Stuart Veale, managing partner at Beringea, a transatlantic venture capital investor, on why tech entrepreneurs should be looking at the opportunities the Midwest offers.
We're often asked why we have an office in Michigan – if you're going to have a footprint in the state, surely you're making your mark in Silicon Valley or New York?
We focus on capturing value – this means we often end up taking quite a contrarian view of investing and uncovering value where others may not have found it. The Midwest is a case in point – it's a great entry point for UK businesses looking to expand into the US, but a remarkably undervalued tech cluster.
It's certainly true that investment in the Midwest remains out of step with the Valley and the East Coast. The Michigan Venture Capital Association found that 68 startups received $179 million in venture capital investment in 2017, up 100% over the past five years but barely a rounding error compared to the $4.2 billion invested in New York tech companies only in the third quarter of 2017.
And yet, the Midwest has all the ingredients to foster an influential tech hub and become an extremely valuable landing spot for UK tech companies – with three ingredients vital to any scaling business: customers, talent and infrastructure .
First, traditional stereotypes of Midwest cities have been especially misleading when thinking about the business landscape. While the economic downturn may have dented some of the region's long-standing institutions, it remains one of America's corporate heartlands and a rich network of potential customers for tech companies.
Far from the glitzy titans of the Valley or the financial behemoths of New York, the Midwest is the engine room that powers the United States – home to axle manufacturers, auto giants and aerospace companies. St. Louis is home to ten Fortune 500 companies, Detroit also has ten, and the greater Chicago area is home to 34 businesses included in this year's ranking. These corporate powerhouses would be ideal hunting grounds for any tech business organization looking for big clients with big budgets. Of course, this may not be for everyone – the coasts offer access to their own corporate titans, but we'd argue that the Midwest represents a reliable choice for any business.
If you needed convincing, look no further than the disparity in cost and pain of finding ownership and talent in the Valley compared to Illinois, Ohio or Michigan.
For starters, the median home price in Palo Alto has now reached an impressive $2.75 million, while an office in San Francisco will set you back more than $16,200 a year, according to real estate firm Cushman & Wakefield.
In contrast, according to online real estate website Zillow, the median home price in Chicago is currently just $214,000. The average annual office rental cost in the city is also relatively cheap, at $38 per square foot – below Los Angeles, Manhattan and, of course, San Francisco.
Talent in the Valley is also only available at a hugely inflated price. Driven by the high cost of living, competition from tech giants and the density of startups looking to hire, the average salary for a software engineer in the Valley has now reached $112,000.
In contrast, the density of skilled workers in the Midwest is an underrated strength. Old manufacturing cities like Detroit have lost none of their influence as technical centers of excellence, and the post-recession boom in engineering services—about 14,000 new jobs since 2006—gives Detroit a concentration of engineers three times the national average. . While one place may work in the automotive industry, the specialized tech talent is definitely there.
The talent pipeline is also strong. The University of Michigan was ranked number 21 in this year's Times Higher Education World Ranking, which means that, along with 92 other colleges and universities in the state, there is a thriving higher education system in the region. This pipeline is further strengthened by the lack of competition from companies or other startups to recruit graduates compared to the West and East coasts.
The savings businesses can make in real estate and talent have a tangible impact on the health and growth of technology companies based in the Midwest. Analysis from Square 1 Bank showed that SaaS companies in the Valley and New York burn nearly twice as much cash to achieve the same revenue as businesses based in the Midwest.
Reid Hoffman, the co-founder of LinkedIn, once said, “Silicon Valley is a mindset, not a location.” In his view, the business approach to creating social networks was far more important than the geographic space in which technology companies reside.
Adopting this mindset to take advantage of the Midwest and avoid the pain points of scaling in the Valley may be the solution to starting your transatlantic journey.
