Building the Midwest: Money. Liquidity. Talent?

A funny thing seems to be happening locally in the Midwest startup ecosystem. Raising money no longer seems to be the biggest challenge for early-stage companies. 

What?! Crazy, right?

It’s a big change from what I remember five years ago. Back then, if you wanted to get funding for your venture, you essentially could call on the 10-12 firms in the Midwest—or, if you were lucky, your rich uncle who printed cash with his manufacturing company downstate. That was about it. 

Tech investors were hard to come by in the Midwest, and as a mentor of mine once said:

“Everyone who invests in private deals, locally, has hit a winner in real estate. But very few people in this state or region have hit a tech deal. There is no 'locker room buzz' with tech.” 

Convincing an “angel” or private investor to speculate on a startup, at a decent valuation, was insanely difficult.

We Have Money Now. 

Now in the region, the larger, more established institutional players seem to be on their second or third larger fund, and everyone and their mothers seem to be starting a micro-venture fund. 

We have more angel investors than ever before and growing. 

For the first time, coastal funds are coming to the Midwest to uncover the next Trunk Club, Everything But the House, Braintree, ExactTarget, GrubHub, Cleversafe, Assurex, HomeChef, Outcome Health, and more. 

Technology entrepreneurship, once outcasted as the “hipster” of employment, seems to be the sexiest path to a fulfilling, fast-paced career, knowledge and personal economic gain.

The PDF attached (pulled from Illinois Venture Capital Association) is a pretty strong indicator of early stage cash that’s been deployed and how we’re growing.

Raising capital is still difficult, but for the first time, we can rely on more than just 10 institutions and a rich uncle to help fund the future of local innovation. And that’s a beautiful thing. 

We’re Building Towards Liquidity.

Another piece of the puzzle we’ve sorely lacked over many years in the Midwest (and venture as a category) is liquidity.  

Simply put: if you can buy and sell stock, why invest in an asset class that gets parked for a decade-plus before returning a dollar? 

Much of the first cohort of local startups are still yet to return capital since they haven’t been able to grow large enough for an ideal acquisition or to take a look at the public markets. 

That's definitely frustrating for early risk-takers. But achieving liquidity is a problem that everyone faces with this asset class, and it’s not just specific to the Midwest. 

The difference is, if you look towards the coasts, there’s a higher density of large tech companies with massive balance sheets that can buy early stage companies at will to acquire talent. This helps get money back into the ecosystem and in investors’ pockets.

Startups solving problems that are interesting to large companies in a tight geographic area, generally, have a larger opportunity to get plucked off in an acquisition. Why? Well - it’s easier for a head of corporate development to build a relationship with innovation around the corner than across the country.

The good news is that there are three current trends that should impact this positively for the Midwest in the next decade:

1. We’re starting to become more mature as an ecosystem with 5 to 10-year-old startups growing to the point of worthwhile acquisition. You see this already with companies like ExactTarget, Braintree, Assurex, Cleversafe, Trunk Club, Grubhub and much more.
2. Large private and public companies are taking notice on how digital - as a platform and a business model - is disrupting their existing way of life. This is forcing large enterprise to jump into the “digital innovation” game, by either funding, partnering, building or acquiring technology companies. P&G, Caterpillar, Blue Cross Blue Shield and many large companies in the region are starting their own venture capabilities to expedite innovation. More on this topic by my good friend Dave Knox, in his book “Predicting the Turn.”
3. The trend of an increase in the available capital should help accelerate companies at a faster rate than previously available, allowing them to grow quickly and achieve a size/scale where venture capitalists would feel comfortable pursuing an exit at a meaningful multiple. 

The hope is that virgin tech investors should start “hitting” deals for the first time, returning more cash, creating more buzz, and ultimately creating a better ecosystem for innovation and startups alike.

But the Missing Piece is… Talent.

About eight months ago I had a great conversation with Robert Hatta, a partner responsible for talent at Drive Capital, one of the largest venture funds in the Midwest.

He mentioned he spends a majority of his time canvassing the coasts and recruiting talent that has a track record of scaling large organizations to the point of exit - in an effort to bring them to the Midwest. 

And therein lies the missing piece and the key to unlocking how our ecosystem takes off: Talent. 

At Hunt Club, we think about this challenge all the time as we help some of the most innovative companies in the world land their next suite of leaders. Three things need to happen for us to create a thriving, high-growth ecosystem:

1. We need to guide the next class of founders to quicker traction. We need to make sure they’re encouraged to take these risks and have support when they fail, so they can continue to get the “at-bats” needed to get a big hit.
2. We need to start getting people to the Midwest that have “been there, done that.” Right now an unfortunate trend line is we’re recycling a lot of the same talent across multiple startups that have yet to create a large, outsized outcome. Scaling a hyper growth company is not for the faint of heart, and we need proven winners who can come in and do it over and over again in sales, marketing, operations, technology, and human capital. We need to actively pipeline this talent in other markets, and show them opportunities that fit exactly to what they’re looking for locally in order to draw them to the Midwest.
3. We need to teach those who get to traction how to recruit and leverage talent so they can build teams to take their business to the next level. The challenge with hiring amazing startup talent, and we see this ALL the time as we hire executives to managers via Hunt Club, is startup founders are busy handling everything from sales to the product to marketing, that they don't put the proper priority on talent acquisition and candidate experience. If you want to convince a world class leader to come to your company, move their family, and take a 20-50% haircut in compensation for some paper equity that may never materialize, you need to create an amazing experience throughout the process that builds trust at each touch point.

We’re Close. 

With the increase of capital and liquidity on the horizon, the challenge we need to solve for next if we REALLY want to expedite the local growth curve is getting world class people to the Midwest to help build the future. We’re going to do our part every day at Hunt Club to continue to invest locally in helping build the creative class of the future.