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Draper: The Midwestern Rebirth Thesis

March 21, 2019

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.

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Draper: The Midwestern Rebirth Thesis | 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 mpatane@clayandmilk.com.
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