America's Midwest: Cashless Chasm or the Valley of Opportunity?

I received a humbling and personally overwhelming response to my debut Huffington Post blog entry that described my recent decision to move myself and my family from Southern California to Michigan. Of the hundreds of emails, phone calls and letters, the vast majority were from Michiganders welcoming me to the state or thanking me for the vote of confidence in Michigan and for reigniting their hope for a better local economy -- thanks for those!

Some responses were a bit on the cynical side, these coming from both from in- and out-of-staters, questioning the quality, quantity or reality of the opportunities that I expressed. The feedback ranged from: "I don't know what you see in this state, because I have been here XX years, and it is as bad as it has ever been -- but I hope you are right!" to the more colorful: "I think you must have inhaled a bit too much of Santa Monica's illegal herbs before buying those one-way tickets to Michigan -- good luck and stay warm!" Though I did heed the warning to buy a quality pair of long-johns, rest assured no herbal influences were involved in my decision to come to Michigan.

In future posts, I will get into more specific examples of the real entrepreneurial opportunities that lie ahead for the state. But in this post, I want to offer a macro-level view of the larger opportunity I see in both Michigan and the Midwest, as a venture capitalist looking for small businesses that have a chance to become much, much bigger businesses.

Before coming to Michigan, I heard anecdotal stories about the untapped innovation and research of the Midwest. It makes sense, right? America's heartland has the country's largest universities, excellent research hospitals like Minnesota's Mayo Clinic, and established industries with heavy R&D investments. Yet the vast majority of America's venture capital investors reside on the coasts. Therefore, even a beach boy VC like me should be able to make something happen in this environment, or so the logic went ...

In digging around to qualify my thesis, I came upon a 2008 CNBC report that I believe demonstrates why the Midwest could be called the "Valley of Opportunity." The report is a list that ranks states in a variety of categories, but those I found most interesting were "Technology and Innovation" and "Access to Capital" (Note: I only focused on states that ranked in the top 25 for Innovation -- sorry Rhode Island!).

Unsurprisingly, a quick analysis shows that access to capital is robust for states on the coasts, but not so much for states in the Midwest -- America's "Cashless Chasm." And nowhere is the discrepancy more starkly negative, by a LONG SHOT, than in Michigan, the "King of the Cashless Chasm." No other top 25 state for Innovation is even close:

In an efficient marketplace, one would expect to see some parity in the relationship between rankings for "Technology & Innovation" and rankings for "Access to Capital" -- and for the most part, except for the Midwest, there is. On the top end of the scale, states like California and Massachusetts are #1 and #4 respectively in Tech & Innovation, and #1 and #2 in Access to Capital. On the lower end, states like North Dakota and Wyoming are #47 and #48 in Tech & Innovation, and #46 and #47 in Access to Capital.

However, as the tables above clearly demonstrate, those states with the greatest negative relationship are here in the Midwest. The comparison in the rankings paints an interesting geographic image: mountains of cash on the coasts, for the most part, keeping in line with opportunities that follow innovation; and deep valleys -- capital voids -- in the middle of the country where investors' capital is not in sync with the local opportunities.

Critics will point out that assumptions reliant on these rankings would not withstand rigorous statistical scrutiny. Certainly, the rankings are the quantification of a subjective classification, which inherently will have some flaws or room to quibble. But methodology quibbles aside, the clear big picture image of the Valley of Opportunity is undeniable: many Midwestern states -- Great Lakes states, in particular -- are home to strong technology and innovation, yet the local dollars for taking these advancements to the next level likely do not sufficiently match the scope of the opportunity (and venture capital dollars often do not travel far from the zip codes of VC partners, especially if the phrase "wind chill" is involved in the travel plans!).

This analysis does not tell the whole the story, but it does provide some evidence of the opportunity for the VC who is willing to invest in a more robust winter wardrobe -- notably a sweet pair of long johns ...

Comments

[no body]

I'll give you some innovation from Rhode Island that fixes Healthcare in America in one fell swoop. Simple publicprivate open-source HIT process to answer the Brookings Institute (http://www.brookings.edu/reports/2009/0901_btc.aspx) and IT naysayers. By using the finest physicians, scientists and evidence based-medicine from around the world to come up with “Best Medical Practices” interactiv­e-electron­ic-medical­-workbooks using:
XML (http://en.wikipedia.org/wiki/XML) ,
XML schema (http://en.wikipedia.org/wiki/XML_schema) ,
XForms (http://en.wikipedia.org/wiki/Xforms),
Dita (http://en.wikipedia.org/wiki/Darwin_Information_Typing_Architecture) and
web-services (http://en.wikipedia.org/wiki/Web_service)
(savings Director Orszag's 700b, no medical errors) which are IETM Class V compliant documents (http://en.wikipedia.org/wiki/IETM) that when filled out are checked for accuracy and completeness in real-time and saved to a third-party (local telecom, savings malpractice 100b). The workbooks are created, maintained and continuously updated (always learning) by the regional Health Information Technology Research Centers, CDC, NIH, FDA and HHS in conjunction with the Healthcare Industry to provide an effectivity rating for the different treatments, the ability to produce a prognosis and cost of treatment in real-time. Senator Sanders 400b in administration costs would be greatly reduced because the forms are already filled out and there's nothing to deny. DOD for their interactiv­e-electron­ic-trainin­g-manuals are already using these technologies the CBO can score the savings..

[therealredstateblues]

Michigan has the highest per capita concentration of engineers and skilled labor, yet also has the highest unemloyment

this article helps to star to understand this discrepency. lack of investment in capital, bith human and equipment seem to be at the root.

other midwestern states such as Indiana and Ohio are in similar straits.

And it stands to reason as well that as mfg goes in these states, so too does the ability and infrastructure to innovate

[Kate Z]

Good article Jeff with some very interesting facts! If you haven't already, be sure you get in touch with the folks at Automation Alley and Diana at GLEQ (www.gleq.org) for some good contacts.

[tompoe]

Your descriptive term, valley of opportunity, needs a little work, at least from where I sit. I'm sitting in the middle of the corn fields of north-central Iowa. I have Open Source Asterisk (software pbx) ready to go. I have VoIP providers sitting out around the country and in Canada, ready to take my money. Problem is, there are so many hops between me and the rest of the country, my quality of service for VoIP is hurting, big time.

Coupled with that little detail, let me mention my experience with local and state officials. I approached my local mayor, Jim Erbs, mayor of Charles City, Iowa, with a community initiative that would enable the community to provide all students (1600) access to their school network in order that they might experience a true 21st century education. My proposal did not include Internet access. It simply called for a local broadband infrastructure, utilizing wireless mesh networking technology. Ypsilanti, Michigan, has a working demonstration of this technology for its' residents. I received a letter from my mayor indicating the city would not support the initiative, as he had received word from Qwest that they would not permit it.

I sent my proposal to our state governor, Chester Culver, indicating the proposal was a template for all small community in Iowa, that would enable all students in Iowa to experience a true 21st century education. He sent a letter rejecting the proposal, and cautioning me not to do anything illegal.

[seawolf77]

It's called beaurcratic resistance baby and the republicans along with insult, shame , and order to heretofore unconceivable levels of skill and disgrace.