For those of you paying attention, the weather skipped spring this year and we in the Midwest find ourselves just tipping into warm temperatures. To keep from going crazy during those cold months, I would take the kids to a nearby pet store. This store has various and sundry kittens, puppies, and rodents that kids can manhandle while parents “shop.” Some parents browse with sincerity. More often, they pull out their phones, waiting for their kids to hit their cuddle quota, and leave without buying a thing. I’m not ashamed to say that I am one of those latter types of parents.
I thought of these pet store visits when a slew of articles about Silicon Valley VCs touring the Midwest came out a couple months ago. “Oh my god, this is so cute!”: That’s the opening quote from a New York Times piece claiming that Silicon Valley is over. In it, the author describes a bus tour for Silicon Valley VCs driving through industrial Midwest towns in Ohio and Michigan and remarking on super cute entrepreneurial assets, such as co-working spaces, and adorable cheap housing prices.
We recently hosted a group of MBAs from Stanford on a similar tour. The pet store nature of some of the stops was not lost on the group. One student remarked that a tour of Detroit, led by a local economic development group, reminded her of the staged tours of Pyongyang, where guides strictly curate what guests see and don’t see. This inspired a small group to go rogue, rent a van, and embark on a self-guided tour.
As an investor who is focused on the Midwest, I’m glad that others see the same opportunities here that we see. Real trends have motivated coastal investors to look beyond Silicon Valley, often to the Midwest, for innovative tech companies. At the same time, investors are finding it harder to make returns in the traditional tech regions as more money chases the same number of startups and the cost of building those companies (talent and rent) continues to rise. However, I have two problems with the nature of these bus tours and the narrative they create.
First, Silicon Valley doesn’t have to implode for other regions to thrive. The Midwest is home to certain massive industries that are either buying a ton of software or being eaten by it. Health care, insurance, agriculture, manufacturing, and supply chain are just a few examples. Startups and entrepreneurs closest to these industries, with the domain knowledge needed to penetrate or disrupt them, have an unfair advantage. The customers are here. The talent is here. It makes sense that the startups in these markets should be here. Investment follows opportunity to make an outsized return. This is the thesis behind Drive Capital (and why we moved here), and it holds whether or not San Francisco collapses under the weight of all those dockless scooters.
Ultimately, if you see what you like at the pet store, you buy it. You feed, nurture it, and help it grow for many years. The stories that matter will be the ones that highlight the great tech companies coming out of Midwest, fueled by investors who are writing checks, not just riding buses.
Robert Hatta is the talent partner at Drive Capital, a VC fund focused on innovative companies throughout the Midwest.