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Chelsea Stoner  |  January 8, 2020
What I See in Steve Case’s Revolution—Actually, a Long History of Tech Innovation in the Heartland

This past fall, former AOL CEO Steve Case announced a second, $150 million investment fund to back small companies based outside the traditional, coastal U.S. tech hubs—namely Silicon Valley and Boston/New York.

I think it’s a great idea. But I’m a little biased, as my investment firm has been pursuing this strategy for more than 15 years.

When I heard about Case’s new initiative, I smiled. Then I went back through some of our internal investment data starting with our eighth fund, which we raised in 2008.  In that fund, about 50% of our dollars invested went to companies in the U.S. heartland, South, or Pacific Northwest—basically any geography in the U.S. that wasn’t New York, Boston or the San Francisco Bay Area.

In that eighth fund, 24 of the 53 total portfolio companies in which we invested fit this description. They included little-known, healthcare-software companies in suburban Atlanta and Vermont, as well as a supply-chain technology company headquartered in Minnesota. (All three of those companies wound up growing substantially and ultimately were acquired by larger industry players.) The companies in the fund also included some better-known heartland tech names such as Indianapolis-based Angie’s List* and Chicago-based Groupon*, both of which staged IPOs. ExactTarget*, also based in Indianapolis, went public in 2012 and was sold to Salesforce the next year for $2.5. billion. (Other IPOs in that fund included Zayo Group*, Skullcandy* and Bazaarvoice*.)

This trend has continued in our subsequent funds, and we will continue to seek out promising companies in places like Georgia, Indiana and Vermont. Here’s why:

1. Not all great technology companies follow a traditional venture path.

Steve Case’s fund is mainly focused on making small, seed-stage investments in the heartland—and hoping larger venture firms piggyback onto subsequent funding rounds. But those non-coastal states also contain some more-mature, family-run businesses, and even large, corporate spinoffs that are worthy of investment. Sometimes investment firms like mine provide growth capital to these businesses or purchase shares from their founders. This allows the founders to diversify their wealth in exchange for selling a minority stake in a company. In other cases, investment firms can take a majority stake if the founders want to sell more of their business. Every company is different, but entrepreneurs and founders can win either way. Our goal is to find these tech companies through our own, in-house research. This is how we found the Atlanta healthcare-software company Brightree*. We were researching technology businesses serving the aging U.S. population and happened to call the company just as executives had hired a banker to help them find a suitable investor. Timing is everything! Believe me, not every successful tech CEO is reading BuzzFeed and going to tech meetups in San Francisco. You’d be surprised.

2. More local, under-the-radar investment firms in the heartland are already doing good deals.

While some Silicon Valley VCs are venturing beyond Fremont and Santa Clara, there are many well-respected, regional investment firms already entrenched in the heartland that can be great partners for larger investors willing to seek them out and infuse more capital into their portfolio companies. We’ve been lucky enough to partner with several of them. One example is Canal Partners, a firm based in Scottsdale, Ariz. and founded by JDA Software Founder and Chairman Jim Armstrong. His firm invested early in healthcare-software company WebPT*, based in Phoenix. There’s also Arthur Ventures, the North Dakota firm co-founded by Doug Burgum, the founder and former president of Great Plains Software, who invested in Washington-based, tax-software company Avalara*. (Burgum was raised in Arthur, N.D. and is now the state’s governor.) These firms may not have ties to the high-wattage celebrities who recently backed Case’s fund—like Jeff Bezos and Sarah Blakely, the Spanx founder—but they sure do know good technology companies.

3. The costs of starting a tech company continue to go down.

This is sort of a no-brainer, but as technologies like cloud computing make it easier and cheaper to start a technology company these days—there’s no need for pricey, on-premise hardware anymore—it’s possible to bootstrap a tech company with very little capital. This means more people, in more places, can start exciting companies. WebPT built a business that grew to more than $100 million in revenue off of just about $2 million invested in the company, for example. While this is not the norm, we are seeing more and more companies get to $10 million in revenue before they take outside capital for growth.

4. You can find great talent anywhere, and these people can also work remotely.

Thanks to the rise of STEM education, and the increasing importance of technology in our economy and culture, San Francisco and New York no longer have a monopoly on the best engineers, data scientists and product marketers. This means you don’t have to set up shop in those costly cities to hire locally—you can stay in Phoenix or Milwaukee and still staff your company with amazing talent. And, thanks to new development, collaboration and video-conferencing tools (like Slack and Zoom), even if you ARE in Phoenix or Milwaukee, you can also hire great people who might live in Detroit or Tallahassee. I recently invested in Redox*, a Madison, Wisc. healthcare-IT company in which most of the employees work remotely.

5. Sometimes, it’s good to be out of the echo chamber.

I don’t want to generalize, but often I see companies in the Bay Area that are committed to a “spend big or go home” model: They are way more focused on growth than profitable unit economics, and they sometimes seem to care more about their office-snack policy than getting a new product out the door. Don’t get me wrong—some of these companies turn into iconic, successful brands, and company culture is hugely important everywhere. But so is discipline. WeWork’s recent stumble is a good reminder of this. In areas like the Midwest, or the Southwest, I often find bootstrapped companies that are simply scrappier, hungrier and more focused on bottom-line financials. Maybe it’s because some of these companies feel like underdogs, trying to compete with better-funded companies from the coasts—and often succeeding. I like these underdogs and will continue to place many of my bets here.

Either way, I’m a big fan of this model, which has produced some great entrepreneurs and executives I’ve been proud to back. And of course, I wish Steve Case luck as he traverses this same path.

This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity. 

The information and data are as of the publication date unless otherwise noted.

Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.

The information above may contain projections or other forward-looking statements regarding future events or expectations. Predictions, opinions and other information discussed in this video are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Battery Ventures assumes no duty to and does not undertake to update forward-looking statements.

*Denotes a Battery portfolio company. For a full list of all Battery investments, please click here.

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