Sweet Home Chicago
Regional investing is the topic of many a venture debate. If you are outside the Bay or Boston areas, why even bother? Being a VC from Chicago, I get to hear a variety of jokes from my Valley peers. Have I seen any good meat packing deals lately? Can we leverage the Mob to help a portfolio company close a sale? You can figure out the others. Other regions take similar stereotypical ribbing. My partners and I draw even more stares from people when we tell them that after 27 years of successful investing nationally, we have chosen to focus almost exclusively on the Midwest region.
There has been a great deal written about why the Midwest has not exploded given the wealth of resources here. Other regions have had similar amounts of ink spent. Shannon Clark wrote about this a short while ago in his post "Why I moved to Berkeley, a reaction to the Great Chicago Tech Debate". There have been even more initiatives and studies about how to kick start things here, including what can government do (McKinsey, AT Kearney, etc). Despite all of this, we remain more confident than ever that this is one of the great, untapped venture markets in the US. Why?
Let me give you a personal example and then expand from there. I grew up in La Jolla. When I was young, you were either in the Navy or in real estate if you lived in San Diego. There was lots of sage brush, but no biotech firms to be seen anywhere. Today, San Diego is arguably one of the top three biotech hubs in the world with hundreds of biotech firms. What happened? The simpliest answer is Hybritech. Hybritech was purchased by Eli Lilly and its founders took their new found wealth and started a variety of new companies like La Jolla Pharmaceutical. These firms succeeded and spun off and so on and so on until you had a massive biotech industry. Of course, the 75 degrees every day does not hurt either. Boulder had similar experience in storage when IBM located their storage operations there.
VC's live or die based upon the timing of their investments hitting the inflection curve. There is the old saying about backing the right product in the wrong decade. So, in essence, we are making a bet not only on our portfolio companies here hitting the curve, but also on the region doing so. What metrics or guidelines do we use in judging where this region is on the curve? We have one simple one, borrowed from Jack Welch. Our companies (or opportunites that we see) have to be #1 or #2 in their space and run by people taken seriously in their respect industry as thought leaders. There is nothing more painful than being the #5 player, trying to explain to your prospective customers why they should buy your product versus one from the other 4. Using this metric, we are seeing an increasing number of opportunities where there are leaders. Examples in our portfolio include: Stereotaxis (the only magnetically guided catheter system in the market), Feedburner (#1 feed manager and RSS ad network in the world), Imago (the #1 player in the 3D atomic probe space...machines that see atoms), Performics (one of the largest online marketing firms) and Cognitive Concepts (#1 auditory process software company...part of Houghton now). Outside our portfolio, you have OptionsExpress, 37 Signal, Univa (#1 grid computing services firm), Navteq, Motorola, etc.
We have the resurgence of Motorola just as wireless applications are exploding, the largest navigation company in the world (Navteq) as location based application are hot, the largest medical device hub in the world (companies representing nearly $80B in sales), one the deepest and best funded university research infrastructures in the world and the largest customer base both in terms of population and corporations. And, more importantly, we have more and more entrepreneurs that are leaders in their field and starting companies here.
I will write in the future about why we see venture capital as being so difficult here (and it is) and what the core challenges to things really taking off here are.
However, I'd highly encourage entrepreneurs and companies to stay put in the Midwest and other regions. The tides are changing. Quality guys & gals like Shannon who have headed to the coasts, the door is always open to come back and join the party, roll up your sleaves and make something happen here!