The Simple Trick to Winning Funding From Midwestern VCs Warning: There are funding quirks in flyover country.
By Sam Hogg
This story appears in the September 2016 issue of Entrepreneur. Subscribe »
Say you're a shiny startup launching in an emerging entrepreneurial hub -- perhaps in Detroit, Chicago or Cleveland. Congrats! You have access to great research institutions, an educated workforce and an astoundingly low cost of living and wages relative to the coasts. But when you look for capital, you'll face the harsh reality of launching a business in the Midwest.
There's no way to sugarcoat this: VCs on the coasts aren't usually interested in you. There's an unfortunate history of many Midwest-based startups raising a seed round of funding, then running out of money before generating sustainable revenue or lining up a Series A round.
Related: 8 Things You Need to Know About Raising Venture Capital
That leaves my Midwest VC colleagues and I as your most likely option. (I'm in Michigan.) But before you pitch us, you must understand that we operate differently than coastal VCs. For one, we don't have as much money to invest. So instead of one or two firms backing that Series A round, you may find yourself working with several firms in the region. We don't necessarily like doing this, but we'd rather own a smaller slice of the next Facebook-like success than provide insufficient funding to get there. So we play nice with each other to get the deal done -- and you'll need to be prepared to answer to many investors.
Still, even with our pooled investments, you usually won't see as high a valuation as you would on the coasts due to the lack of competition among us. PitchBook, the trade journal for equity investors, estimates that in 2015, the median Series A valuation in the Midwest was nearly 50 percent lower than the national average. That's a lot less money to dole out to co-founders. It means you'll likely need to operate with fewer dollars and have a plan to become cash-flow positive sooner rather than later. Midwest roads may be yawning, but our startups' runways are short.
Related: 4 Reasons to Stand by Your Midwest Startup Location
Can you deal with multiple firms, tougher terms and more pressure to produce? If so, there's a prize waiting for you at the end: The same PitchBook study showed that the median exit size of successful venture-backed Midwest deals was nearly identical to the national average -- about $60 million. That's good news for founders who can make it work.
