Bits to atoms in the midwest
This month I’ve been thinking about innovation and the midwest with fellow Midwesterner/Southerner, data analyst, and investor Kyla Scanlon.
This was an interesting and personal topic for me. I grew up in Michigan, moved to the East Coast, and I’m now working for an SF-based tech company.
Every time I drive home to Michigan, I look around and say: there is so much stuff here — unrecognizable buildings, plumes, smokestacks, crops.
From earlier today:
What is that tower? How did it get there? What does it do? (Ready-mix concrete supply.)
The innovation and growth narrative of Silicon Valley and tech in the year 2020 is detached from the stuff taking up the majority of space in the world, the factories and buildings at the center of life for most Americans. I wanted to connect those two stories.
A journey into how the Midwest became the Midwest, how SF became SF, path dependence, pendulum swings, and individual agency:
I. How the Midwest became the Rust Belt
The Midwest had resources to be processed and a means to transport them, at the precise time when we were developing the technology to process and move resources at scale.
In 1850, textiles were the most important part of the American economy, representing 1/5th of the U.S. Industrial Production Index, followed by Transport Equipment and Machinery, and shifting into chemical and fuel products gradually over time.
During this time, the Midwest became an industrial hub due to its proximity to natural resources (ex., fertile soil, heavy metals) and water access. The upper Midwest specialized in mining and pineries, while the lower central states became the nation’s breadbasket.
The former capacity can be traced back to Precambrian lava flows, while the latter can be owed to ancient glaciers producing rivers (ex. The Mississippi River Basin, the Great Lakes) and favorable soils (see clay loam and alfisols on the chart below).
The region took this advantage and ran with it, leading US technological exploration into the early 20th century: Chicago was the nation’s first railroad center, and Detroit was, of course, the capital of the automobile industry.
Meanwhile, at this time, the West coast was just beginning to be populated.
II. How SF became SF
When the semiconductor came around at the beginning of its s-curve, the midwest was riddled with the tech debt of supporting industry at the end of its cycle.
The tabula-rasa West Coast was been able to, from nothing, deploy the infrastructure to capture and grow the market for bits-oriented technology: computers, and software.
I was surprised to learn that much of this growth can be traced back to something specific and cultural: Stanford hiring Fred Terman as its president. Terman—who saw war-era innovations firsthand while working for the DoD— created the physical place (the Stanford Industrial Park) that would link public innovations with corporate America in the postwar years.
Enter offshoring, and since then, the West coast has taken off, while the Midwest has fallen behind. As of 2020, CA is home to 550 publicly held companies; Kentucky (where Kyla is from) is home to 13. The returns from these public companies have also varied dramatically by region. The South and the Midwest have lagged behind the West and the Northeast over the past five years. Notably, the South has outperformed on a 20Y basis (due to oil and gas).
We all know the story but it’s still helpful to see how this played out on the ground level. The graphic below shows the unemployment rate by state since 1976, and you can see unemployment shifting from the coasts to the middle of the country.
III. Very little VC funding is making its way to the Midwest.
Only a few good venture-scale outcomes have come out of the Midwest, and limited dollars have gone in.
The graph below shows the Top 100 YC Companies by location as of November 2020. Out of the 85 companies listed, only 3 are headquartered in the Midwest/South, 3 in the Northeast, and 2 in Utah.
Some standouts: capital-efficient Zapier is in Tulsa, Oklahoma (south-midwest). EquipmentShare is in Columbia, MO; ShipBob is in Chicago, IL.
This trend continues at the top of the funnel rather than being a function of conversion rates. Looking at the W20 YC cohort, there were 117 companies headquartered in the United States: 99 are based on the West Coast (98 of which are in California), and 18 companies represent the rest of the country. 10 are located in New York, NY, 3 in Massachusetts, 2 in Texas, and one each in Michigan, Chicago, and Pennsylvania.
The problem isn’t the availability of venture dollars — at least not now, in a time of surplus capital. If the ideas were there, then the investment would follow.
I think it’s a challenge of culture and agency. A critical mass of people knowing they should believe in their hard-won insights and having the audacity to try to raise money for them.
Knowledge of how much money there is in the world seeking a return — money that good builders would be doing a favor, and not vice versa. And while its easy enough to point at Fred Terman and Stanford and say “we should do something like that,” I have no idea what alchemy actually led to agency production, people throwing inputs at the top of the funnel with abandon.
IV. There will be a pendulum swing
We are at the end of the current S-curve. There’s going to be a reactionary counter-swing, and the middle of the country, with its maker cities and legacy knowledge of production processes, is well positioned to partake in a technology of atoms not bits — manufacturing, agriculture, energy.
There are some compelling early balls in the air: strong universities capable of serving as fulcrums (as Fred Terman did at Stanford); natural resources and geographic advantages (ex., the Ohio and Mississippi Rivers); public-private projects like the Tennessee Valley Authority and the Research Triangle in Raleigh-Durham; startup community playbooks to build on, like Denver, etc.
I can imagine a world where bits-oriented invention reestablishes a network of small, strong economies across the midwest (a la the work of David Castells-Quintana and Vicente Royuela in “Agglomeration, Inequality, and Economic Growth:”
“A more balanced urban system, in which small and medium-sized cities play a fundamental role in the mobilization of local assets to exploit local synergies, seems to be a better strategy than intense urban concentration.”
For 20 years, we have been building software. The Midwest is now the tabula rasa that the West once was, only with the advantage/disadvantage of more tacit knowledge, and more industrial history. It starts, probably, with individual agency. We think the scope of opportunity is massive.
Companies and Careers in Energy Tech
Tennessee Valley Authority, a publicly owned development corporation
NextMV, a Midwest based logistics startup
Nimbus, an Ann Arbor based urban mobility company
Rivian, a Michigan-based EV startup
EquipmentShare, a Missouri based industrial equipment rental service
Censys, an Ann Arbor based cybersecurity startup
ShipBob, a Chicago-based e-commerce fulfillment service
M25, a Midwest-focused venture capital firm
Until next time! In the interim, feel free to share your favorite elegiac mid-country industrial dwellings.
Yours,
Lea