By one account there are more entrepreneurs building billion-dollar companies in the Midwest today than in the past 50 years combined. How might this reshape the economy of places like Central Kentucky? Victor Gutwein is managing director of M25 Group, an early-stage micro venture capital fund based in Chicago. The company focuses investment in companies headquartered in the Midwest.
Q: Your website states that M25 will only consider investing in Midwest headquartered companies and for a variety of strategic and practical reasons. What are those reasons?
A: The Midwest is a home of not just traditional businesses, but also technology startups. We’ve seen that there has been a democratization of technology, know-how and talents across the U.S., not just in isolated pockets on the coasts. Those have been completely overlooked. The level of attention right now is really low, but the level of activity is really high and, so, there’s this big-market inefficiency. There are a lot of strategic advantages based on just being able to scale a company here. You have a good amount of large companies across a lot of industries to work with. The entire region has a huge economy — the fifth largest in the world if you were to position us as one country. And there’s a lot of talent and great university ecosystems around the region.
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We see all the right ingredients for an ecosystem here to develop great startups, but we don’t see a lot of capital yet, so that’s what we are trying to take advantage of.
Q: You recently launched a regularly updated ranking system that’s focused on startup cities in the Midwest. Why is a ranking system needed?
A: I think first and foremost it’s to drive attention to the Midwest as a group of communities doing a lot with a lot of activity. We wanted to show that there’s a lot of activity going on in every college town, every regional capital, every mid-size city as well as the big cities like Chicago and Minneapolis. And we really wanted to be able to demonstrate that there’s a rising tide of technology, but some cities are doing it better than others and some cities have more natural advantages and are experiencing more growth than others. You would think it’s important to measure yourself against that instead of just showing straight-up growth that could just be part of a larger rising tide instead of your own efforts.
So, I think having that yardstick to measure against others helps a city or an ecosystem or a state know what they’re doing right, what they’re doing wrong and where they can improve still.
Q: How many cities are you ranking? And what criteria do you use to rank them?
A: In this first edition we ranked 54 cities based on the ones that had the most measurable startup activity. And there’s actually 20 different weighted variables that go into this ranking and they vary. One of the most obvious is “number of startups in that community” and also the kind of the venture backing or the investments that have been made behind it.
But also we take into account things like the resources, talent-wise; the universities, the IPs, the percentage of the population that’s educated, as well as the government resources and tax credits. We take a look at the investors, angels, the accelerators, and the venture capitalists in the region.
Q: And where does Lexington figure into that top 54?
A: Lexington comes in at 19. To give some context it helps to talk about some of the other cities nearby. Louisville came in at 15 and then we have Bowling Green at 48 and Cincinnati at 5. And I also think it’s important to put Lexington in the context of other kinds of college towns with the same kind of types of demographics. So, to put that into context I compare Lexington against Champaign, Ill., or Lincoln, Neb., or even Madison, Wis.
Q: I’ve been to MidwestStartups.com where you can roll your cursor over a map and find cities that you have ranked and get a little blurb of information on each. And in our region which includes, as you mentioned, Louisville, Lexington, Bowling Green, Evansville, Covington, Cincinnati, it looks like the smaller cities are actually faring better with startup activity than the bigger ones. Is that true and why?
A: It does vary heavily. You’re going to have better output from a city like Lexington which has a few natural advantages over some of the larger cities. You get cheaper labor cost and you get lower cost of living. Those can be a big advantage for the success of a startup.
I also think Lexington and some of these – some smaller cities fare well because they have highly educated populations because they have such strong universities. So, they may be a college town and have a small population, but they may be spinning out a lot of startups overall because of that innovative population. We see a lot of both undergrads and graduates and even PhDs spinning out into the software startups, even if they aren’t using a specific piece of technology that was developed as a patent at the university they can often be behind a startup and can be some great talent to have there. That’s one of the attractive features of Lexington and something I noticed when I was there earlier this year.
Q: Lexington has deep agrarian roots as you might know and one conversation that’s taking place is interest in Central Kentucky positioning to become sort of a “Silicon Valley” of agriculture technology. Has that concept been on your radar?
A: Quite frankly, I think the Midwest should be like the world leader in ag tech. I can’t necessarily say which specific area in the Midwest will be the most suited. As a whole the Midwest has some of the biggest ag businesses and there’s a ton of research coming out of all of these land grant universities and I’ve seen some amazing startups already coming out. Kentucky, as a whole, should be well-situated as it has a unique environment with good soil as well as being a leader in some of the livestock industries as well. So, it could be a great place to be a hub for ag tech.
Q: What’s your general assessment of what the future holds for the Midwestern region in general and Central Kentucky in particular?
A: We’ll see in the next five years that this is going to go from a kind of tech backwater to people really understanding that this is a place of tech growth. And it will be integrated throughout most of the industries. There will be effects in manufacturing, agriculture, education, healthcare, government, the list goes on. That’s not going to be a secret very long. It shouldn’t be a secret now. We’re still doing a lot to get that word out so that we can attract investment, but in the future it will start to be competitive.
Tom Martin’s Q&A appears every two weeks in the Herald-Leader’s Business Monday section. This is an edited version of the interview. To listen to the interview, find the podcast on Kentucky.com. The interview also will air on WEKU-88.9 FM on Mondays at 7:35 a.m. during Morning Edition and at 5:45 p.m. during All Things Considered.