Breaking Down the Mighty Middle Report
The acceleration of startup and venture activity outside the coasts
Introduction
Don Valentine, founder of Sequoia Capital and a father of the American venture capital industry once said:
“We make enough mistakes on investments we make here
(in Silicon Valley), that we’re not comfortable we can (be successful)
3,000 miles away, never mind 8,000 miles away.”
From the inception of Sequoia, Don Valentine was convinced that the only way for the most prominent venture capital firm in American history to be successful was to only invest within the confines of Silicon Valley.
To be fair, why should they invest outside of the valley? The valley had already established a tech ecosystem brought about by the invention of the semiconductor that would eventually grow into what we know it as today. It had access to some of the best technical talent in the world, which was cultivated by local institutions like Stanford and UC Berkley. Silicon Valley was, and still is, the center of technological innovation for the world. In the last 60+ years, if you wanted to work for or build a technology company, common sense tells you the best place to build it is in Silicon Valley.
Then the internet happened. Knowledge, capital, and other resources could be shared and distributed with few clicks of a button. States like Colorado, Texas, and New York then saw themselves developing their own tech ecosystems. More states followed, and although many state’s startup ecosystems are still very much behind Silicon Valley in terms of talent, capital, etc., we have begun to see more and more that you no longer have to be located in the confines of Silicon Valley to be a successful technology company.
The Mighty Middle
A couple of weeks ago, Crunchbase and Dundee Capital (a venture firm based in Omaha, Nebraska) released their first edition of the Mighty Middle Report.
The report covers venture capital and startup activity in 25 states between the coasts.
It’s an excellent read and if you’re an entrepreneur, startup employee, investor, or work within a tech ecosystem in the middle of the country, I would highly recommend reading the report front to back.
If you don’t have the time, however, I have condensed the report into some key takeaways and have added some data of my own findings.
Follow the Money
Venture dollars invested in the mighty middle hit an all-time high in 2019, with $20.2 billion being deployed. In 2010, only $5.8 billion was invested -- that's a compounded annual growth rate of 13%.
Texas, Colorado, and Illinois dominated venture capital activity in the mighty middle over the past decade. Combined, venture activity in these states totaled close to $51 billion. That accounts for 55% of total venture dollars invested in the mighty middle alone, which collectively raised $92.6 billion. Texas and Colorado are home to some of the most notable VC's in the world: Austin Ventures (Austin) and Foundry Group (Boulder).
For those of us based in the Southeast -- the states of Alabama, Tennessee, Mississippi, Arkansas, and Louisiana -- collectively received $4.2 billion in venture dollars. $3.8 billion of those venture dollars were invested in Tennessee with a total of $689 million being invested in Smile Direct Club and Campaign Monitor.
How has COVID impacted the mighty middle? In Q1 of 2020, there was $2.5 billion invested, which is down from Q1 from the year prior to when $3.8 billion was invested. This is a decrease of 34%.
Stages
The vast majority of venture dollars being deployed in the mighty middle, year-over-year, are going to late-stage rounds (Round’s C, D, etc.).
While the above statement is true, the number of seed-stage deals grew by 106% in the last decade, going from only $550 million invested to $1.4 billion. The average seed round size for the past decade in the Mighty Middle was $849,000 whereas on the coast the number was $1.16 million. In 2019, the average seed round size in the mighty middle was $1.2 million, just behind the coast’s average of $1.66 million.
What is driving seed rounds?
Accelerators, nonprofits, and government organizations are the three biggest conduits for a successful seed funding environment in the mighty middle. As an Ohio native, it was awesome to see the report highlight just how good of a job Ohio does at deploying seed-stage capital within the state through city-focused public-private partnerships like CincyTech (Cincinnati), JumpStart (Cleveland), and Rev1Ventures (Columbus) which in turn all are apart of the state-run Ohio Third Frontier Program.
Here’s an example of how well Ohio does at investing in its early-stage startup ecosystem: Cinytech is a VC based in Cincinnati focused on life sciences and digital businesses. When Cincytech raised a new fund back in late 2015, it didn’t have to go very far to raise the capital, it raised money from local high-net-worth individuals and grants from corporations such as Kroger. When they hit their goal of $20 million raised, Ohio Third Frontier added another $10 million to the fund to invest in founders.
It’s a great example of how the city and state can work together in order to support early-stage businesses.
When cities and states work together, early-stage businesses have a better chance of success.
Now that I am based in Birmingham, AL, this something that I can say we lack in the Southeast outside of Tennessee and excluding Georgia.
In Birmingham, we’re fortunate to have Birmingham Bound, Innovation Depot, TechStars Energy Accelerator, Velocity Accelerator, as well as the Alabama Futures Fund.
The state of Alabama doesn’t have an Ohio Third Frontier Fund, but if it did, just imagine how it could collaborate with the aforementioned organizations to better support early-stage entrepreneurs across the state.
Alabama Launchpad is one organization I believe can be reorganized to mirror the Ohio Third Frontier Fund. Instead of hosting state-wide pitch competitions, the money could be put directly into the hands of investors like Alabama Future’s Fund, TechStars, and Velocity. Not only does this allow for capital to be invested in great early-stage founders, but it also improves collaboration between the state and cities.
Funding News in the Southeast
Sonar: The Atlanta DevOps platform allows teams to better manage their tech stack. they just raised $1.6 million from David Sack’s (Founder of Yammer and member of the infamous PayPal Mafia) Craft Ventures and others.
Startups hiring in Birmingham
Quantalytix: The Birmingham based fintech offers a loan management platform for lenders. They’re looking for a Mid-to-Senior .NET developer. If you’re interested, let me know, and I will intro you to the founder!
Job Description can be found here
Happy learning and make sure to share and comment!
-Sean