One of the most optimistic reports in years about the venture capital available for startup companies in our region appeared this week, in the middle of a pandemic when it’s hard to feel great about anything.

It is a good news story, though, even if more venture capital may not be the perfect measure of the health of a region’s entrepreneurial community. More beats less, no matter the economic environment.

And the report’s details jump out for what they show about entrepreneurship here: that middle-of-the-country entrepreneurs seem to get more work done with less money.

It might be a cultural trait born of necessity, but it seems significant now in 2020. Never easy, building a company from scratch is going to be harder in this year of the pandemic recession.

This overview of venture capital in the middle of the country comes from the private company data of research firm Crunchbase and from Omaha-based Dundee Venture Capital. In its 10-year history, Dundee has invested in nearly 50 different companies in 19 cities, including the Twin Cities.

Not only have venture capitalists from the coasts dramatically increased funding in the middle of the country, the report explained, there’s also been a slew of middle America venture funds created since 2010, at least 128.

As described by Dundee partner Greg Beaufait, Dundee did the report with Crunchbase hoping to see data that confirmed what they had been seeing in the market.

In addition to total dollars, they also looked at things like the number of transactions, who was investing and the number of successful “exits,” which means companies that grew to the point they got acquired.

Their focus was not on Minnesota or even the Midwest, but the 25 states that fill in the country between the coasts. This area encompasses the traditional Midwest along with the vibrant entrepreneurial community in and near Denver, extending down through Texas to include the hotbed of Austin and then back up through Pittsburgh, included by Crunchbase as it seems more Midwestern than not.

Venture capital financing isn’t exactly evenly spread out across this area, clustering around the metro areas you would expect to see on such a list, including the Twin Cities. Beaufait, who joined Dundee in 2013, moved to Minneapolis in 2016 to establish a Dundee presence in one of the most promising spots in the part of the country the firm called “the Mighty Middle.”

Here in Minnesota there was $3.7 billion invested in the five-year period ended last year, a big jump from $2.4 billion in the previous five years.

Chicago, greater Denver and Austin, Texas, ranked well ahead of the Twin Cities in total dollars invested over the 10-year period, but the Twin Cities was sixth on the list among metros in this 25-state region, with investment roughly comparable to the Dallas and Pittsburgh metro areas.

“The thing that was most compelling was the depth in the region,” Beaufait said. “It wasn’t any one or two or three companies, or any one or two or three cities. Almost any way you sliced the data, there was a doubling at least. Almost every single data point lined up with the narrative.”

One thing that was eye-catching was how companies in the middle of the country on average never receive as much money in a given financing round as companies did in the coastal tech clusters, nearly 40% less in early stage rounds.

One obvious explanation is that it’s simply cheaper to hire employees in Pittsburgh or the Twin Cities than it would be in the San Francisco Bay Area, so companies don’t need as much money. None of the Top 10 most expensive American cities on a well-known ranking are in the middle of the country.

“It’s also a capital efficiency and a mind-set thing,” Beaufait said. “Capital doesn’t solve every problem, and, in fact, it can make some problems worse.”

It also seemed true that for a long time Midwestern entrepreneurs likely concluded it would be easier to find customers to keep the bills paid in the early years than look for outside investors.

Two of the well-known technology success stories in our region, Minneapolis-based Jamf and Code42 Software Inc., grew over the course of years without accepting a big slug of outside capital.

While more capital has been flowing in the last few years, much of that bootstrapper’s approach of doing more with less money remains here in the Midwest, said venture capitalist Rob Weber of Great North Labs, which has invested alongside Dundee in two companies.

To the story of Code42, a security software company that started out doing technology jobs for other clients, Weber told of a similar origin story for Zencoder, a locally based producer of video technology that his family invested in that got acquired in 2012.

“Both Code42 and Zencoder [generated] very strong returns,” Weber said. “I got four or five other examples I could give you. I never came across a team in San Francisco that was running a services business when they were trying to build a product. I think that’s what happens in the kind of culture we have, and when there hasn’t been an abundance of capital.”

It’s still too early to know two months into the pandemic-related recession, Beaufait said, how the rest of the year might go. Some startup companies have seen their opportunity shrivel while others — he mentioned one that sets up telemedicine for veterinarians — have suddenly found a much bigger market need.

“The net of it is we have record amounts of dry powder on the sidelines,” he said, meaning uninvested money in venture funds. “There will still be plenty of investment activity at the early stages, and across all stages really, even in this environment.”

 

lee.schafer@startribune.com 612-673-4302