Fundraising in the Midwest

Problem

I was a founder and CEO of a highly successful startup funded and propelled by Y Combinator. Yet, we decided to return to the Midwest, where we tried to fundraise by applying the Californian fundraising model. That simply didn’t work. We had to completely change how we fundraise, including who we would approach and how.

The main problem we encountered when we moved from California back home was how VCs were evaluating companies. We had a couple of angel investors in California that helped set a valuation there, but that wasn’t much help in the Midwest. In addition, we were relatively young back then, barely in our early 20s, and were rejected by a number of VCs just because of our age. For those who didn’t succumb to ageism, the numbers we showcased didn’t line up with their expectations. The Midwest investors are more inclined towards profitability and a long-term runway rather than moonshot-based investing. That comes in stark contrast to what is standard in the Valley, where companies can raise Series A and millions of dollars with no revenue. We made our breakthrough in California, which is an epicenter of a startup universe, and initially had little understanding of how fundraising in the Midwest would look like.

Actions taken

We stopped fundraising and went to investors for feedback instead. One of the investors from M25, who happened to be one of our earliest investors, took the time to sit us down and put us before some big investor names here in the Midwest. We were too small for them to invest in us, but they could provide some critical feedback on why our approach would not work. They helped us shift both the narrative and numbers to fit the Midwest approach. That included helping us refine the strategy and pitch to make it more appealing to the traditional Midwest venture capitalists.

Feedback meant that there were some hard truths we had to hear and make changes both in terms of fundraising but also our business strategy. We learned how fundraising varied from one region to another within the same country and/or industry. We also learned a great deal about distinctive attitudes of venture capitalists that would differ across the country and how California and the Midwest value different things. In a nutshell, the Midwest will always value profitability over 10x explosive growth. Also, being cash flow-efficient was not something we paid much attention to since we followed a California-type approach. In the end, investors themselves helped us re-do our projections and finances for the capital costs we would have over the next two years. We adjusted that down to expectations in the Midwest.

At moments, this felt too taxing. We considered going back to the Valley to fundraise there. It seemed that our deck was more appealing there, but for us, Indiana and, most broadly, the Midwest is home, and we wanted to build our business here. Also, there is a growing startup economy here which we wanted to be part of. Taken all together, it helped us decide against going to the Valley.

Lessons learned

• Fundraising differs significantly from one region to another, with the Californian model being a gold standard but rarely applicable outside of California. If you want to fundraise elsewhere, you should try exploring different approaches. We tried to change our pitch, which didn’t play out as expected, but some other adjustments did.
• We had a great support network of investors, and we were lucky to have some incredible investors in the earliest days. Instead of having to take capital from whoever could offer it, we were able to find investors with shared values. By shared values, I am not referring to their investment thesis only, but to how they operate, what is their outlook on different geographies, etc.
• If we wanted to raise in the Midwest, we wanted all our investors to be from the Midwest. There were a few small angel exceptions, but we shifted our fundraising to Midwest investors. For most firms in the Valley, we were just a too small investment, while for local investors who didn’t care only about the company but the ecosystem as a whole, we were an exciting possibility.