In doing the research for the Silicon Prairie Annual Report, slated for a November release, Chapman and Company noticed an interesting trend when comparing venture activity (as identified in Pitchbook) in the Midwest.
As can be seen in the below graph (which includes Midwest communities that received venture investment in 2017), the order of investment generally follows population. This is not surprising.
There are some unusual underperformances––Omaha, Oklahoma City, and Wichita are examples––and there are some over-performances––Madison, Champaign and Lincoln all appear to overperform based on where they appear in this list.
Thanks to our sponsor
However, there are really two dominant themes that emerged as we began to manipulate the data and look into it more deeply.
First, the three largest communities in the Midwest clearly dominate the investment of the region. Chicago, Minneapolis, and St. Louis both have the most deals and significantly overperform their expected value. These communities each had more than $500 millio dollars in investment, but they also overperformed the expectations of what a community of their size should produce based on the rest of the region.
In particular, Minneapolis had a particularly impressive 2017 with multiple large deals––particularly in healthcare technology and healthcare software. As such, the region overall performed admirably with over $3 billion in investment activity during 2017, and indications for 2018 suggest another great Midwestern year for investment.
The second big takeaway from the data is that the next six cities from a population perspective, dramatically underperform their expected values. In particular, Kansas City surprised us with the relative lack of dollars invested in the ecosystem. Kansas City did have nearly $100 million in investment, but the expectation was nearly $200 million. So, it is not that there is no investment or company creation taking place. Instead, it is that these middle-sized communities are underperforming versus the expected value that the population would suggest.
This, at some level, is a list that looked differently five years ago. During that time, Chicago and St. Louis had not built as robust an ecosystem. Thus, the expected value based on similarly situated Midwest cities was lower. But now with their success, the rest of the region is now underperforming versus the data.
The third big takeaway is the success of college towns as magnets for venture capital dollars. The significant over-production of companies that create venture investment is noteworthy. The top five are Champaign (University of Illinois), Madison (University of Wisconsin), Lincoln (University of Nebraska), Columbia (University of Missouri, and Iowa City (University of Iowa).
Interestingly, these communities have significant dollars tied to venture investing, but in many instances, the start-up companies are not, in fact, university spin-outs. Thus, the correlation may have more to do with other factors regarding these towns such as transience of population, alumni networks in richer venture capital environments, access to significant, well-trained human capital, etc.
However, it may also be that being in a university town, even if the investment or innovation creation is not causally related to the university – is still tied to the university in some way.
In conclusion, venture deals are a good metric for measuring venture activity. It is one measurement of an ecosystem, but not the only measurement. It can be distortive when the population is not considered. And, it often reveals other trends such as success of venture raising in college towns compared to those towns population. In short, this is a better way to view venture capital in your community. Using some mechanism (in this case the Midwest’s similarly situated communities) creates the ability to compare cities to their normal selves––not other communities but also not simply raw numbers.
