By Somak Chattopadhyay and Pia Sawhney
As the U.S. begins to rebound from the COVID-19 pandemic, we need venture capital investment more than ever. But we also need to ensure that it is better distributed.
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Investors in Silicon Valley, New York and Boston are now more willing to make decisions about companies hundreds, if not thousands, of miles away from their offices, rather than the famous 20-minute drive from Sand Hill Road.
Furthermore, entrepreneurial talent has been leaving the major tech hubs to seed growth in other parts of the country. All of this is evidence that the tech companies of the future can and will indeed be built anywhere.
But it’s not the whole story. Venture capital has become a political, economic and social justice mandate, rather than just a funding mandate.
More equitable distribution
Despite the pandemic altering the importance of place, the majority of all venture capital is still invested in just three states: California, Massachusetts and New York.
According to Brookings, innovation jobs driven by venture capital are also concentrated, in good measure, in 16 American counties. The same report shows 41 counties now hold half of the whole nation’s innovation-based employment. And get this: Those jobs represent less than 27 percent of the nation’s job total overall.
Overinvestment and overconcentration of technology in a few hubs has an adverse economic impact on working people and the middle-class. Places outside the major hubs suffer from receding growth and opportunity, negative stigma and a climate of social disintegration associated with stagnating cities and towns.
Political division, too, affects these outcomes. Being less economically secure means reacting by voting against those who support coastal populations and marking them as callous and indifferent political elites.
As Silicon Valley Congressman Ro Khanna has noted, in our currently ever-diverging economy of haves and have-nots, almost all of us are losing.
What makes a place compelling to build companies?
The modern technology economy needs to work for more people and places, and, thanks to technology, it has become easier to do so.
Now knowledge workers can migrate to find a better quality of life anywhere, without the pressure of commuting to headquarters in a major tech city. As technology increasingly enables companies to be built everywhere, founders can take advantage of unique resources in their hometowns or in new college towns.
Lower startup costs, tremendous research universities and regional expertise in key industries also lead to innovations in smaller towns that are increasingly unlikely to happen otherwise or elsewhere.
As founders and some investors have known for a long time, there are great opportunities across the heartland of this country. Venture capital outside the hubs arrives slower or later in a company’s development, but the capital goes much further and has a visible and sustained impact on local jobs and community growth.
Let’s rewrite the story
We know the narrative. Starting in the 1980s, the Rust Belt — so-called because of a decades-long decline in industrial manufacturing jobs in favor of automation and investment overseas — has experienced decades of neglect.
In the wake of the 2016 presidential election, there was much discussion about bringing back older industries, like coal and steel, in states where manufacturing had previously supported the economy. But that did not happen.
Today, new models for work-life balance, novel investment frameworks and infrastructure have the potential to revive overlooked regions in the Rust Belt and the Midwest.
Promoting economic growth through tech startup ecosystems is not just good business, it’s good government, good community building and good planning for a transformative future.
Distinct strengths
From the Northeast across the Midwest, where industrial cities were formerly dominant, metro areas that share traits with larger cities, including Buffalo, Columbus, Pittsburgh and Indianapolis, have emerged as important contenders in tech and could become our cities of the future.
Local universities with excellent reputations in science and engineering have helped to seed vibrant startup communities, alongside economic development organizations and passionate individuals. New ecosystems driven by digital transformation of traditional industries now include agriculture, health care and transportation — all sectors that have roots in the real world and specific, local economic histories with legacy strengths in manufacturing and logistics.
Chris Olsen of Drive Capital in Columbus, Ohio, often describes the Midwest as not only “where stuff gets made,” but also “where stuff gets invented.”
Brookings has noted that the middle of the country hosts more than 200 of the nation’s Fortune 500 companies and 20 of the world’s top 200 research universities. The report also shows that the upper Midwest generates a quarter of the nation’s corporate and university patents and a third of its university-based research and development.
As MIT professors Simon Johnson and Jonathan Gruber suggest in their book, “Jump-Starting America,” creating new technology hubs in old manufacturing hubs would significantly improve pathways to better economic outcomes for those places that have been left behind.
Building momentum: Who will fuel tech-based growth?
These days, the idea of investing in startup ecosystems in Upstate New York, the South and the Midwest is no longer as outrageous as it once seemed. Certainly, it felt that way at times when we began our journey and pitched the thesis seven years ago.
That approach — being closely involved in the ecosystems we are building — means our firm, community and region collaborate deeply. Collectively, that has meant highlighting and utilizing key local strengths and working alongside industry professionals and community leaders.
We are true believers that great companies can be built in unexpected places, that creativity can come from anywhere, and that thriving entrepreneurial ecosystems can be created in underestimated regions.
Pia Sawhney and Somak Chattopadhyay are directors of Armory Square Ventures, a venture capital fund located in New York State.
Illustration: Li-Anne Dias
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