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Taking your tech business stateside? The Midwest has an edge

midwest tech

Stuart Veale, managing partner at Beringea, a transatlantic venture capital investor, on why tech entrepreneurs should consider the opportunities afforded by the Midwest.

We often get asked why we have an office in Michigan – if you are going to have a footprint stateside, surely you make your mark in Silicon Valley or New York?

We focus on harnessing value – this means that we often end up taking a fairly contrarian view on investing and uncovering value where others may not have found it. The Midwest is a prime example – it is an exceptional entry point for British businesses seeking to expand into the US but a remarkably under-appreciated technology cluster.

It is certainly true that investment in the Midwest remains off the pace of the Valley and the East Coast. The Michigan Venture Capital Association found 68 startups received $179m of venture capital investment in 2017, a 100% increase over the past five years but almost a rounding error compared to the $4.2bn invested in New York technology companies in the third quarter of 2017 alone.

And yet, the Midwest has all the ingredients to foster an influential technology hub and become an immensely valuable landing point for UK technology companies – on its side are three ingredients critical to any scaling business: customers, talent and infrastructure.

First, traditional stereotypes of the cities of the Midwest have been particularly misleading when thinking about the business landscape. While economic downturns may have hit some of the ancient institutions of the region, it remains one of America’s corporate heartlands and a rich network of potential customers for technology companies.

Far removed from the glitzy titans of the Valley or the financial behemoths of New York, the Midwest is the engine room powering the United States – home to axle-makers, auto giants, and aerospace firms. St. Louis is home to ten Fortune 500 companies, Detroit also has ten, while the greater Chicago area is home to 34 businesses included in this year’s rankings. These corporate powerhouses would be ideal hunting grounds for any business-to-business tech company organizations seeking big clients with big budgets.Of course, this may not be for everyone – the coasts offer access to their own corporate titans, but we would argue that the Midwest represents a credible option to any business.

If you did need persuading, you would have to look no further than the disparity in the cost and pain of finding property and talent in the Valley compared to Illinois, Ohio or Michigan.

For starters, the median house price in Palo Alto has now reached an eye-popping $2.75m, while a single desk in San Francisco will set you back over $16,200 annually, according to property firm Cushman & Wakefield.

By contrast, according to online real estate site Zillow, the median house price in Chicago is currently just $214,000. The average annual cost of office rent in the city is also relatively cheap, at $38 per square foot – below Los Angeles, Manhattan, and of course San Francisco.

Talent in the Valley is similarly only available at an immensely inflated price. Driven by the high cost of living, competition from tech giants, and the density of startups seeking recruits, the average salary for a software engineer in the Valley has now reached $112,000.

In contrast, the density of skilled workers in the Midwest is an under-appreciated strength. Legacy manufacturing towns like Detroit have lost none of their clout as technical centres of excellence and a post-recession boom in engineering services – some 14,000 new jobs since 2006 – offers Detroit a concentration of engineers three times higher than the national average. While a portion may work in automotive, skilled tech talent is certainly there.

The pipeline of talent is also strong. The University of Michigan stood at number 21 in this year’s Times Higher Education’s global rankings meaning, along with 92 other colleges and universities in the state, there is a thriving higher education system in the region. This pipeline is further enhanced by a lack of competition from corporates or other start-ups to recruit graduates compared to the West and East coasts.

The savings that businesses are able to make on property and talent have a tangible impact on the health and growth of technology companies based in the Midwest. Analysis from Square 1 Bank has showed that SaaS companies in the Valley and New York burn almost twice as much cash to reach the same revenues as businesses based in the Midwest.

Reid Hoffman, the co-founder of LinkedIn, once said, “Silicon Valley is a mindset, not a location.” In his view, the entrepreneurial approach to building social networks was far more important than the geographic space its technology companies inhabit.

Embracing this mindset to harness the advantages of the Midwest and to avoid the pain points of scaling in the Valley may be the solution to beginning your transatlantic journey.