Midwest ZIP Codes May Provide Entrepreneurial Edge

By Judy Stringer, Crain Content Studio-Cleveland

Not so long ago, Ohio entrepreneurs were often urged by outside investors to relocate to Silicon Valley, where a well-established startup ecosystem increased the odds of getting the right leadership, talent and funding to propel an idea forward.

Today, the notion that Silicon Valley is the only place to start a company is quickly dissolving. In fact, Valley investors like John Locke say there may even be advantages to building your startup in the Midwest.

Locke, an Ashland native, is a partner at Palo Alto, Calif.-based Accel, which was the first investor in tech breakouts like Facebook, Dropbox and Slack. Locke is a board member in tech companies including SeatGeek, GoFundMe and Tenable Network Security. He was one of a handful of Silicon Valley entrepreneurs and investors who came to Cleveland Aug. 15 as part of JumpStart Inc.’s third annual Startup Scaleup event.

Locke said one big advantage local entrepreneurs have over their Silicon Valley peers is cost of living as well as a great set of local universities. Salaries, rent, taxes – companies here pay a fraction of what they would inside the Valley. In addition, employees tend to stick around longer in the Midwest.

“We’ve seen that people often have more loyalty to companies they work for than what we see in San Francisco or New York, where employees are more transient and don’t stay at companies as long,” he said.

Then there’s the wider consumer view. Many Silicon Valley startups like to focus on problems faced by people in the Bay Area, such as how to get food delivered faster. Midwestern entrepreneurs, on the other hand, are often interested in exploring problems that affect a much larger audience of “mainstream American consumers,” Locke said.

Crain Content Studio-Cleveland sat down with Locke to take a closer look at the evolving startup climate.

Is it a misconception that you can’t raise financing, or grow or scale a tech business outside of Silicon Valley?
Absolutely. Great tech companies can be built anywhere these days. We like to say at Accel that Silicon Valley is a mindset—not a place. There are numerous examples of great tech companies built in the Midwest. We were the first investors in Braintree in Chicago, which PayPal acquired for $800 million. We’re invested in Plex Software in Detroit and Hudl in Nebraska and a few other Chicago companies, like G2 Crowd. More generally, you can look at ExactTarget in Indianapolis, or CoverMyMeds in Columbus or Duo Security in Ann Arbor, all breakout tech companies on par with any Valley successes. It’s starting to be a long list of Midwest successes.

What are the challenges for entrepreneurs launching companies in Ohio?

It used to be fundraising, but the fundraising environment has really grown in the last five years thanks to JumpStart here in Cleveland, Drive Capital in Columbus and Cintrifuse in Cincinnati – there are a number of firms that are willing to take on the risk of investing in startups and are proudly supporting local companies. We’re here more and more, too.

The main challenge now is recruiting and encouraging the best talent coming out of local universities to think about joining something entrepreneurial as opposed to the larger, established companies.

But it’s happening: A number of the best local universities are starting to encourage local entrepreneurial activity. Carnegie Mellon is a great example.

Eventually, some of those leaders will be homegrown, right?

Yes. And, we are already seeing that.

I think a great example is Dan Manges. Dan was our co-founder and CTO at Braintree, and he grew up in Lexington. After the PayPal acquisition, he could have started his next company anywhere. He had a lot of investors who wanted to work with him. He decided to do it (launching the insurance startup, Root) in Columbus, which is great. I think you’ll see more Dan’s.

What are VCs looking for when making their next big bet?

We of course like large, fast-moving tech markets. And, we are trying to find outstanding entrepreneurs who have some unique tie to the problem they are solving or some unique angle that the wider world doesn’t see.

In case you missed it at Startup Scaleup, or just want a refresher, you can watch the full “Silicon Valley Money, Midwest Zip Code” session below, where Locke, Dan Manges (co-founder & CTO of Columbus-based Root and founding CTO of Braintree) and Andy Nielsen (CEO of Cincinnati-based Everything But the House) discuss how entrepreneurs can attract coastal capital without giving up their midwestern address, the opportunities and challenges of scaling a startup outside of the Valley and what top VCs really look for when making their next big bet.