepreneurs and small business owners are the engines of economic growth, and that we are all better off if those individuals are given the opportunity and the resources to create jobs.

For 40 years, one of the primary ways the federal government has tried to do that is through tax cuts.

That approach usually doesn’t work.

Research (and the words of actual CEOs) shows tax cuts for large corporations and wealthy individuals usually aren’t reinvested back into job-creating activities. Instead, large corporations often use the money for share buybacks. In the rare instances when those tax savings are (indirectly) invested in startups, the money flows into funds where it will get the highest return—which means the money isn’t likely to end up in early-stage funds focusing on Midwestern startups.

If you believe the reason for having a startup scene in St. Louis, Kansas City, Des Moines, or Omaha is to recreate Silicon Valley on a smaller scale, then the public sector shouldn’t play a role in solving the lack of early-stage funding. The government definitively should not be in the business of helping just a few people experience the windfall that comes with a billion-dollar exit.

But if you believe that the reason for having a startup scene in those cities is to help create good jobs, strengthen economies, and revitalize communities, then the government may have a role to play in helping early-stage startups access capital. In fact, it may have to play that role.

Of course, no one wants Washington, D.C., deciding which startups are worthy of an investment.

That’s why funding should come in the form of block grants distributed to state and local organizations like the Missouri Technology Corporation.

You could also label a concept like this “corporate welfare.” And, maybe it is—but at least it’s corporate welfare with intent. It isn’t cutting taxes on large corporations because in “theory” they will reinvest in the local economy. Instead, it’s investing money directly in the idea that entrepreneurs are our best job creators.

In most instances, the private sector is the best entity to solve a difficult problem. On occasion, it isn’t. And when the private sector is best suited to solve the problem, it tends to solve it quickly, because being the first to solve the problem means being the first to profit from the solution.

The fact that every founder, funder, and support organization identifies a lack of early-stage funding as a problem yet to be solved tells me that we should at least explore the idea of a public sector solution.

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Dustin McKissen is a two-time LinkedIn “Top Voice on Management and Culture”. He is also a columnist on Inc.com and a contributor for CNBC and VentureBeat.

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  • Lean Startup Mentor

    The early stage funding landscape for startups is not so simple. The SBA/SBDC underwrite millions of dollars to new businesses as well. These require an interested bank and a personal guarantee, so the owners need to be locally established and have at least some net worth. SBIR/STTR grants are available for technology startups. These range from $75,000 to $3,000,000. Medical, engineering startups based on university research are the typical awardees, with strong intellectual property (think patents). and yes, there is a need for pre-seed funding to prepare these ventures for SBIR grants. Universities and state economic development centers have tried to fill this gap, but yes, more funding is needed.

    There is a third group, student/recent grads, that do not have patentable IP, or community roots, or even measurable net worth. These entrepreneurs start with nothing and create social and business disruptive ventures. While in college they can get support, encouragement, and even minimal funding through competitions. A few successful alumni even will invest in these.

    As an experienced entrepreneur and investor I have learned that it is very difficult to pick winners and losers when it comes to startups. With this landscape of diverse technologies and needs, I do not believe any government agency, federal, state, or local can choose the winners and losers – Nor should they.

  • Steve Kiene

    You are just flat out making up the statement that “every founder, funder, and support organization identifies a lack of early-stage funding as a problem”. Without even thinking about it I can name a dozen founders and funders that do not believe this.
    There is enough early stage funding in the Midwest. Just because most ideas don’t get funded is not evidence to the contrary. Have you spent any significant time in Silicon Valley trying to raise early stage capital or talked to a good cross-section of people out there who are trying? It’s just as hard if not harder out there.
    Good ideas from good entrepreneurs get funding. I have yet to see a case to the contrary. The bar to get started needs to be high. Otherwise the system is artificially propped up and will collapse on itself later on.