On Monday, Revolution — the Washington-based venture capital firm lead by Steve Case — announced a new $150 million seed fund dedicated to investing in entrepreneurs living outside of the well-established startup hubs.
What’s different about this initiative is that the fund’s limited partners are all prominent names in business — Jeff Bezos, Dan Gilbert, Eric Schmidt, and Meg Whitman, to name a few — and are being pitched in a very public way as active collaborators with the fund’s portfolio companies. In other words, the fund won’t just cut you a check, it will connect you with once-in-a-lifetime mentorship and corporate partners.
Tuesday, I spoke with Anna Hensel of VentureBeat about the announcement, and how the fund might help businesses and startup communities in Middle America. I’ll use this opportunity to expand on what we discussed. Three things stand out.
First, it’s worth taking a step back to understand what’s actually occurring in the Midwest venture funding market already. Though the Rise of the Rest Seed Fund appears to have a broader geographic mandate, their activities have traditionally focused on this region — so that is where I will focus here.
I looked at seed and early stage venture capital deals in the Midwest region and for the country as a whole, using publicly-available data published by PwC Moneytree. Two insights emerge. First, when looking at total venture deals and those at the seed and early stage, the Midwest has been steadily increasing its share of US deals for more than a decade.**
Also, when looking at funding amounts, Midwest startups are receiving about $150 million in seed and early stage funding each quarter the last couple of years — an amount equivalent to the entire ROTR Seed Fund.
So, while the fund is an immensely welcome additive to venture capital in the Midwest, the simple point I want to make is this — we aren’t starting from nothing here. Many observers seem to not grasp that fact. Midwest startups are attracting venture capital investments at a pace faster than the country as whole in recent years. This is a point certainly not lost on the ROTR team — who have stated that they intend to earn returns competitive with elsewhere.
The second point I want to make is why the ROTR Seed Fund is worthy of special attention. In my opinion, it’s the very thing that makes it different — the big value add of these investors is not the capital per se, but the expertise, relationships, and other resources they bring. For the same reason you go on Shark Tank for more than some seed funding (you get televised exposure and maybe even Mark Cuban on your board), an investment from the ROTR Seed Fund could get you a direct line to Ray Dalio, John Doerr, or Tory Burch.
The magnitude of these add-ons—the additional value gained from capital as a service beyond capital as a commodity — will be the key difference. It’s what will make this more than just another fund. On the other hand, this is also the biggest question mark: how involved will these investors really be, and how deeply will they engage with these communities?
That’s the third point I want to make — what will be the impact on startup communities? First, success breeds success. To the extent these investments and investors can help individual companies succeed, particularly in places where that hasn’t happened before, it will energize, educate, capitalize, and elevate entrepreneurs in those communities over the long run, even those that are not directly supported. This is the most direct way that ROTR can have a lasting impact on communities broadly.
A second impact these investors can have on startup communities is the extent to which they are willing to work with local supports and entrepreneurs outside of those direct investments — in other words, will they take a broader interest in these communities and adjacent startups, or will it be purely limited to portfolio companies? Will they help seed ecosystems, or work with individual companies only?
We already know that their presence alone will create spillovers to the broader community—for example, research has shown the presence of a startup accelerator in a community has positive benefits to non-accelerated companies by attracting additional outside investors to the area. But, my hope is that their involvement will go deeper than residual impact.
To summarize, the ROTR Seed Fund is a welcome addition to the early-stage venture funding landscape, which will likely have a big impact on companies and communities throughout the country. It will be interesting to follow over the coming years, and my hope is that what is learned there will be shared more broadly with startup communities everywhere.
** In this short post, I stick with deal volume rather than dollar volume. This is because deal sizes in the Bay Area have been so large, particularly in the later stages, they obscure funding trends overall. I have examined these numbers, which show that when excluding the Bay Area from the national figure, the share of dollars invested in the Midwest is going up in a similar pattern to deal volume when including or excluding the Bay Area.