The Midwest is home to a third of the Fortune 500 companies. Twenty of the world’s top research universities are here. That’s more than any other region. We also produce a third of our nation’s research and development, new patents, and top talent. So what would happen if we stopped exporting capital from the Midwest to the coasts? What if University endowment funds and wealthy individuals from the Midwest placed more investment dollars in their backyard? This week’s article from the Brookings Institution provides valuable insight into this topic at the core of our strategy.
Tom Kilcoyne, General Partner
Source: Brookings | Re-Post Boomerang Ventures 7/16/19
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.
Such a program is not new. In fact, Frank Samuel, the architect of Ohio’s “Third Frontier” state investment fund, first proposed a “Great Lakes” regional venture capital fund in a 2010 Brookings paper.
THE IMPORTANT ROLE OF VENTURE CAPITAL
Many see the venture capital game as a flawed process that leaves entrepreneurs hostage to the ever-growing big-dollar whims of a handful of (largely white and male) coastal multi-millionaires or foreigner investors. While VC isn’t perfect, and it certainly has its share of representation problems, it has also been an essential generator of both innovation and economic opportunity for the United States. For example, in recent decades VC has generated more economic and employment growth in the U.S. than any other investment sector. Annually, venture investment makes up only 0.2% of GDP, but delivers an astonishing 21% of U.S. GDP in the form of VC-backed business revenues.