The last two years changed a lot about business, particularly in the tech and startup space. In the Midwest, things are changing even more rapidly. We caught up with just a few of many Midwest tech leaders based in Michigan to ask them for their insights on the emerging trends in Midwest tech.
A few highlights to look forward to: Melting borders, continued remote work (and its benefits), investment from the coasts, and developing industries in several tech-related verticals. Midwest tech is accelerating its growth with rapidly increased VC funding, new tech hubs emerging, and industries taking new shape.
Here’s what our panel of experts, from startup leaders to investors in Midwest tech, think is important about what’s happening right now.
More Funding Flows into the Midwest
Ben Bernstein is principal at ID Ventures, a VC firm out of Detroit. “There is a lot of capital out there and a lot of new funds,” he tells Purpose Jobs. “It feels like there is a new focus on the middle of the country as investors look away from the coasts for deal flow and more attractive valuations.”
This trend was mentioned by all our experts: funding is pouring into Midwest tech hubs. This is changing how VCs invest in startups, and changing how Midwest tech CEOs run their businesses and scale.
Ara Topouzian is Executive Director of the Michigan Venture Capital Association, and a veteran head of regional chambers of commerce. He’s seen all the money pouring into Michigan in the last few years, and had a front-row seat to the deals going to startups. He says that the Midwest’s reputation is changing among investors.
“The startup culture in Michigan continues to be robust. We are seeing continued efforts in funding startups across the different seed/investing stages as well as industries. As we enter the second full year of the pandemic, it is evident that the investor community has the ability to fundraise as well: we have seen new funds deploying investment throughout Michigan.”
This goes beyond Michigan, of course. Chicago is now minting billion-dollar-valued tech startups at the rate of at least one per month as of 2021. And Columbus has an exploding insurtech and healthtech scene, thanks to the work of Drive Capital, that is attracting international companies to relocate their headquarters in the Midwest city.
Mike Psarouthakis is Director of Ventures at Innovation Partnerships, formerly the Office of TechTransfer at the University of Michigan, which helps inventions discovered by staff and researchers at the University of Michigan get out into the world for commercialization. He’s also Managing Director of the Accelerate Blue Fund. In Ann Arbor, he’s seeing a dramatic rise in startups thanks to the research funding that flows through the University of Michigan.
“At the University of Michigan we have the great fortune to see technology generated and commercialized in practically every vertical given U-M's ~$1.6 billion annual research budget, the largest of any public university in the country ten years running,” Psarouthakis says.
Remote Work is the New Normal
The pandemic forced a reckoning on how many jobs really needed to be done in person, including those that traditionally require face-to-face meetings for collaboration or funding deals. Whereas before it was unthinkable to invest in someone’s startup you had never met, now VC calls are often done mostly on Zoom. And tech companies are competing for talent across the country and the globe.
Ben Bernstein of ID Ventures thinks this is a good thing: “The shift to remote work has likely benefited our region. We have seen several founders in our pipeline move back to Michigan from the Bay Area, New York, Los Angeles, Chicago, etc. The lower cost of living and ability to build out a distributed team lifts up places like Michigan to compete nationally.”
Paul Henchey is President of the New Enterprise Forum, a pitch competition and startup founder mentorship program in the Midwest. He says remote work has changed not only work setups but investing. “The last year has had some positive effects in that the widespread adoption of Zoom and other tools for remote meeting and remote working has made it easier for Michigan-based companies to collaborate with investors and talented staff from across the country and around the world.”
Alison Todak is co-founder of Shine & Rise, a networking service founded in Ann Arbor for women in tech, and Head of Platform at Plymouth Growth, a Midwest investing firm that focuses on B2B software and tech-enabled services startups. “The region should lean into the ‘work from anywhere’ mentality and push for relocation to the Midwest,” Todak says. “The affordability and opportunity the Midwest offers is a key differentiator that many other regions cannot compete with.”
Jim Simpson is CEO of Blumira, one of several cybersecurity startups featuring alum of the Duo Security exit in Ann Arbor. He says remote work is changing how startups scale in the Midwest: “With the pervasiveness of remote work in 2021, you don’t need to create a startup in one of the traditional tech hotspots. Talent is available, even if your headquarters aren’t in Silicon Valley – and more recently, talent is out and about in the world. Ann Arbor has an incredibly strong talent pool, thanks to the University of Michigan, and has spurred multiple cybersecurity startups including Censys and Arbor Networks (acquired by Netscout). In 2022, we expect those growth trends to continue.”
Borders Between Coasts and the Midwest Are Melting
The Midwest is historically seen as a manufacturing capital, and has been seen for years as a flyover state by tech. This attitude is shifting, largely because of the cost and standard of living difference between the Midwest and coastal cities, and because a massive shift in lifestyle priorities is happening due to the COVID-19 pandemic.
Skip Simms is Senior Vice President of Ann Arbor SPARK, a business support organization that helped put Ann Arbor on the map as a Midwest tech hub. He’s also an angel investor with the Michigan Angel Fund. “The Midwest is getting recognized as a good place to start and grow a tech company,” Simms says. “The whole working from home new world is allowing companies, big and small, to build their business without having to go through the relocation hassle for employees. The Midwest talent pool has been rediscovered, so companies are willing to stay here, grow here, thrive here. Investors don't have to fly over anymore."
Alison Todak of Shine & Rise and Plymouth Growth says that 2021 changed how the Midwest and the coasts do business. “Borders have melted away, opening up opportunities for companies that are headquartered in the Midwest. With the ability to recruit remote workers and draw in talent globally, investors can no longer question the location of the founding team,” Alison said.
This was quite a problem in the years leading up to 2021. Ara Topouzian of the MVCA says that the Midwest is no longer seen as unworkable for new business: “I often tell people that Michigan is no longer a flyover state, and, for that matter, neither is the Midwest. When I speak to out-of-state investors, they like Michigan for reasonable valuations and an agreeable climate for doing deals.”
That’s because companies in the Midwest value their companies in a more conservative way, and they have more runway to make their companies succeed with the lower cost of doing business here.
Ben Bernstein of ID Ventures sees the capital and the people returning to the Midwest as full of potential for business: “I think all of the capital circling Midwest startups is exciting! I’ve seen a true collaborative effort from investors to help each other and the ecosystem in terms of building deal flow and providing exposure for each other’s portfolio companies.”
Jim Simpson of Blumira Security says that the growth of a security startup ecosystem in Ann Arbor and Detroit has had a huge impact on the region’s growth as a recognized tech hub: “We’re seeing more and more cybersecurity startups crop up in the Midwest. I’m proud to say that Michigan is leading the charge with the fastest growing venture capital investment rate in the United States. A lot of that has to do with the past success of Michigan-based startups like Duo Security (acquired by Cisco for $2.35 billion) and StockX (valued at $3.8 billion). Many alumni from these successful companies have stayed in the area to join another local startup, to create a new company or to reinvest in our ecosystem through mentorship and angel investments.”
But, Simpson, cautions, regional partnerships are key to solidifying the Midwest as a conglomerate hub of tech industries, rather than small individual tech hubs for particular industries:
“In order to continue solidifying ourselves as a tech hub worthy of attracting the nation’s best talent, we have to continue to build bridges between Midwestern cities. For example, it would behoove Ann Arbor and Detroit to band together as a single ecosystem. These two cities are closer together than San Francisco and San Jose, which most of us think of as just Silicon Valley. As we become more united within Southeast Michigan and even build bridges with cities like Columbus, Chicago, and Madison, we’ll reach a more critical mass and have a greater gravitational pull.”
Everyone Struggles To Hire Talent
As companies hire remotely and remove geographical barriers for candidates, finding top talent has now become a global competition.
Jim Simpson says every tech company is struggling to fill all their positions: “There’s a double-edged sword component to the remote work boom; more opportunities for employees create challenges for employers finding talent. Though Michigan has an abundant talent pool, the demand across the board for top talent has never been higher — especially for engineering and development roles — and potential candidates have a lot of options.”
Simpson adds that this is a culture and quality of life issue for employees: “It’s exciting to see my home state grow into a new hotspot for such an emerging industry. I’m also excited to see more companies do the right thing for their employees. The focus isn’t just about the bottom line anymore, it’s about keeping employees happy and engaged.”
Skip Simms says that remote work is also changing the equation for how businesses value Midwest talent.
“The Midwest emerging as a tech hub is similar to how the pandemic has accelerated some companies’ businesses,” he says. “Having cut travel time significantly has allowed more meetings with people located anywhere in the world from your laptop. It's not ideal, but it has escalated entrepreneurs’ ability to connect with more customers and investors. That in turn allowed Midwest companies to have more face time with all stakeholders and thus raise awareness of the awesome talent here, not to mention great products and services.”
Where Do We Go From Here?
The Midwest is on track to grow in several tech industries on a much larger scale than seen before in history. But there are still some big opportunities in Michigan and the Midwest region.
Paul Henchey says he’s excited about the diversity of industries where he’s seeing growth in the Midwest: “For me, the most exciting thing about tech in our region is the wide variety of different industries that are active and thriving. When people think about Michigan, automotive and mobility technology may come to mind first but in our work with startups we see a very wide range of solutions being developed here – medical devices, information security, healthcare IT, consumer products, marketing technologies and SaaS solutions enabling every type of business.”
Despite record-breaking investments in Midwest companies by Midwest VCs, there’s still a bit of conservatism among Midwest VCs. They still have limited resources, which often are funneled toward those startups with the highest income potential in the shortest length of time.
“Access to capital remains a challenge for early stage businesses,” adds Paul Henchey. “Organizations like TechTown, Invest Detroit and Ann Arbor SPARK do a good job of supporting entrepreneurs in the very early stages of business formation, but the venture capital firms and angel investors based here still seem to be more risk averse compared to their peers on the coasts. There seems to be a reluctance to invest in companies that are years away from making significant revenue, even if that potential market is very large.”
For Mike Psarouthakis, it’s an awareness issue: “I believe one of the largest challenges our region faces right now is perception, ours as well as others. We have all the assets to be a recognized and highly successful worldwide tech hub. World-class research institutions… rapidly evolving high-demand industries… the awareness that if we want those industries to thrive and grow this country can't remain overly dependent on foreign sources of hard tech, risk and growth capital, and embracing innovative changes on how people work… all of which will make talent stick or move to the region. It is not a coincidence that California has one of the largest and most advanced entrepreneurial work forces in the world and generally does not allow companies to use non-compete agreements for most employees.”
Skip Simms also reminds us that the Midwest has historically been a strong location for global companies, not just American ones. “The U.S. is still where global companies want a presence,” he reminds us. “That's because we still have the world's strongest economy and a free enterprise system. We need to keep reminding everyone the Midwest has the culture and workforce needed for success. And don't forget we have a great quality of life thanks to lower overhead for companies and families. Embrace the clean water and four seasons nature has provided us.”
Simms says that the Midwest has been challenging for some tech companies, but spurred others on to capitalize on changing trends in business and automation.
“Some companies have even thrived and soared past their growth projections as a result of the new environment we are all working in. Investors have gotten comfortable with making new investments in entrepreneurs they have only met via Zoom. VCs set another record in 2021 in dollars invested, albeit driven primarily by a relatively small number of unicorns. But I think we may see the same is true of angel investment when that data is gathered. There doesn't appear to be any indication that this trend won't continue in 2022,” Simms says.