Draper: The Midwestern Rebirth Thesis

Venture University’s Third Cohort is rapidly coming to a close after a whirlwind quarter, and the Fourth Cohort is kicking off the first week of April.  In less than three months our five deal sourcing teams (Consumer, Enterprise, FinTech / Blockchain, Healthcare, and Frontier Tech) vetted almost 2,000 deals, held over 1,000 startup meetings, and will have made 6 investments by the end of March, co-investing with top tier investors such as Peter Thiel (Thiel Capital), Google’s AI Assistant Fund, Bessemer, First Mark, Y Combinator, and the Former President & CEO of the S&P.   

When looking at our portfolio companies, VU’s investment fund thesis has revealed itself as per its design: a highly curated portfolio (~4x more selective than a traditional fund) in companies going after huge markets, amazing teams, and impressive traction. For those of us who are moving on, it is almost time to breathe, take stock of what we learned, and consider what it means for our own paths forward.

As Venture University expands into new markets, it will become intriguing to see how the regionality of venture capital theses, strategies, and investor tendencies affect the VU portfolio. Being a Midwesterner with over a decade of startup experience here on the border of Chicago and the Silicon Prairie, the development of our own regional investment thesis has captured my imagination ever since my return to Iowa. Traditional startup regions tend to have a clear, distinct regional thesis, from Silicon Valley being the startup cradle to Boston being healthcare hardware to New York being later stage optimization. As newer regions like Washington, D.C., start to develop theses like deployable R&D or Florida refines its commercial approach to SpaceTech, it has become my belief that the Midwest’s greatest opportunity is to coalesce around a thesis of Rebirth.

I have noted in earlier columns, as my brother generally asserts in The Midwest: God’s Gift to Planet Earth, that the Midwest has a history of transformative innovation. The Midwest built industrial giants that underpinned thriving communities. Midwestern industry made commitments to its communities, through business innovations like Employee Stock Option Programs (ESOPs), that it would protect our gains. And then we all just primarily held on. We stayed in our lane. We kept taking our risks on known commodities. We focused on getting the Boomers through. This focus on maintenance has left many of our companies stagnant to the point of unbankable. These unbankable companies have history, assets, clients, and hidden innovation just sitting on their shelves, yet no more access to enough traditional financing for making significant changes. And now we have three generations ready to transform these industrial cornerstones of our communities. Like a young startup with a great team, a great concept, and access to scale if it secures the investment to convert a manual process into one dependent on AI / machine learning, what if we considered these unbankable companies the minimum viable product for a transformative startup?

Machine learning / AI startups are nearly a dime a dozen, while unbankable businesses are awash with unnecessary processes. LegalTech solutions languish, while unbankable businesses generate and fund avoidable legal services. Regional higher education institutions are dying, while unbankable businesses lack the research and development capacity to push boundaries. Throwing the unique financial leverage accessible to ESOPs into the mix, what if our venture capital investment thesis started at the mergers or acquisitions that generate a completely new business that is ready for a completely new generation to lead? What if our Midwestern Series A was a company with 20 years of unscalable history and a transformative future path? What if the traditional end of the line for venture becomes where the Midwest starts?

Venture is about making big, transformative, long-term bets on scalable companies run by teams that will remake the world. As venture capital investors, we have traditionally looked for the perfect whole cloth mixture of market, solution, and team from which a unicorn could be born. Developing a culture that prizes and nurtures whole cloth unicorns takes generations.

Until then, Midwest venture should start looking for thoroughbreds who can be reborn.