2023 Best of the Midwest: Startup City Rankings
A surging Ohio city jumps to the top 5, collegetowns overperform (again) and SSBCI funding having an impact
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.
The defining word across the Midwest over the past 12 months seems to be resilience. VC funding continued to slide nationwide and reached new lows with corresponding massive budget cuts at startups needing to slash unsustainable burn rates. Declining sales, layoffs and down-rounds became the norm across the US, but not all was doom-and-gloom in the Midwest. While the Midwest was not spared layoffs or tough recapitalizations, the slide wasn’t nearly as dramatic. Fortune 500s are not canceling their software or delaying cloud migrations, startup CEOs aren’t laying off whole teams of expensive developers and Indiana and Missouri scaleups aren’t struggling under a 100x revenue multiple that they’ll never grow into.
So what has happened across the region? A lot more of the same. Major new funds were raised in Chicago (S2G Ventures for $300M and KB Partners for $127M), Minneapolis (Arthur Ventures for $470M) and Ann Arbor (Arboretum for $268M and Plymouth Growth $125M). In a tough environment, Chicago even had some impressive emerging managers raise a Fund I (Buoyant Ventures for $76M and 81Collection for $41M). More importantly, startup funding and acquisitions remained impressive. Chicago’s SMS Assist was acquired for $950M while LanzaTech IPO’d with a $2B market cap, while the city boasted a slew of major fundraising events. Outside of Chicago, Kansas City’s Rx Savings Solutions was acquired for up to $850M, and nine-figure fundraises included Columbia, Missouri’s EquipmentShare raising $290M, Columbus’s Branch for $215M, Lincoln’s Spreetail for $208M, Minneapolis’s Gravie for $179M and Indy’s Sanctuary Wealth for $175M.
These events and others, combined with the changing macro landscape (and the different ways that states and cities have responded to it) make for some compelling observations. We saw a city drop out of the top 5, replaced by a capital that’s been aggressively courting venture capital investment since the early 2010s. Collegetowns continued to be resilient and largely thrive. And some states as a whole shifted up — or down — due to the way they put together their investment incentives and programs, largely with the help of the federal SSBCI stimulus. It’s also important to remember — these rankings are relative, where each city is competing against the other to have the most compelling ecosystem. So even if a particular ecosystem is doing well, if it isn’t doing great then it may in fact lose ground. This can be frustrating from a rankings perspective, but the overall scores tell more of a story — for example, just 3.8 points separate #4 Pittsburgh (29.6) from #10 Cincinnati (26.1). We’ll get into more of that later, but before any additional spoilers leak please allow us to introduce your 2023 Best of the Midwest: City Rankings!
Quick takeaways:
Chicago at #1 in the Midwest
#1 Chicago (+0, 49.3) repeats their back-to-back-to-back-to… #1 performance in the Midwest. We already mentioned the major liquidity events from SMS Assist and LanzaTech; on top of that, a half dozen $100M+ funding rounds including Kin Insurance’s $109M Series D from Geodesic Capital and Nerdio’s $117M Series B from Updata partners. And another slew of 8-figure rounds including another $80M for Project44, $70M Series C for Fly.io by EQT, Hallow’s $50M Series C by Goodwater Capital and Hunt Clubs $40M Series B. Add to that the new VC funds raised and Chicago is in good shape, but this is getting old. So that’s why we tackled the question: How do Chicago — and other major Midwest metros — compare against national peer cities? Check out the results and analysis here to see where LA, Denver, Austin, Miami and others fell with the same methodology.
Columbus’ first time in the top 5
#5 Columbus (+1, 29.0) finally did it, and boy was that well-deserved. Let alone hosting the largest fund by AUM (Drive Capital), it has created, seemingly from scratch, a near-decade long legacy of putting up massive funding rounds and generating monster exits. More importantly, the flywheel is alive and well. Starting with the $1.1B sale of CoverMyMeds to Mckesson in 2017, which indirectly created a diaspora of angel investors and new startups (Scriptdrop, Redi Health and AndHealth to name a few), the recycling of talent, capital and founders has been impressive. While not all Columbus unicorns have had entirely great outcomes, the startup circle of life means that layoffs at one company often become the critical hires at another (or founders themselves). In addition, Columbus kept up with major funding events this year such as Forge Biologics ($90M Series C) and MentorCLiQ ($80M funding by PSG) and the launch of Heartland Ventures $52M Fund II.
Iowa starting to thrive
It’s encouraging when you see major impactful events across a state, especially one that has historically underperformed in our rankings. Iowa City had a $75M Series B for Digital Diagnostics led by KKR and Cedar Falls had a $45M Series B for Moov led by Commerce Ventures. Iowa also saw increases for it’s top two metros, with #27 Des Moines (+1, 18.1) and #33 Ames (+2, 16.3) both gaining ground. It’s also starting to see some reuse of talent on its own, with former Dwolla CEO/founder Ben Milne raising $11M for crypto startup Brale and former Dwolla COO Charise Flynn raising $1M for Hummingbirds.
What is going on in Bloomington, Indiana???
It’s been frustrating (for a lot of reasons) to be a Purdue fan, but nothing gets me more distraught than seeing #14 Bloomington, Indiana (+1, 23.7) continually put up impressive numbers and rise in the rankings (we’re starting to just call it Windiana these days…). It surpassed #16 Lafayette (+0, 22.1) last year for the first time, but now it’s ahead of much larger metro #15 Milwaukee (-1, 22.7) and only 0.3 points below #13 Cleveland (-1, 24.0). And it clearly has the support of the community — in Midwest Startups’ third “Midwest Madness” tournament this year, B-town took first place again after winning the inaugural tournament in 2021. It’s driven by a few things:
- Bloomington has the highest number of deals done per VC located there. That implies it has done an outsized job at attracting outside capital to invest there (and that there aren’t very many VCs based in Bloomington, a small market just an hour from Indianapolis)
- It has impressive startup momentum, adding 22 startups from 2018 to 2023.
- Like many college towns, it has best-in-class metrics for Startup Density, Educated Workforce and University ecosystem
- It’s in Indiana, one of the best states for government programs increasing investment like tax credits, direct VC investment and a state-focused fund-of-funds.
The activity is obvious for anyone zooming in. SecondSight, Stagetime, Folia and SummaForte all announced VC financings. Local startup hub The Mill is leading efforts expanding the Trades District with an additional Tech Center to be added in the future. And the local angel fund Flywheel is more active than ever — with big plans to grow.
North Dakota: Population IDGAF
The 47th most populous state (and least in the Midwest) doesn’t care that you don’t care (…yet). This year they had not one but TWO (2!) metros in the top 30, with #22 Fargo (+4, 19.3) moving up 4 spots and #27 Grand Forks (+5, 18.2) increasing 5 spots. Startup activity and density are on the rise, buoyed by investment in accelerators (such as gener8tor’s flagship program) and strong state-backed investment from the North Dakota Growth Fund. This is on top of their efforts to use federally-funded SSBCI funds to support startups and is having a clear impact in attracting entrepreneurs to start (or move to) an already strong state for cost of living and tax climate.
Wichita on the map
The biggest gain this year was seen by #29 Wichita (+13, 17.6), moving up thirteen spots to make the top 30 (first time since 2017). This wasn’t a shocker for anyone that has been watching — steadily increasing grassroot efforts are now being matched by federal/state resources to boost Kansas’ primary startup ecosystem outside of the KC metro. While the city still lags in exits and big outcomes, an active angel community and new SSBCI programs complementing a strong angel tax credit are laying the groundwork for more startup growth in the coming years.
Pay attention to CoMo
#21 Columbia, Missouri (+1, 20.3) is the smallest ecosystem to announce multiple major financing events in the last 12 months. The 45th largest Midwest metro of just 214K people, it boasted another massive $290M Series E for hometown hero Equipment Share and also a $45M Series B for up-and-comer Paytient. Raw startup activity still lags behind others in the top 25 but local accelerator Scale has been incredibly active to boost those stats and helps draw in external VC dollars. While Missouri has made a big effort to deploy SSBCI funds through a direct-investment program, it has limited state-backed funding sources and still lacks an angel investment tax credit so Columbia’s government programs score falls significantly short of similar cities #17 Lexington, Kentucky, #19 South Bend, Indiana and #20 Lincoln, Nebraska.
A note on SSBCI
A lot of emphasis in the discussion has been the drastic changes in government resources from the SSBCI — the “State Small Business Credit Initiative”. High-level, this is a national allocation of $10B that is being divided up to treasury-approved plans that each state submits. States have a lot of options on what they can propose, and they have all done it differently. Many have taken advantage of the dollars to boost startup activity and funding — either directly (through loans and equity programs matched by private dollars to technology startups) or indirectly (through a fund-of-funds program allocating to fund managers). Some states have directed it away from startups and more towards traditional loans and insurance programs for more ‘main-street’ businesses. Regardless of whether that is the right decision for that state, if a state invests more in their technology industry, then the government programs score will likely see a boost (and vice versa).
The Classic Rivalries: 2023 Edition
Michigan vs. Ohio
Coming off back-to-back wins, Ohio must be feeling pretty confident. We already discussed #5 Columbus’s long-fought rise to the top 5. And the amount of capital coming in is just massive — Columbus boasts the third highest Capital Invested score in the Midwest. Ohio has continued to score slightly higher on government programs, although both states double-down on coinvestment programs and SSBCI-backed fund-of-fund programs. #10 Cincinnati stayed flat, albeit closer to #9 Madison than #11 Kansas City. Unfortunately for Ohio, their third and fourth largest ecosystems (#13 Cleveland and #23 Akron) declined one and four spots respectively.
Michigan on the other hand saw #6 Detroit gain one spot, #8 Ann Arbor stay flat and a bit of a wash with #28 Grand Rapids sliding 5 spots, but #30 Lansing gaining 3. More interestingly, Ann Arbor saw two of the larger new funds raised this year: $268M Arboretum Ventures and $125M Plymouth Ventures. Whereas the largest new fund across the entire state of Ohio was Tamarind Hill’s $52M Fund II. It’s a lot to sort through and it was a down year overall but some ecosystems seem more sustainable than others. Given my natural skepticism towards the present values of Ohio’s largest recent success stories and the outsized boom Michigan is getting in electric cars and infrastructure spend, I’m giving this one to the mitten state.
The 3 C’s of Ohio
This one is less fun to analyze every year. We haven’t seen a change in order since Columbus jumped past Cincy in 2020, and the gap has widened basically every year. Now, eight years into the rankings we have #5 Columbus (+1, 29.0 points) a full five positions ahead of #10 Cincinnati (+0, 26.1 points) and a seemingly insurmountable eight spots ahead of #13 Cleveland (-1, 24.0 points). I don’t necessarily see this ‘turning around’ anytime soon, as even though some of the causes of Columbus’ rise may not be permanent, the flywheel of talent and capital clearly will be. What we can all hope for is that Cincinnati and Cleveland continue to deeply invest in new startup creation and a variety of funding opportunities (both effectively activating federal/state dollars but also outside private capital like Cintrifuse has done with mobilizing Cincinnati’s corporate resources). These efforts have shown they can pay off and are even more critical in a slower startup economy.
Collegetowns
While the Midwest’s Big Ten is completely morphing into a national (very) Big Ten (plus 20) conference, our regional collegetowns have had a lot of activity. #8 Ann Arbor (+0, 27.2) has managed to stay atop cross-lake rival #9 Madison (+0, 26.8) by a 0.4 point (half the margin of last year). Ann Arbor has best-in-class Startup Density, the highest Educated Workforce, a more favorable Tax Climate and surprisingly chart-topping Internet Access. Madison has superior Government Programs, a very strong score in Accelerators and a strong score relative to size on Big Companies. Interestingly, as already noted Ann Arbor’s VC funds have been more successful announcing recent fundraises, but Madison has been the center of more fund-of-fund activity including more dollars for the beleaguered Badger Fund of Funds and corporation-backed NVNG. Time will tell if Madison can continue to shrink the already narrow gap between the two standouts.
Just down the top 25 we had some movement but no changed positions. #14 Bloomington, IN (+1, 23.7) is now two steps ahead of #16 Lafayette (+0, 22.1) and three ahead of #17 Lexington, KY (+0, 21.5). #19 South Bend (+1, 20.9), #20 Lincoln (+1, 20.6) and #21 Columbia (+1, 20.3) all moved up 1, while #25 Champaign (-1, 18.4) rounded out the Top 25. We previously touched on the excitement in Bloomington and Columbia, but Lafayette announced a major exit with Purdue spinout Adranos selling to Anduril, South Bend’s SIMBA Chain took on $30M and Lincoln’s Spreetail took on a whopping $208M. Lafayette also tops all collegetowns in the University Ecosystem score, coming in 5th (only behind major metros Chicago, Pittsburgh, Minneapolis and St. Louis), which should bode well for more university-associated innovation coming out of that ecosystem. Overall this continues a larger multi-year trend of thriving formation, investment and acquisition from smaller-but-still-mighty collegetowns across the region, clearly forming a critical part of the overall vibrancy and strength of the Midwest tech economy.
All of this is just the tip of the iceberg — there is a lot more to uncover about your city by diving into the rankings and the accompanying data. In addition, make sure to check out the National Peer Rankings: Major Metros to see how our region’s largest cities stacked up against cities like Atlanta, Philadelphia and Seattle. Regardless of what you find, we hope it serves as a small factor in encouraging entrepreneurship, investment, career and other opportunities in the cities we live and work in. Because in tougher times, it is even more important to see the experienced early sales hire team up with the backend engineer and leave the hometown unicorn, develop an MVP, raise angel capital and a Pre-Seed round, and start to build, hire and grow the next big thing. Those companies are only going to be able to do that with the inspiration and experience from nearby big outcome success stories, with the education and knowledge from world class universities and companies, with the early help with formation and funding from accelerators, angels and government resources, with sales and hiring opportunities from the cities they are in (or can reach) and with the investment from capital partners actively in or investing in their ecosystem. We’ve got all the ingredients here, so let’s all continue to #InvestintheMidwest
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.
Data: We divided it up into three categories with 25 underlying weighted variables that come from 16 different data sources, ranging from the US Census to the US News and World Report to individual state government websites. Since 2018 we have relied on PitchBook as our source of startup and investor data. 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 25 variables are pooled into 3 major categories (data cutoff date at 06/30/2023). Here is what goes into each one:
Startup Activity which includes subsections for Startups (number, density and momentum), Exits and Big Outcomes (43.5% 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 (39.0% 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 investor activity, accelerators, universities and government support. Data comes from several different sources: the US Census, US Patent & Trademark Office, Fortune.com, Pitchbook, US News & World Report, 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 Sam Cavender and Leandro I Bedolla who meticulously pulled all of the data through several months of tedious work and planning. Additionally, thank you to Katie Birge, Ruth Brungard and Abhinaya Konduru for help in visuals, publishing and distributing.
