ITA Exec Spin: Chi-Town Brings the ROI
Thursday, March 2, 2017
Posted by: By Julia Kanouse, CEO, ITA
As we’ve written about here before, collaboration is the basis of any healthy tech ecosystem - organizations need to be able to find and share ideas, resources, and mentorship, from the executive level on down. An organization that exemplifies this approach is Hyde Park Angels. HPA is leading the way in taking a people first approach to investment - creating and fostering the necessary collaboration by connecting experienced entrepreneurs, executives, and investors with up and coming companies. There is no doubt they are making an impact on the Midwest tech scene, and we are proud to call them a partner.
I had the chance to sit down and chat with Peter Wilkins, managing director at HPA about the trends he’s seeing and his outlook for the coming year.
You just returned from a trip to the Valley where you primarily “pitched” the Midwest as a place to invest. What was your lead?
The Midwest is a juggernaut in the U.S. economy. Specifically, to understand the investment ecosystem and educate coastal VCs on the activity here, we conducted a proprietary analysis of the whole landscape from top to bottom. Our research uncovered that the Great Lakes region ranks higher than any other in the U.S., with a GDP of $2.8 Trillion as of 2015. That makes us the 5th largest economy in the world with only the United States, China, Japan, and Germany ahead of us.
What’s more, 109 of the Fortune 500 are in the Midwest. To top that off, cost of living and doing business here is reasonable, actually sitting right at the national average.
From an investment perspective, this means a few things. One, startups in the Midwest have unique opportunities for investment and acquisition because they have access to a massive concentration of Fortune 500 companies looking to enhance themselves by integrating new technologies and approaches.
What’s also happening is that because so much industry lives here, there is a strong cross-sector investment with corporations making investments in companies alongside venture capitalists. The low cost of business adds another favorable variable into the equation by creating an environment where valuations can stay at lower levels, producing higher returns for investors who in turn continue reinvesting in the ecosystem.
The Midwest is also finally developing into a robust tech ecosystem where groups like ours are stimulating growth and building the community, while companies are finally maturing to the point of reaching big exits and creating a new generation of serial entrepreneurs. Cleversafe, Gogo, Fieldglass, Trustwave and others have achieved unicorn valuations, brought more capital and talent here, and laid the foundation for other companies to follow in their footsteps.
How does the Midwest stack up against other regions regarding deals and invested capital?
There is no question that California remains the leader in the venture capital market with more than 50% of all investment dollars going into the state. However, when we break down the other top regions of the U.S., what we classify as “Tier 2” regions, we see something fascinating. The Great Lakes region is home to the greatest number of high-value exits. Specifically, other than Silicon Valley, Chicago has had more unicorn exits in the last five years than any other area of the U.S. including New York City, Los Angeles, and Boston. I think, as a result, we’re going to see more and more dollars invested and deals done here in the coming years.
We often hear that investment in Chicago/Midwest companies is a better value for venture investors? Is this true? What have you seen and how do we compare?
Chicago and Midwest companies are a better value for venture investors. We did an evaluation of how much capital it takes to maintain a 10% ownership in a company from seed to Series C in the Great Lakes region versus Silicon Valley and Tier 2 regions like the Pacific Northwest, Boston, Los Angeles, and New York. We found that here, maintaining that ownership requires around $2.27M, which is the lowest of all the other regions. In fact, in Silicon Valley, that same purchase requires $4.98M, or 2.2x more than in the Midwest.=
What are some of the key drivers influencing these returns?
Going back to an earlier point, the cost of doing business in the Midwest is lower. It’s 21% more expensive in Boston, 25% more expensive in New York, and 42% more expensive in San Francisco. Why?
Everything from real estate to talent costs less, which makes starting and running a business more affordable. We also see that in a less competitive atmosphere than a San Francisco or even a Los Angeles, companies retain talent longer, which keeps companies stronger and operations cost down.
The Midwest culture built around working hard, delivering results and satisfying customers also means less of a race towards crazy valuations and more of a focus on growing sustainable, profitable companies. Companies like Braintree and Trustwave focused on delivering results to enterprises, many of which were based here, and the results were strong for their businesses and investors.
What do you see on the horizon for 2017 – at both the national level and here in the Midwest?
Based on some of the trends in the Chicago ecosystem, we think there will be a good flow of capital into the marketplace in both the seed and later stages. Just looking at our portfolio as well as the portfolios of our Midwestern co-investment partners, we see so many companies that are strong enough and game-changing enough to attract investors from across the country. Overall nationally and for the Midwest, we’re going to see some of the same trends we saw last year. We’ll see more capital coming into a smaller number of top-performing companies, and we’re going to continue seeing this trend of startups achieving exits through acquisition. In particular, we’ll see more Fortune 500 companies playing in this space, either by acquiring companies to disrupt themselves from the inside out and maintain their relevance in a changing technological climate. We’ll also see their corporate venturing arms maturing and becoming more active in finding new opportunities for their parent companies.
We’ve already seen this trend burst onto the scene in the form of Unilever’s acquisition of Dollar Shave Club and Walmart’s purchase of Jet.com. This trend overall bodes very well for the Midwest which has that higher concentration of Fortune 500 companies coupled with lower valuations, making us significantly more competitive in the venture capital market.