The Next Silicon Valley?

Silicon Valley wasn't always the hotbed for VC investment that it is today. Now the Midwest is vying for that same funding.

Feb 20, 2014 at 10:00AM

Jesse Vollmar, co-founder and chief executive of Ann Arbor, Mich.-based start-up FarmLogs, is a pioneer. FarmLogs was founded in early 2012 in Silicon Valley, where most tech start-ups are born. But after wrestling with the logistical divide between the physical location of his business and his customers -- farmers primarily located in the Midwest -- Vollmar shattered the mold and decided to move the business away from tech's epicenter to the Midwest.

"In Silicon Valley, you're in a bubble of tech geeks, and that's awesome. But there are challenges being disconnected from reality," Vollmar told me. 

Don't let the name fool you -- FarmLogs is a technology company. It builds the technology that tells farmers what they need to know about their fields, including precipitation levels and market prices, in minutes, which in turn saves those farmers hours of time.

Risk-taker Vollmar picked up the business and moved to Michigan only after having raised $1 million in seed capital funding. "Raising another round from Silicon Valley wasn't impossible, but we were at a significant disadvantage being an outsider from the Midwest trying to raise capital from Silicon Valley funds," said Vollmar.  

As fate would have it, lightning was about to strike. 

Driving in profits
Soon after Vollmar relocated, a couple of VC veterans were similarly drawn to the region. Mark D. Kvamme and Chris Olsen co-founded Drive Capital, a venture capital firm dedicated to investing in businesses in the Midwest. Kvamme noticed something special about the region after serving a six-month stint for Ohio Governor John Kasich. 

"He was surprised by what he saw," Olsen told me. "He spent his life in Silicon Valley, his first job was at Apple (NASDAQ: AAPL) at 19 years old. He ended up going to Sequoia Capital and then out here to Ohio, and he said, 'Looking around this feels a lot like Silicon Valley felt in the 1970s.'"  

Kvamme also realized that Midwestern states were an underpenetrated region for VC funding. Olsen, also a Sequoia alum, agreed that the start-ups in the region were nothing short of spectacular. "Everyone forgets there used to be semiconductor plants being built among the apple and cherry orchards in Silicon Valley. That beginning transpired into a tremendously successful ecosystem. In Ohio, there are all of these great companies and no venture capital paying any attention to them," he said. 

Drive Capital last month closed its maiden fund after raising $250 million. The fund has only made five investments so far … among them, FarmLogs, which received $4 million.  

FarmLogs is currently looking to double the size of its engineering team. That shouldn't be too hard considering the company is located in a college town, near the University of Michigan at Ann Arbor, a top-tier engineering school. Worth noting also is the pedigree of tech talent that has already emerged from the Midwest, including Marc Andreessen, a University of Illinois at Urbana-Champaign gradate, and Google (NASDAQ: GOOG) co-founder Larry Page, a University of Michigan alum.

Plus, the competition for talent in the Midwest is less stiff in comparison to Silicon Valley. Even though nobody is sacrificing on quality, the talent's cheaper: The average cost per engineer, including salary, benefits, etc., is $10,000 per month in the Midwest versus as much as $30,000 in the Valley, Kvamme told me.  

Flying cloud
FarmLogs is one Midwestern venture funding success story, but it won't be the last. "It fits with the broader themes going on in technology about which we're really excited. The biggest one of them is cloud services," said Olsen. 

Olsen pointed to the example of Facebook (NASDAQ:FB). Mark Zuckerberg had little choice but to build the company in Silicon Valley, but not because of investors. There was plenty of capital in Boston. It came down to talent and being near the people who had the expertise to build out data center infrastructure. In Facebook's case, it was Jonathan Heiliger who built out the data center for the company.

"There's been a paradigm shift. It used to be you had to build a company near the engineering talent and infrastructure. Now, assuming the capital component to building a business is done, entrepreneurs can put their businesses next to their customers," said Kvamme, adding the Midwest is an attractive candidate with a concentration of 150 of the Fortune 500 companies. 

The next Silicon Valley?
In terms of VC funding, the Midwest is just a microcosm of the Valley. Silicon Valley generated about $12 billion in VC funding in 2013 compared to the Midwest's $1.1 billion.   

With the spotlight for tech start-ups now shining on the Midwest, however, the region's sure to attract more competition. The response? Bring it on.

"We are drumming up attention for what we do," Vollmar said. "More people have started to take notice of the agriculture industry, that it could use technological innovation." But FarmLogs, with 5% of the U.S. crop farm market, has a head start. Start-ups won't catch them and the tech leaders aren't as nimble.  

For venture capitalists, the landscape looks different. "From a competitive standpoint, we view it as more of a cooperation than anything else. We would love to see more venture firms setting up here and investing in the region. Our attitude is we'll partner with you, invest alongside you. There's a huge opportunity here," said Kvamme.  

Conclusion
A recent study published by the Ewing Marion Kauffman Foundation suggests there has been a sharp decline in the number of tech start-ups since the 1990s. In addition to the one-two punch of the tech bubble bursting and the economic recession, the fewer number of tech start-ups could be a function of industry consolidation led by industry bellwethers. 

If Vollmar encapsulates the spirit of Midwestern entrepreneurs, however, we won't be seeing too many sellouts from the region.

"We believe this will be a company that absolutely could go public one day," Vollmar told me. "It's one option for us. We're not looking to sell the business for a quick $20 million. We are trying to build something."

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Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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