I recently attended a great conference for venture investors and managers where the main topic was the importance of investing in capital-starved or emerging markets, thereby garnering favorable terms amid low competition for the best deals. Around the room, West Coast managers nodded their heads in agreement…only to return to their Sand Hill Road offices and continue investing in the most competitive venture capital market in the country. And the limited partners in attendance? Many privately admitted they agreed with the premise of deal sourcing in emerging markets but in practice keep their money in the traditional coastal players they’ve always backed.
So is the idea of investing in capital-poor markets actually actionable? Many international emerging markets require investors to hedge currency risks, political landmines and the challenges of opening up Western markets once the product or service takes off. Fortunately, there’s a region with many characteristics of an emerging market but that trades in the U.S. dollar and is openly accessible to the world’s largest consumer markets—the United States’ own Midwest.
I run a venture capital firm in Michigan, a state that has the resources, heritage and fundamentals to prosper in the new economy but is currently limited by its lack of capital. According to CNBC’s 2011 “America’s Top States for Business” Rankings, Michigan is among the top ten most innovative and technologically advanced states yet ranks a lowly 31st in “access to capital”, a startling disparity compared to other top technology and innovation states:
Our Midwest neighbor states are in similar but less drastic predicaments, making the entire region prime for venture investors and limited partners looking for opportunity. On average, Midwest venture capital investments yield a premium over investments in the top venture markets; Midwest companies are more capital efficient as they do not need as much capital to grow as companies operating in other venture markets:
The Midwest has the infrastructure and workforce to compete in new economy sectors, such as clean technology, information technology, life sciences/health care and advanced manufacturing. Now we need venture limited partners and managers to recognize the opportunity. Certainly a few firms are already profiting: the biggest Internet IPOs of the past three months will both be Midwest-based–Angie’s List of Indianapolis and Groupon of Chicago. Will the rest of my friends from the coasts, both limited partners and venture investors, do more than just nod heads at a conference when thinking about the Midwest as an “emerging market” and join us here?
Charles Rothstein is the senior managing director and co-founder of Detroit-based Beringea. The opinions expressed here are entirely his own.