Yes, The Midwest Is Different: Tech, Infrastructure And Values Mark … – Forbes

INDIANAPOLIS — When you think about the business capitals of the United States, Indianapolis doesn’t exactly leap to mind. For one thing, it’s home to a lot of people who have that Midwestern niceness going on, a sensibility that borders on diffident to someone accustomed to the sharp elbows and self-promotion of the East and West coasts.

“We’re just nice Midwestern people with nice Midwestern values,” said Indiana Secretary of Commerce Brad Chambers, in an interview this month. “I believe in that. It’s real.”

I visited Indiana in January as part of a reporting tour sponsored by Armory Square Ventures called Deep Dives into Secondary Cities and ended up thinking about what kinds of innovation may arise as different places, like Indianapolis, build more momentum in a shifting economy. The old manufacturing and ag centers of the Midwest don’t look like they’re decaying anymore: They look lucky to have infrastructure and a low-cost of living. A culture of investing back in the community and a supportive state government is starting to pay off for this Midwestern state and city.

The number of businesses in Indiana is surging, with the number of new formations up 51% in 2022 over 2019, to about 83,500 – a sign of economic growth to come. The number of companies adding their first hire in the first half of 2022 was up 32% compared with the same period in 2019, to 30,500.

Indianapolis broke into the top three of the Best Startup Cities ranking, put out by Midwestern Startups, displacing Pittsburgh. CNBC ranked Indiana number one on its list of the top states for infrastructure, citing its freight-shipping capacity and location within a days’ drive of 110 million people. (“Hoosiers, pick up your jaws,” wrote the Indianapolis Star newspaper, noting what it called the city’s Frogger-like street landscape). Indianapolis, like other low-cost cities, has a new livability buzz in a high-inflation environment: It recently vaulted 19 spots on the US News & World Report of best places to live and now resides at 63.

Today’s Businesses

Indiana and its capital aren’t home to a lot of flashy high-tech entrepreneurs – though there are a few of those – but in Chambers’ eyes, there’s little difference between the high-tech entrepreneurs that grab the headlines and the thousands that are filing to open businesses and hire employees now. “Risk-takers are risk-takers, no matter if its coding or software or a restauranteur,” said Chambers, who founded a rental real estate company, Buckingham Cos., in Indianapolis. He’s also recently been named to a national investment advisory board at the U.S. Department of Commerce.

The broad approach seems to be working. In terms of growth, Indiana looks more like a sunbelt state, said Kristian Andersen, a partner at High Alpha, a venture firm based in Indianapolis. Sunbelt states, like Texas, Georgia and Florida, have been growing fast for a decade or more. Now, it seems that the post-pandemic economy will also favor Rust Belt and Corn Belt cities, like Indianapolis, the country’s 15^th largest city.

Of course, as in many American cities, there are layers of reality. Indianapolis may be moving up in the world, but there are also some parts of it starting out behind. Racial tensions are a part of the city’s fabric as they are in most places. Indiana was the headquarters of the Ku Klux Klan in the 1920s; Indianapolis was also the headquarters of Madam C.J. Walker’s hair care company; she’s often cited as the country’s first Black woman millionaire. Today, there’s a small cohort of Black founders, including Darrian Mikell, co-founder of Qualifi, which is using an audio platform to help speed up hiring – and remove biases from the hiring process.

A serial entrepreneur, Mikell said he’s never experienced overt racism – but he is aware that building a network was harder for him than it might have been for other entrepreneurs. “The network and the community know we’re underdogs,” he said.

An Agricultural Hub

What makes me think Indianapolis is likely to grow in the next few years is strength in agtech. Innovation energy comes from change. The Ukraine War and new tension with China mean there are rising concerns about food and energy security.

Take a company called Taranis. Mike DiPaola, the chief commercial officer, helped the company decide to move its headquarters from Israel to Westfield, just outside Indianapolis. The company wanted a place in the corn belt, but one that had a tech workforce.

Taranis has about every innovation bona fide you can imagine. Founded by four Israelis, it has raised $100 million from venture capitalists. It has an AI-based product – in this case, a crop-scanning solution (it flies drones and planes) that it sells to farm co-ops, which are organizations that keep farmers informed of trends in crop health. The company considered Illinois, Missouri and Iowa, among others, DiPaola said.

The Indiana Economic Development Corp. invited executives to box seats at the Colt games. That didn’t hurt. Then, DiPaola realized per-employee costs in Indiana were more than one-third lower than in neighboring Illinois. And there was the proximity to a research institution. “I’ll see you at Iowa State and raise you at Purdue,” he joked.

Taranis has 120 employees outside Indianapolis, though it keeps an innovation hub in Israel and has a location in Brazil.

Other agtech companies are homegrown, like The Bee Corp., founded by Ellie Symes. When she was an undergraduate at Indiana University, she volunteered for a project about environmental sustainability. “I ended up falling in love with bees,” she told me. The Bee Corp, that makes a camera technology, called Verifli, that allows people who rent hives to check on the health of bee collectives. It’s raised $5 million, about half in grants.

Here’s a disturbing fact, which is the kind of thing that you learn about when you’re visiting a place that prides itself on being an agtech center: Queen honeybees used to live for three years. Now, they only live for one.

Nobody is sure of the reason, Symes told me.

Money That Stayed Local

Symes got her first funding — $100,000 – through a business competition in which a man named Scott Dorsey was involved. He was a founder of Exact Target, which was acquired back in 2013 for $2.5 billion by Salesforce. When Exact Target was sold, Indianapolis Monthly estimated more than 100 people became millionaires (and a few, millionaires many times over).

In terms of dollars raised and exits since then, Indiana’s biggest hits have been in what’s called enterprise software; Exact Target was a marketing software company for other companies. “We are stone-cold SaaS experts,” said Andersen, by “we” meaning the Indy ecosystem.

The biggest player is High Alpha, which is itself a story about the value of investing in one’s hometown, or in the case of Andersen, one’s adopted town. (He was reared in Arkansas, where he also started another venture fund).

ExactTarget’s founders and early executives, and Andersen, an early investor, founded High Alpha. It has raised a total of $215 million across three funds, it said as it announced the close of a new $110 million fund in 2021. It also has a large venture studio to mentor entrepreneurs at the very genesis of their ideas. Andersen said the studio has generated exit values of “several hundred million” dollars.

He listed a half-dozen acquisitions, including:

• Lessonley was acquired by Seismic

• Octiv by Conga (now Apttus)

• and Pattern89 by Shutterstock

The Indianapolis ecosystem is so small that a few big deals next year will reverse the decline of 2022. Five new venture funds launched in 2022, including Alios and Boomerang.

Ecosystem supporters say companies including Scale Computing, which raised $55 million, and Zylo, which raised $31.5 million, are raising the state’s profile. Scale Computer operates in an area of tech that focuses on locating computing power — near the end user, to speed up processing time. It runs counter to the idea of centralizing data processing in “the cloud,” which are large facilities with big servers. Scale Computer makes appliances and has a platform of services. Zylo is an enterprise marketing software company.

Despite the developed SaaS community, Indiana remains a tiny share of the nation’s deal market – a little less than 1% in number, and about .3% in deal value, according to TechPoint, a tech industry nonprofit. In 2022, there were 132 deals for a total of $441 million, a sharp decline from the prior year but still the second-highest year on record.

Ting Gootee, CEO of TechPoint, said that she receives calls from private equity and venture capital firms, looking to invest in the area to diversify their portfolios.

JMI Equity, a Menlo Park-based firm, has made three investments in Indiana, she said.

Existing Infrastructure

Indiana remains a rail hub, with a total of 724 million tons of freight moving through the state each year. Indianapolis is the home of the Lucas Oil Stadium, the Indy 500 racetrack, and a huge convention center, 750,000-square-feet, that land-starved East and West coast cities would dream of. Big companies here include pharmaceutical giant Eli Lilly, Cummins Engines and Elanco, an animal health company. Big companies are likely to be more important in the world of innovation in the coming years as the challenge turns to how to better integrate technology into the physical world, versus how to write software.

Indeed, in an era where money is more expensive than it’s been in decades, with interest rates higher than 5%, Midwestern values seem more reassuring than old-fashioned.

“We’re never going to be a New York; we’re never going to be a Miami. We’re not going to be a Phoenix,” said Mark Radzik, the founder of Granite Creek Capital Partners, which manages a $200 fund investing in Midwestern companies with $3-$15 million in revenue. “What you do have is entrepreneurs who say, ‘I may not have gone to Harvard, but I’ll work real hard, and I’ll figure it out.”

Government Support

Indianapolis, which is in the East Coast US time zone, is also on the rise in part thanks to long-term investments from the state, and recent shifts from the federal government. Minnesota-based Skywater Technologies plans a $1.8 billion semiconductor plant adjacent to Purdue University near Indianapolis. The plant is one of at least 24 planned nationwide in response to federal government incentives, which are also driving a broader shift to re-shore manufacturing.

Indiana has been an unusually steady supporter of both entrepreneurship and early-stage investment over the tenures of a long string of governors. It has an early-stage fund called Elevate that puts money into companies alongside private investors, small business development centers, and a state tax credit for venture investment. During the pandemic, the state allocated $500 million fund for communities that created proposals and matched state grants with private dollars. That $500 million turned into nearly $7 billion of projects planned around the state, Chambers said.

What Indianapolis Is Like

High Alpha anchors a new retail-hotel-restaurant-office development on the northeast side of Indianapolis, which makes use of the century-old buildings constructed for what was once the largest Coca-Cola bottling works in the country.

Now, there’s the Bottleworks Hotel, a food court, a row of restaurants that range from the swanky to the diner-esque, a shop-local shop, and a YogaSix – where the staff kindly refunded my money when they realized I’d accidentally signed up for a month’s membership. Along with a resurgent economy, I found a nationally known art museum, Newfields, and a lot of buzz about the upcoming summertime BUTTER fair for Black artists.

There’s, today, a small but growing cohort of Black founders. The people working at high-tech companies in Indianapolis are almost 75% white, according to TechPoint. Indianapolis is also home to Sixty8 Capital, which focuses on undercapitalized founders.

I talked to Mikell, co-founder of Qualifi, which has raised $7.7 million in venture capital. A serial entrepreneur, he started the company in 2019 along with his brother, Devyn Mikell, DeSean Prentice and Keenan Jaenicke.

Working without a salary, he raised money piecemeal. Checks from angel investors carried the company through the first couple of years. “I was a little bit naive and overconfident,” he says wryly. “It definitely led to a lot of hard times.”

Two accelerators, Gener8te and TechStars, helped the company find its footing. Today, it has 19 employees and counts among its clients three major health systems. (Disclosure: one investor is ASV, which also sponsored this reporting project).

Qualifi’s technology records phone interviews and provides employers with transcripts (and audio). Recording the first-level interviews asynchronously speeds up the process. It also removes some bias, conscious and unconscious, from the hiring process. “One of our core tenants is that diversity is an advantage,” he said.

The Midwest Rising

For years, people have been talking about high-tech ecosystems in the Midwest rising. That story turned out to be partly true: they grew slowly but never achieved the centripetal force of bigger ecosystems.

But they’ve built something different, which may in fact be better suited to the new economy. When Andersen and I had lunch in High Alpha’s office near that old Coca-Cola bottling works, we talked about the future of Indianapolis. He’s focused on building a finance community that can “locally adjudicate” the value of startups and entrepreneurial teams, rather than relying on outside investment. He didn’t say Indiana aspires to be the next Silicon Valley or to attract attention from the coasts – that dream seems to be dying in most places.

Rather, he told me about the 35 companies launched from High Alpha. Mikell, the Black founder of Qualifi, talked about the entrepreneurs he reaches out to for support and encouragement. Symes, who founded The Bee Corp., emphasized her non-dilutive funding – grants, not investments. Chambers, the secretary of commerce, told me he focuses on how the state can leverage private capital, not supply a ton of its own.

I left Indianapolis feeling that, with a little bit of outside capital, it’s capable of generating a lot of its own economic energy, like the internal combustion engines still produced there.