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A doctor in Boston touches a screen to assess a patient’s infection risk. A banker in New York wires $1 million to London with a few keystrokes. A student in San Francisco cracks her first quadratic equation on a tablet.
And they all did it with software from … Wisconsin.
Most people are surprised when we mention these examples of high tech from the Heartland, because the story of American entrepreneurship has shifted overwhelmingly to the coastal tech hotbeds in California, Massachusetts, and New York.
But Wisconsin — home to banking software giant Fiserv, hospital electronic medical record innovator Epic Systems, and academic software leader Renaissance Learning — reminds us that the Heartland of our country has a thriving entrepreneurial culture stretching back generations.
Those of us who have been working with these companies for 25 years know what’s driving these founders and how they’re building their companies, oftentimes with little to no institutional capital until a very late stage.
In fact, the disparity in venture funding is enormous. The 12 states that comprise the American Midwest, as defined by the U.S. Census, have a combined population of close to 68 million people — not much different than California, Massachusetts, and New York, which collectively have about 66 million residents. Yet despite population parity, the Midwest captured just 5 percent of the $69.1 billion of venture capital deployed throughout the U.S. in 2016, according to the National Venture Capital Association 2017 Yearbook. The three leading tech states claimed 74 percent.
Nevertheless, a steady stream of successful IPOs proves that the Heartland is forming companies without a heavy reliance on venture capital. The flow of public offerings includes Workiva (Iowa), SPS Commerce (Minnesota), Paycom (Oklahoma), BATS Global Markets (Kansas), Paylocity (Illinois), ExactTarget (Indiana), Grubhub (Illinois), and Vantiv (Ohio).
The drumbeat of significant strategic M&A exits is just as strong. Consider Oracle’s purchase of TOA Technologies (Ohio), IBM acquiring Truven Health (Michigan), TD buying Scottrade (Missouri), IAC’s purchase of Angie’s List (Indiana), and McKesson’s acquisition of CoverMyMeds (Ohio).
People in Silicon Valley like to talk about the passion of founders, and at TCV we’ve seen plenty of it. After all, TCV itself was founded in the Valley and has backed California-based companies like Airbnb, Electronic Arts, FinancialForce, Netflix, Facebook, LinkedIn, Genesys, Dollar Shave Club, OSIsoft, and Redback Networks, to name a few.
That said, the determination of Midwest-based founders, who have literally bet their own homes on their companies, is a kind of commitment you don’t see every day. The people who work for that entrepreneur are committed, too. They often work on engineering and product development challenges that take years to solve. They don’t quit as often and go somewhere else for two main reasons: First, the number of tech employment choices is far narrower compared to Silicon Valley, and second, the character of the Midwest includes enduring loyalty to your place and your people.
Tech companies in the Heartland often win their first sales from large, well-established companies in their own communities. There are about 150 Fortune 1000 companies headquartered in the Midwest (exceeding the number in California, Massachusetts, and New York). These are demanding customers, like any Fortune 1000 client would be. When you depend on the revenue from such clients to fund your operations, there’s only one level of value and customer service you can offer: “outstanding.”
Contrast this with the tech hotbeds, where startups can gain early traction by selling to other tech companies anywhere in the country. This is typically a buyer set that’s not just open to vendor experimentation, but prone to it. They’re also likely to have their own hiccups in the release schedule, bugs in the code, or glitches in the supply chain, so they are more willing to roll with the same from suppliers. Not so typical in the Midwest.
To be clear, there are some distinct advantages of being a Heartland company. Costs are indeed lower, particularly for facilities and salaries. This is one reason why great companies in the Midwest can start with significantly less funding, get cash flow positive early, and build significant businesses until it’s time for late-stage growth capital to accelerate growth or ahead of an IPO or later liquidity event.
Talent in the Midwest is also plentiful. There are outstanding universities producing top-notch graduates. The entrepreneurs we have invested in tell us that a significant portion of these young people want to do world-class work in STEM and computer science at great firms, but they also want to stay close to their families. This dynamic helps to create an employer’s market for Midwestern tech firms, so they can count on recruiting among the top 1 percent to 5 percent of local graduates. Compare that with Stanford or MIT, where countless companies are fighting over the top 20 percent to 30 percent of graduates.
The same goes for proven talent. The Midwest is home to powerhouse companies including UnitedHealth, 3M, Principal Financial, GM, Express Scripts, Medtronic, US Bancorp, Cerner, Honeywell, Centene, Procter & Gamble, and Best Buy. These companies are stocked with savvy managers and legions of well-trained employees across a wide range of functions and roles. Tech companies in these regions can lure people from these behemoth talent pools because they offer a clearly differentiated opportunity for wealth creation, generally a faster pace of work, and a chance to help shape the future.
Perhaps the most overlooked advantage is that Midwestern entrepreneurs are local heroes. They are winning a game that is clearly stacked in the coasts’ favor. They are creating high-value jobs in a region hungry for them. They are proving that the Heartland way is not slow and stodgy. Instead, it’s patient and productive. And when they do bring in growth-stage venture capital, it’s to scale their company into durable, long-term market leaders that create wealth and opportunities for employees and shareholders alike. We have been part of this equation several times, and often it feels like we’re the lucky ones, not the other way around.
When you look at it from this perspective, you can understand why Heartland entrepreneurs never left Kansas City for Boston or Cleveland for Cupertino. They are vital to their communities in a myriad of ways. They’re central to America’s technology leadership, and they show us that the high-tech industry can look a lot more like the rest of the country.
Tim McAdam and Nari Ansari are, respectively, general partner and principal at TCV, a VC firm that invests in growth-stage private and public companies in the technology industry.
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