Venture Capital Gets Bigger, But Midwest Keeps Missing Out

By on June 11, 2019

From Brookings: Those working to accelerate economic growth in the Heartland must face some stark realities. The Great Lakes region continues to export wealth to coastal economies, even as investment leaders try to equalize growth between the coasts and the Heartland. The region sees only a tiny fraction of venture capital (VC) deals, despite producing one quarter to one third of the nation’s research and development, new patents, and top talent. Great Lakes VC funds are currently seen as too small or too unknown for investors—at a time when VC is funding fewer firms with bigger exits.

Given all of that, here’s an approach policymakers and investors could try to stem the export of capital from the region: A regional venture capital fund-of-funds. A recent analysis sponsored by the Brookings Institution and the Chicago Council of Global Affairs, and conducted by a team of University of Michigan Executive MBA candidates, suggested such a remedy.

 

A regional fund-of-funds would be a vehicle for in-region and out-of-region investors who put their dollars to work with investments in venture capital firms. The regional fund would allocate investors’ money into a network of well-run state and local/regional VC funds, and co-invest with them in promising companies. Such a fund would facilitate much-needed growth in the size and scale of the venture capital network in the Great Lakes/Midwest—allowing it to be competitive in today’s larger and later rounds of funding. This, in turn, would help transform more of the region’s prodigious innovation into new businesses and jobs locally—realizing good returns for investors and fueling economic transformation of the “Rust Belt” economy.

Midwestern Wealth Subsidizes Coastal Investing

Ironically, the region generates a lot of wealth that is invested in venture capital. The Midwest is home to seven of the nation’s 25 richest universities in terms of endowments, and some of the largest foundations in the country. The region is also home to many public and private pension funds, with substantial resources under management.

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About Tom Finan