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Draper: Is the Midwestern definition of Venture Capital wrong?

During a surprisingly candid Moneyball-esque discussion in Chicago, a number of proposals on how to change venture so it better serves Midwestern startups concluded with: “but that’s not venture.” Hours later, after exhausting nearly every metaphor comparing the Oakland Athletics’ sabermetrics precision to the San Francisco Giants’ home run flash, the intriguingly unanswered question became: so what IS “venture”?

The dictionary definition of venture capital is “capital invested in a project in which there is a substantial element of risk, typically a new or expanding business.” Venture capital investment is typically deployed through a legal entity owned by investing partners that is structured to exist for 10 years or less. The VCs managing the fund will leverage their skill sets to develop an “investment thesis” that articulates what types of bets they are comfortable making. And this thesis will typically inform an investment strategy that the VCs think will yield cash returns before the end of the fund’s life. These strategies, theses and structures are (potentially surprisingly for many) designed to reduce investment risk.

It is broadly accepted that Silicon Valley, Boston and New York have developed ecosystems that can support the creation of “unicorn” startups with extremely low probabilities of attaining remarkably high financial rewards. Yet, failure rates in such environments are now so high that veteran VCs like Andrew Zalasin are opening up discussions about “what makes something ‘successful’ or a ‘great startup’ or ‘spectacular.’” And others like Mark Suster are more directly stating that VC “wrongly defines success as “unicorn outcomes” [which is] often the wrong goal.” Like their coastal colleagues, Midwestern VCs often subscribe to the notion that no fewer than 70% of early stage companies require follow on investment, and argue that what separates the Midwest from Silicon Valley, Boston and New York is our unwillingness to accept low probability, high reward events.

Yet plenty of Midwesterners are participating in commodities or equities funds that are just as risky. Plenty of Midwesterners are participating in private equity deals that could implode. Some of our most successful investors are making big returns every year betting that rockets won’t blow up. The majority of our communities are making the most unpredictable investments imaginable by betting on the weather. So, why can’t we translate that risk appetite to venture? What makes venture unique?

Venture is unique because the “commodity” we are betting on is rarely fully formed. Early stage companies are so malleable that their form on payout often won’t resemble the concept at investment. This is fundamentally different from betting on known outcomes. Corn will always be corn, a building will always be a building, a share of GE will always appear to be a share of GE. But Uber is no longer a dispatching tool for Black Cars. Slack was basically an accident. Dwolla is no longer a peer to peer payments tool. Midwesterners are typically defining venture by greater than 10x returns – the “home run” of early stage investing – when the most distinctive characteristic of venture is change.

The reality of Silicon Valley, Bosto and New York is that less than 25% of venture capital funds routinely deliver any profit. It’s easy to look at these returns and believe that the point of “venture” is gambling. With this gambling model, ecosystems become the casinos that win when more people bet. And if we continue to chart a path where Midwestern VC follows the Silicon Valley, Boston and New York model, our effort will likely win us funds just like theirs with median Limited Partner (LP) returns of less than 1.6x across the asset class.

But what if we embraced the fact that the defining characteristic of venture is the malleability of the investment? What if we embraced the fact that Midwestern communities can facilitate different changes? What if we embraced the fact that finding businesses with a top-end upside potential of 3x could yield a 2x return more quickly? What if we focused on revenue based returns instead of equity buyouts? What if our community, which can reliably build doubles, starts seeking more doubles instead of hoping for home runs?

Many estimate the top 25% and top 10% of venture funds are currently returning between 2.5x – 3.5x and 3x – 8x, respectively, within 10 years. Yet the “bottom” 75% are rarely even returning the investment. If we look at our Midwestern skill set, partnership opportunities, and educational pedigrees, a Moneyball approach could produce funds returning 1.8x – 2.5x on average, while opening up a whole new swath of previously overlooked investments.

At the moment, the Midwest doesn’t consider hitting doubles “venture” because it’s not what they do in San Francisco. But last I checked, the Oakland Athletics are still playing baseball.

Chris Draper is the Managing Director of Trokt, and has been selected as one of 25 VC Investor Apprentices from around the world to join Venture University’s Third Cohort. Draper has been a part of the Iowa startup ecosystem since moving back to Des Moines in 2010.

Previous coverage

Draper: It’s all about the X -Feb. 7, 2019

Draper: Venture University could be Iowa’s game changer -January 24, 2019


  • Evan Lonergan
    Posted February 25, 2019 at 9:26 am

    Chris, as Midwesterner born and bred, I love this appeal to us to approach things differently. While there may be some funds in the Midwest that can succeed along the lines of the Coastal model, I think the majority should blaze a new path as you recommend. Thanks for writing!

  • {(Andy)Jenks}
    Posted February 25, 2019 at 12:02 pm

    Hey Chris, couldn’t disagree more. this is basically saying let’s be mediocre so we can get mediocre returns. you’re missing that this is a power law distribution and the top 1% return orders of magnitude more than the top quartile. if you’re going to spend your life’s work doing something aim to be the best. that’s how big business get built and world class investors aim regardless of region. 1.8-2x net will put you out of business.

    Oakland may be playing, but they’re not winning the wold series. If i’m an entreprenuer i want to be winning the world series not playing for a paycheck.

  • Laura Kinnard
    Posted April 28, 2019 at 2:25 pm

    Hey Chris, it was good seeing you recently at the Mainframe fashion show for DMACC. I saw this article before and didn’t get a chance to comment on it. But this is the exact topic but I have been thinking about for a while, why we feel like we have to follow that exact model instead of carving out one that fits the Midwest. I disagree that somehow shooting for a double and hitting that consistently is somehow mediocre. To your point if we shoot for doubles and have a high success rate, then the net is a higher return overall, with a quicker payout, as you pointed out. I think the idea that we leverage being agile and malleable. Also because of our very tight-knit ecosystem and lower costs, I suggest we tap into community-wide resources and develop more intential mentorship, services, and programs that refuse to accept defeat even if success does look different on the other side.

Comments are closed.

Draper: Is the Midwestern definition of Venture Capital wrong? | Clay & Milk
A central Iowa ag-tech accelerator has secured more backers and finally has a name. The Greater Des Moines Partnership first announced the accelerator last year, naming four initial investors. On Monday, the Partnership said the program will be called the "Iowa AgriTech Accelerator" and named three new investors. The new investors include Grinnell Mutual, Kent Corp. and Sukup Manufacturing, all Iowa companies. They join investors Deere & Co., Peoples Co., Farmers Mutual Hail Insurance Co. and DuPont Pioneer. Each investor has agreed to put up $100,000 for the first year of the accelerator. Startups entering the program will receive $40,000 in seed funding in exchange for 6 percent equity. Tej Dhawan, an angel investor and local startup mentor, is serving as interim director until the AgriTech Accelerator names a permanent leader. Dhawan held a similar role with the GIA before Brian Hemesath was named as managing director. As interim director, Dhawan said his main job includes hiring the accelerator's executive director, establishing a business structure and initial recruiting for the first cohort. The accelerator will place few filters, such as location and product, on the applicant pool, Dhawan said. "When you’re seeking innovation, innovation can come from every corner of the world so why restrict ourselves," he said. One area the the AgriTech Accelerator won't recruit from is biotech. For its first cohort, the AgriTech Accelerator will work out of the GIA's space in Des Moines' East Village, Dhawan said. A future, permanent home is still to be decided. The accelerator's program will host startups from mid-July through mid-October, ending with an event connected to the annual World Food Prize. The GIA, which the AgriTech Accelerator is based on, also ends with presentations at an industry event. The accelerator has also started lining up a mentor pool. The Iowa Corn Growers Association, Iowa Soybean Association and the Iowa Pork Producers Association have agreed to provide mentors, as has Iowa State University. While the AgriTech Accelerator is loosely based off of the GIA, it will differ in its business structure, Dhawan said. The GIA runs through a for-profit model for both operations and its investment fund. The AgriTech Accelerator will have a nonprofit model for its operations and a for-profit setup for its fund. Dhawan said the nonprofit model is being used so the accelerator can better work with other nonprofit partners, such as trade associations. "These are all organizations that are nonprofits and can be amazing stakeholders without ever having to be investors in the accelerator," he said. "It becomes easier to work with trade associations in their nonprofit role when we are also a nonprofit." When it's up and running, the AgriTech Accelerator would be one of a handful of ag-focused startup development programs in Iowa. Others include the Ag Startup Engine out of Iowa State University and the Rural Ventures Alliance from Iowa MicroLoan. Matthew Patane is the managing editor and co-founder of Clay & Milk. Send him an email at
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