Forget the Valley: Investors Flock to Surprising Locales for Deals

Although many are looking optimistically at the economy, very few are confident we are completely out of the woods. With a rebound arguably under way, now is the time to set sights on investing in the future. Data released earlier this month from the National Venture Capital Association showed growth in the acquisitions and IPO market for venture-backed companies in the first quarter of 2010 -“ reaching 111 deals, an all-time quarterly high. As more companies get bought or go public, confidence in the economy will recover and venture capital firms will be more willing to invest in startups.

Silicon Valley has long been considered the Mecca of venture capital investing. It’s a region whose reputation precedes it as ripe with game changing technology, savvy entrepreneurs and ample financing to not only support companies’ rapid growth, but also deliver big returns. On the East coast, Boston and its inner 128 belt evoke the same notion. But times have changed and these cities are losing ground to regions that are becoming increasingly competitive by fostering innovation and sourcing deals in their own backyards.

The Midwest is a prime example. Long beholden to its Rust Belt roots and as of late, it’s struggling manufacturing industry, the region boasts a network of world-class universities, anchoring an intellectual capital goldmine bolstered by endowment funds and institutional investment groups. And although the Midwest venture capital industry may be smaller than its coastal counterparts, it definitely packs a punch. In fact, many are surprised to learn that the region produces one-third of the capital that goes into venture capital investment. The recent successful exits of Health Media and HandyLab are examples of the viability of the region and cause investors to take notice. And these companies are not exceptions to the rule; they’re the model.

The Midwest-”and similar underdog regions around the country-”have what it takes to win investment, and an established model from which to build. A model comprised of leveraging the billions in research from the local universities, bringing on smart local talent to translate technologies into business concepts, attracting investors from Midwest-based VCs that can provide “right-sized” funding to grow the business, and looking to larger VCs from across the U.S. that can piggyback on regional investments to catapult the business onto a national stage.

This final step is key -“ for the Midwest’s future and continued growth in innovation and entrepreneurship, as well as for more established VC regions. As the Midwest can attract coastal firms to co-invest with the smaller and fewer venture capital firms they have, two important things happen: the coastal firms can leverage the Midwest as a good hunting ground for young company deals, and the local venture capitalists get the highly capitalized partners they need to do bigger deals and to carry them forward.

The Midwest just needs to keep building momentum and keep working with the industry’s heavy hitters. They have to build companies that are on the scale and level of quality sufficient to compete for money. They have to retain talent and prove their executives are just as good, if not better, than coastal management teams. As evidenced by Health Media and HandyLab, wherever you find proven success, billions of funding for R&D and excitement among entrepreneurs -“ investment dollars are never far behind.

David Brophy is the founder of the University of Michigan Ross School of Business’ Michigan Growth Capital Symposium.

Previous articleLeadership is about Life in Society
Next articleNomination: Michigan Economic Bright Spots
Richard Blanchard
Rick is the Managing Editor of Corp! magazine. He has worked in reporting and editing roles at the Port Huron Times Herald, Lansing State Journal and The Detroit News, where he was most recently assistant business editor. A native of Michigan, Richard also worked in Washington state as a reporter, photographer and editor at the Anacortes American. He received a bachelor of arts from the University of Michigan and a master’s in accountancy from the University of Phoenix.