2020 Best of the Midwest: Startup Cities Rankings
For the 4th Annual ranking of 50+ Midwest tech ecosystems, a LOT has changed.
The annual Midwest Cities Rankings are our yearly deep dive into understanding how micro-environments in the Midwest are performing relative to one another in terms of startup activity, access to resources, and business climate. To view the full rankings, visit the city rankings page on Midwest Startups.
National skepticism and resistance to building, growing and investing in tech companies across the rising cities in the Midwest had already mostly faded away in late 2019. August 2019 brought an unprecedented rush of megarounds: Detroit’s StockX grabbed $110M, Columbus’s Root Insurance closed $350M, Kansas City’s C2FO raised $200M and Chicago’s VillageMD got $175M. September saw Detroit’s Rivian raise another $350M, followed by a ridiculous $1.3B in December. Before the end of the year Minneapolis’s Bright Health raised a whopping $635M and Duolingo became Pittsburgh’s first unicorn. It was a year for the books, and investors everywhere were paying attention. The M25 Summit in Chicago the first week of March 2020 was the largest gathering of VCs ever in the Midwest…
Then COVID-19 and the murder of George Floyd in Minneapolis rocked our world.
Would our recently promising rise to the top fade away? Had the Midwest built companies that were here to stay, that could ride out the environment, and still become the Fortune 500 of tomorrow?
Some of it still remains to be seen, but the results to date have been nothing short of encouraging.
Many of our states got to work launching emergency funding vehicles for tech startups to supplement national efforts. InvestDetroit launched a $3M Tech Startup Stabilization Fund. JobsOhio put $50M to work behind their startups. Economic development investors in places like Pittsburgh and Indiana also quietly launched their own pandemic relief efforts for tech startups.
Additionally, momentum towards making Midwest VC less white has already made significant progress in 2020, with Cincinnati’s $50M Lightship Capital debut fund (dedicated to underrepresented entrepreneurs) and the launch of Chicago’s Chingona Ventures by the first Latina GP in the Midwest. Dollars are already being funneled into Black and Latinx founders, with Louisiville’s FreshFry, Milwaukee’s Fiveable, and Chicago’s Rheaply, 4Degrees and CASHDROP all receiving strong seed rounds in 2020. ChicagoBlend recently released data showing some indication of year-over-year growth in the right direction. These all come on top of the first (and largest) gathering of black VCs at the kickoff of the Midwest chapter of BLCK VC in Chicago in September 2019 (hosted by M25 partner Mike Asem.)
And — with a sigh of relief — strong funding efforts continued even as COVID was at its worst — Chicago’s Tempus took in $100M in March this year, followed by another round for Detroit’s StockX in April. Perhaps more interesting, seed and Series A rounds by nearly-entirely coastal funds have (anecdotally) skyrocketed. Recent examples include Ann Arbor’s Censys
(raised a $15.5M Series A by GV, Decibel and Greylock), Chicago’s Chowbus (raising a $33M Series A from Left Lane, Altos, Fika and FJ Labs) and Chicago’s CASHDROP (raising a $2.7M seed from Harlem, Founder Collective, Long Journey and M25).
To be clear — we are in a weird environment, and it is not a great time to be a VC firm raising capital from conservative Midwest LPs, and for many startups it is not a great time to be raising money, selling to enterprise, or taking risks and burning excess capital. But that being said, there is reason to be optimistic about tech, and particularly tech in the Midwest. Midwest companies have much lower costs, longer runways, and are more able to become profitable. Midwest companies typically have a diverse customer base representative of the ‘average American’ and the overall American economy. And the biggest hurdles of the past — access to capital and access to experienced startup talent — have instantly eroded away. Zoom may be the bane of our daily existence, but it is the great equalizer in the battle between a startup in a spare bedroom in Menlo Park and a startup in a spare bedroom in Dublin, Ohio or Overland Park, Kansas or Minnetonka, Minnesota.
Given this overturning backdrop and constant need for adaptation, it may be more interesting, telling and important to regularly measure and compare our Midwest cities against one another. Each Midwest city is in a race to attract, grow and retain tech startups, and now that struggle is more complicated, nuanced and difficult than ever before — particularly as the pandemic causes coastal founders to boomerang back to their hometowns. As always, our goal has been to provide an analytical, objective benchmark to help entities and individuals determine how ecosystems are performing relative to each other. Each year we have received great, helpful feedback and include some changes and improvements to our methodology. While there will be no “perfect” way to rank these cities on completely objective terms, we strive to remain as unbiased as possible and continue to invite your comments and ideas as we will undoubtedly refine and improve each year. But for now, we are pleased to present…2020 Best of the Midwest: Startup Cities Rankings!
The Top 25
Key Takeaways:
The Top 5 Are Staying Put
Chicago, Minneapolis, Pittsburgh, Indianapolis and St. Louis. These familiar cities are once again the top five, and in the same order since last year. There are some changes — the point gap between #3 Pittsburgh and #4 Indianapolis widened (last year was a 0.5 point gap, this year 2.5) and all have experienced a lot of proud moments. Most important to understand — these 5 cities are a class above the others, with 4.0 points between #5 St. Louis and #6 Ann Arbor.
Collegetowns Down
Adding insult to the injury of an uncertain future for in-person higher education, collegetowns across the board performed worse. These include #8 Madison (-1), #15 Lafayette (-1), #17 Champaign (-1), #19 Bloomington, IN (-2), #21T Lexington (-2), #24 Lincoln (-5), #25T Lansing (-1), #25T Iowa City (-3), #28 Columbia (-1) and #30T Ames (-3). The only bright spots were #21T South Bend (+2) and #32 State College (+7). Many of these were hurt by the reduced emphasis on life science outcomes in this years rankings, and overall they still perform much better than non-university-dominated cities of similar size.
Rivalry Time — 3 Annual Battles:
1. Michigan vs. Ohio
Once again Michigan claims the top city in the battle of two powerhouse Midwest tech states, with Ann Arbor coming out on top at #6 overall, still buoyed by a truly exceptional research university, a multi-billion dollar recent exit with Duo Security and a slew of encouraging financing rounds, many in the towns’ core strength of cybersecurity. Encouraging for Ohio though, Columbus rose two spots to #7, much of it on the backs of an equally bright university infrastructure, large corporations to work with and many big tech financings as well as the CoverMyMeds exit. #9 Detroit also rose 2 spots to give Michigan once again two spots in the top 10, with several unicorns giving the big lift, while #10 Cincinnati (-3) and #11 Cleveland (-2) remained strong but lost their edge. All of these five cities are within 2 points of each other though, and when an ecosystem has a relatively lower-performing year that will be felt with significant movement. Honorable mention should go to top 25 cities #20 Akron (+0), #23 Grand Rapids (+3) and #25T Lansing (-1), which are smaller but important ecosystems in their states. Additionally, both states have tremendous government support, with groups like InvestDetroit/InvestMichigan and Rev1/Jumpstart/Cincytech among the most active economic development startup investors in the nation.
If I had to give a winner to this rivalry this year though, it has to be Michigan.
2. #6 Ann Arbor (+0) vs. #8 Madison (-1)
The battle of the mustelidae (family of mammals including badgers and wolverines…) landed more solidly in Ann Arbor’s burrow this year, growing a 0.3 advantage in 2019 to 0.8 in 2020. These very similar ecosystems are neck-and-neck in most categories, but Ann Arbor scores much higher in Startup Density, Big Outcomes and Connectivity, among others. But watch out Blue —Madison’s Access to Resources score is nearly 2 points higher (and could grow
as the state starts to organize a corporate fund of funds similar to Renaissance in Michigan), and this can be a leading indicator of a rise in startup activity down the road.
3. #7 Columbus (+2) on Top in Ohio
The 3 C’s of Ohio have always been closely fought, and often end up tied. This year Columbus came out on top in the highest margin to date, with 21.1 points to #10 Cincy’s 20.4 and #11 Cleveland’s 19.6. These cities are similar in many categories, but Columbus wins solidly in categories like Big Outcomes, Big Companies and Capital Invested. It doesn’t take a local to figure it out — take Drive Capital (the Midwest’s highest AUM VC fund), Root Insurance (a powerhouse unicorn), CoverMyMeds (a billion+ recent tech exit), The Ohio State (the largest university) and a slew of top Fortune 500s. Cincy and Cleveland can compete (and win) on some aspects — like having a top corporate-backed VC fund of funds or the highest-ranked university in the state — but Columbus simply overpowers when it comes to Access to Resources.
Bad Year for Downstate Illinois
When we talk about Illinois startups, most assume we mean Chicago — but Marc Andreesen did start the Mosaic web browser (see: Netscape) while a compsci student at the University of Illinois at Urbana-Champaign. Unfortunately, what has long showed promise has not yet come to fruition, as #17 Champaign (-1), #44 Bloomington, IL (-7), #47 Peoria (-11), #51 Rockford (-2) and #53T Springfield (-3) all fell spots. Some are a symptom of collegetowns declining broadly, others likely because hyper-dominant Chicago keeps sucking up talent, capital and resources, but clearly something needs to change.
Iowa Finally in the Top 20
We have long opined how Des Moines seemed to underperform in these rankings, and this year saw a big boost in relative performance, moving up 6 spots to #18. A highly educated workforce, strong accelerators/incubators (including the new Techstars Iowa), large companies, decent startup density and a relatively high number of VCs vaulted Des Moines higher. The intense focus on insurtech (with the Global Insurance Accelerator and numerous highly engaged corporates) and agtech (with the Iowa Agritech accelerator and statewide resources flowing in) should continue to benefit this ecosystem and create more startup activity — and ultimately Big Outcomes — in the future.
Highlighted changes to rankings for 2020
As always, we are taking input and tweaking both to react to new available data, factors that are changing in importance or simply advice from the community. This year we had several changes:
- We added 5 new cities (Beloit, Grand Forks, Jefferson City, La Crosse, and Traverse City) bringing the total cities tracked to 59. And it turned out that all of these warranted inclusion — micropolitan Traverse City even debuted at #34.
- Given access to comprehensive data on tech talent from HumanPredictions, we were able to include both the number of developers and the average tenure of tech employees to our Talent, Sales and Innovation section (reducing Patents, Fortune 500s and University Ecosystem weighting)
- Due to COVID-19, we added internet access availability from the National Digital Inclusion Alliance to our Connectivity section and decreased the importance of airports
- Given the lower barriers to accessing national capital sources, we decreased the importance of local VCs and Capital invested locally (shifting more importance to Talent Sales and Innovation and Accelerators)
- We focused the rankings more towards digital tech and deprioritized life sciences, which are hugely beneficial for society but not always as emblematic of growing, supporting and impacting the local ecosystem
- We increased the number of universities we include from the US News & World Report and added not just the ranking as the quality indicator but also the student enrollment numbers to have a more holistic view of the impact a school has on the tech ecosystem
Methodology Recap: How the Rankings were Calculated
Relative vs. Absolute: Before we start to ask ourselves what makes one ecosystem better than another, or one ecosystem moves up or down in the rankings, it is important to understand what we are measuring. These rankings measure a core based statistical area’s (CBSA) relative rank as an ecosystem for a startup to launch, grow and scale. A city can still absolutely improve while its rank stays constant or falls. In fact, due to the strong macroeconomic tech/VC market and the rising tide throughout the Midwest region, it is very likely that the vast majority of these ecosystems grew since last year.
Data: We divided it up into three categories with 27 underlying weighted variables that come from 18 different data sources, ranging from the US Census to the HumanPredictions tech talent database to individual state government websites. Since 2018 we have relied solely on PitchBook as our source of startup and investor data, and appreciate their help in collecting the data this year. We realize there will be some degree of error from any data source, and there can be healthy debate and judgment on how to weigh the importance of individual variables. Ultimately we aim to be as consistent and objective as possible and understand it will continue to improve every year.
Data and Calculations
Our 27 variables are pooled into 3 major categories (data cutoff date at 06/30/2020). Here is what goes into each one:
Startup Activity which includes subsections for Startups (number, density and momentum), Exits and Big Outcomes (41% Weight):
A measure of how active the tech community in the city is, and the size and quality of the network available to a new startup. Factors included are the number of startups present, the number of exits, the growth in startup formation and the scale of large outcomes (both large exits and large fundraises). Data comes directly from Pitchbook.
Access to Resources which include subsections for Talent, Sales & Innovation, Investor Presence, Accelerators/Incubators, and Government (41.5% Weight):
A measure of how supportive the city’s environment is, and the value-add it can provide to help a startup grow. It considers factors such as the quality, quantity and loyalty of the available talent, investor activity, accelerators, universities and government support. Data comes from several different sources: the US Census, US Patent & Trademark Office, HumanPredictions, Fortune.com, Pitchbook, US News & World Report, the Seed Accelerator Rankings Project, The Global Accelerator Network, US Small Business Administration and individual state websites.
Business Climate which include subsections for Business Costs, Demographics and Connectivity (17.5% Weight):
A measure of how conducive the city’s economic environment is to attract and scale a business. It includes demographic and economic factors such as the cost of living, labor costs, business tax friendliness, population and GDP per capita, as well as ‘connectivity’ indicators like the quality of internet access, airport and highway infrastructure. Data comes from several sources: the Bureau of Labor Statistics, the Bureau of Economic Analysis, the US Census, the Tax Foundation, the National Digital Inclusion Alliance and Google Flights.
A HUGE shoutout to Leandro I Bedolla, who meticulously pulled all of the data through several months of tedious work and planning. Additionally thank you to Katie Birge and Abhinaya Konduru for help in visuals, publishing and distributing.
