The Midwest Mentality Revisited

Jeff  Carter
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Posted: Mar 21, 2012 12:01 AM

A couple of days ago, a young guy penned an article on the start up scene in the midwest, particularly focusing on its biggest city, Chicago. I linked to it in Breakfast Links yesterday, and wanted a day to ruminate about it before I posted anything. It’s my pragmatism coming out. Unlike some, I was not insulted by his post. I did a Pinterest board to illustrate that.

My pal Matt Moog, who has done a couple of start ups and runs the Built In Chicago website tweeted, “It is insulting because it over generalizes and stereotypes. Is is unrepresentative and a mischaracterization of who we are.”.

I am not going to disagree with Matt, whom I respect very much. I tweeted back at him that it made me more “DETERMINED”, deliberately using caps. Matt points out in his tweets that several people that spoke to the reporter were misquoted. My personal experience is reporters misquote me all the time. Or, they utilize the things I tell them for their own agenda. I think that is what happened here. The reporter started out with some pre-conceived notions of the midwest and instead of using the scientific method to prove or disprove them, he wrote a story that affirmed his biases. I think Matt makes some excellent points. We midwesterners sometimes have a chip on our shoulder. That’s not a bad thing. Makes us work harder, or at least 9-5.

The weather in the midwest isn’t what it is in the Valley. We get that. But people are generally nicer, and the cost of living is a heckuva lot cheaper. The schools are better and its a good place to raise your kids. Midwesterners tend to embrace rather than grouse about their situation. When you shovel six inches of snow and as soon as you put your shovel away, six more inches fall on your freshly shoveled driveway, it makes you see things differently! It’s why we invented the concept of “dibs”.

Additionally, if you read some of the comments on the blog, they are from midwesterners that moved out to Silicon Valley to do a start up. They are happy they did. I say, “Good for them!”. However, bear in mind that when people undertake a move, they use the heuristics of cognitive dissonance and confirmation bias to reaffirm that their action was the correct one.

First, let’s assume the writer is correct about the past. There wasn’t much of a start up scene in Chicago or the midwest. The midwest is entrepreneurial, but in a much different way than the coasts. Also, because of the strength of Silicon Valley, that underlying force was used to build a lot of the internet. That’s what the 1980's-2000 was. Building the base. Upon that base, lots of cool stuff can be created. But, just like commodity trading, don’t use the past to determine the future. Regions can change.

The midwest has had some really great success stories with regard to modern day entrepreneurs. However, they aren’t in your face stories. They are quieter. Ruby on Rails is one of those. Modern day programmers use that elegant language to program all kinds of websites. It sits behind the drama. For real midwestern drama, we go to the Goodman or Steppenwolf theatre. The top plays in the US come out of the midwest.

The author’s first evidence comes in the form of “midwest pragmatism”. He says,

Pragmatism is defined as dealing with issues on a practical level, rather than a theoretical one. What does this mean in the context of startups? Well, it means that there is no “let’s build a cool tool and then figure out the business model”. No. In fact, if you do that here, you don’t belong. That’s a plain fact that I have found very few people disagree with.

In the context of building a specific type of company, what does this mean? Again, these are loose rules and anything is possible. But according to one of the resident experts on the Chicago ecosystem, Paul Lee, it means that the biggest companies in the technology world would be impossible to build here. Specifically, the company multiple people, including Lee, brought up was Twitter.

Midwesterners are pragmatic. Twitter is a success, and has value because it is omniscient. However, what if someone were to build the same sort of thing and attached a revenue model to it? Nothing says Twitter is here to stay. As a matter of fact, if they don’t figure out a compelling revenue model I suspect their investors will lose money because who are they going to sell it to? Already, there are signs the Twitter model is breaking down in the form of Pinterest and Instagram. Things can change. No doubt, it’s valuable. But I think that maybe Twitter needs a midwestern mentality when it comes to revenue (which isn’t necessarily profit). He also neglected to say the inventor of Twitter came from Nebraska.

We can be theoretical too. Perhaps he should check out all the Nobel Prize winners that have photos on the wall at the University of Chicago. Midwesterners get theory. We develop many of them. Milton Friedman was pretty famous before he moved out to the Valley. Kevin Murphy moved here from the coast to undertake more rigorous research when it comes to theory.

Old Silicon Valley stalwarts Quicken, YouTube, and PayPal clearly had paths to revenue and eventual profitability if they were successful. It’s not clear to me that a midwesterner would not have funded them if they had the chance. When I found out about PayPal I was on the CME Board (1999-2001) and floated the idea of creating a clearinghouse for the internet. It wasn’t in our business model, but payments are clearly a midwestern strength. Braintree, Feefighters, and Dwolla prove that, along with all the credit card processing companies in the Dakotas. Midwesterners never got a shot at putting risk capital up for early internet companies. You had to be in the Valley with proximity and access to put money in.

The writer points to a lack of programming and engineering talent in the midwest. He might be right, but the reasons he cites are incorrect. It’s not the hot start up scene that takes engineers out of the midwest and replants them in the Valley. It’s Bill Gates. Companies like Microsoft ($MFST) go to the University of Illinois-Purdue-Michigan campus and hire all the engineers. It’s job security, not start ups that attract starving, poor graduates. After a couple of years in a corporation cutting their teeth and learning, they start companies. They bloom where they are planted. What if Groupon ($GRPN) and other big tech companies in Chicago begin to hire all that talent? The talent and ideas will bloom in the midwest.

A point of information, Larry Ellison, Marc Andreessen, Steve Dorner, Max Levchin, Jawed Karim; all University of Illinois engineering alums. That’s just one school! Purdue, Northwestern, Michigan, and Wisconsin and others all have excellent engineering schools. Hugh Hefner created Playboy in Chicago. The talent is here. The jobs right now are elsewhere.

The writer says that all midwesterners inevitably point to the above talent, and then goes on to say the intensity isn’t here like it is in the Valley. I don’t know how to quantify “intensity”. All I know is that a company I invested in, Alltuition, went out to the Valley and won Launch. If you didn’t know, it’s the Super Bowl of start ups. Whenever I go by the Alltuition offices, they are pretty intense. Even when they play ping pong.

The midwestern ecosystem is beginning to fire on a couple of cylinders. There is a learning curve effect that must take place, just like it does in every industry. The midwest is starting to go down the learning curve. Midwesterners need to learn how to deal with failure, and with success. We don’t get really excited about things, and probably need to get the pom poms out more when something great happens. We hide our failure, and need to take positive experiences from it.

It’s not that midwesterners aren’t risk takers. The midwest is full of them. Farmers take a lot of risk. For the last century and a half traders have patrolled the trading pits at the three local exchanges. I’d ask the writer, “How many successful high frequency trading firms do you have in the Valley?” We have more than I can count on my fingers and toes here. Most of them generated pretty decent revenue from the first day. Bob Tamarkin wrote that the trading floors of Chicago contained more millionaires per square inch than anywhere else in the world and I think that’s correct. Some of that capital is now finding its way into midwestern start ups. Tallgrass Beef for example was started with the bulk of capital coming from a trading floor. A pretty cool company is Ubid. It took a midwestern sensibility and revenue pragmatism to make it successful.

Currently, there aren’t as many start ups to put our capital in. Because of the risky nature of investing, we get fewer at bats. When we lose money, we might not have a chance to make it back for awhile. In the Valley, they have just as many failures as anywhere else. However, like a good discount retailer, they make up for the failure on volume. But, it is a changing environment and more capital is being invested today than in prior years. As we used to say at the stodgy old commodities exchanges, “the trend is your friend.”

That brings up the point about whether the ecosystem in the midwest is puny compared to the Valley or even the east coast. It is. It’s not a very deep pond, nor is it very big. But it’s not static either. It’s growing, and one day we will have a lake. Someday an ocean. No one has the market cornered on ideas, or execution of those ideas.

The ecosystem is slowly being built in the midwest, brick by brick. That is one of the reasons I co-founded Hyde Park Angels. Since HPA started, successful ecosystems have also been spawned in places like Boulder, CO and Austin, TX. Did anyone envision that? These other ecosystems help make the Silicon Valley ecosystem better. Everyone benefits. Kind of Coaseian. Or maybe you might consider it a Nash equilibrium.

HPA was the first successful large scale angel group in the midwest, and is considered one of the top angel groups in the entire nation. We have funded 14 companies, all of them pre-revenue, or at least pre-profit. Every company I have ever looked at has a hockey stick revenue graph. I think Al Gore took the global warming chart and loaned it to start ups for presentations! But the reporter didn’t mention one angel group from the midwest in his article. I can name twenty.

It has been done here. It can be done here. It will be done here again.

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