
From Bezos to Walton, Big Investors Back Fund for ‘Flyover’ Startups - petethomas
https://www.nytimes.com/2017/12/04/business/dealbook/midwest-start-ups.html
======
mbesto
I live in SV and love the quality of here. Honestly though, the situation for
early stage startups here is becoming untenable.

My theory is the following:

\- Seed money is drying up (there's legitimate data to support this) because
it's all being saturation in Series Alphabet companies that are all raising on
legitimate growth or legitimate track records (but with zero growth and very
good connections).

\- The housing situation is atrocious, and the tech scene is getting older
(read -> having kids).

\- This means employees are saturating towards Google/FB/Apple/etc because
that's the only thing you can afford to do in the bay area. When you can
afford pay hundreds and thousands of developers $500k all-in packages because
your yearly profits alone can sustain the whole of the bay area (looking at
you Apple) then it's almost impossible to compete for talent in anything that
isn't Google/FB/Apple/etc or a Series Alphabet with strong capital.

\- The rest of the world has learned all of the failures and lessons of SV and
caught up. And yes all of the "inbound content" you created was free
consulting to the 5 man shop running out of Madison, WI who is now competing
with 3 man Stanford drop-out of the mid 2000's.

My bet is on this fund and other similar funds, like the middle market PE
funds in tech (PSG, KKR, GSV, etc), Indie.vc, Venture for America, etc. This
is the next big horizon in money making tech investing, not the next
Instagram...those days are over.

It's amazing how many tech companies no one here has heard of but are making
very legitimate money and are based in very unconventional locations. Tampa
Bay, Minneapolis, Charlotte (and the tech triangle), Knoxville, Orlando,
Atlanta, Provo, Boise, St Louis, Denver...you name it. I think we're gonna see
many more Bandwidth.com's, MailChimps, Kabbage's, Outcome Healths, etc in the
very near future.

~~~
thesmallestcat
The SV BigCorps have really poisoned the well out there. It's depressing that
the majority of good programmers in the bay area are obsessed with the
compensation package. Not saying it's the wrong decision, but like you said,
it sucks the air out of everything else. I'd want to blow my fucking brains
out if I had the typical Google SDE/SRE's job and the most interesting
challenges were whether it was worth it to take the Google Bus to work or how
to deftly navigate the D'Amore spiderweb, but that's life if you want to work
with good people out there. I've interviewed with "top flight" YC alum etc.
startups in the area and came away hugely unimpressed. Maybe it was just luck
of the draw, but as a startup guy, I have no reason at all to move out that
way. Over time stuff like this will result in bland, money-driven talent with
good pedigrees and hurt innovation, to echo your point again.

~~~
stevenj
>It's depressing that the majority of good programmers in the bay area are
obsessed with the compensation package.

I think many people across a lot of industries are primarily concerned with
their compensation packages when evaluating jobs.

~~~
thesmallestcat
What a dull truism. I'm not living paycheck to paycheck, I make silly good
money for where I live. The fact that I could be making 400k+ total comp in
Google Mountain View hell or Facebook Palo Alto hell does _nothing_ for me.

~~~
stevenj
I have a hard time believing that the majority of people making 400k+ at
either Google or Facebook would consider their work/life situation a type of
hell.

I understand why some people don't want to work for those companies or in
those areas, or aren't motivated by money. But I think many others do, and the
ones that are living it now are doing so by choice and for their own reasons.

~~~
bob_theslob646
Well to give you and idea on how expensive it is to live, let's talk taxes.
Let's say you are married and make 400k a year and live in San Matteo , CA.
California tax rate is 9.3% and federal is 33%. So before living you owe have
(400,000x(1-(.093+.33))=230,800.

Now let's say you want to house your family. You decide to buy a house. Well
you only have $230,000 so you can't put 20% down on a home with an average
price of a million won in San Mateo, so you put 10% down on this home ( random
home in San Mateo.)[[https://www.zillow.com/homedetails/1715-Borden-St-San-
Mateo-...](https://www.zillow.com/homedetails/1715-Borden-St-San-Mateo-
CA-94403/15531518_zpid/) ]

It's a 3 bed 2 bath home with 1400 square feet.I'm also assuming you have two
kids.(each get their own room)

So now we're at 230800 - $110,000 = 120,800

Now you have to pay the yearly mortgage which is 5606 x 12 =67272

120800-67272= 53,028 left over to live in.

Well don't you need a car to go to work? What about a car for the wife? Car
insurance? You are looking at 1200-1500 a month, if you buy a newer car and
have great credit with insurance.

(1300x12) - (53028)= 37,028

You see how quickly it goes.

So the thing is I'm not sure if you can put a down-payment on a house less
than 20%. That will take off on the mortgage (save you an additional 12-15k) (
I also assumed an interest rate of 4.37% for the 30-year fixed and I believe
if you put more down you get a better interest rate)

~~~
azernik
Who pays a down payment out of a single year's savings?

~~~
bob_theslob646
I assumed, that a person who would be moving there and would be buying a home
and or have no savings...

I know hard for some people to imagine, but alot of people have no savings ,
leave paycheck to paycheck

~~~
openasocket
Yeah, but unless you're putting the down payment on a house every year, that's
an extra 110K (post-tax!) dollars every year after the first. I can't imagine
how I could spend that much money, especially since the mortgage and car
payments are already taken care of.

~~~
bob_theslob646
You are correct.

------
everdev
I ran a remote web agency for years and sought talent in flyover states. I
found employees who were just as talented as those out here in Silicon Valley
but just preferred where they lived.

A modest Silicon Valley salary was typically well received since their cost of
living was usually much lower.

~~~
aantix
A region where modesty (especially monetary) is highly valued and the region
consistently comes in last for VC funding..
[https://www.citylab.com/life/2016/02/the-spiky-geography-
of-...](https://www.citylab.com/life/2016/02/the-spiky-geography-of-venture-
capital-in-the-us/470208/)

------
codeonfire
Bezos is the worst person to invest in flyover areas. Amazon culture is
extremely classist. Every bad stereotype you can think of happens. If you are
from a rich family on a coast and went to an ivy you get lots of funding,
support, and an easy management job. If you are from flyover country you are
supposed to be a robot slave whether working in a warehouse or coding through
the weekend. Yeah, if you are from some village in Asia tech companies will
help you out and hold you up as an example, but guess where people in flyover
states are not from.

------
jorblumesea
The biggest danger to the flyover states is the states themselves. While
investment in education remains high, the future doesn't look great. Top tier
state research universities are seeing their budgets slashed and faculty
poached by the ivys. Declining tax base, reduced federal funding and sadly an
anti intellectual voter base will destroy the advancement opportunity of the
middle class and hurt American R&D. The coasts meanwhile continue to pour
money into investment and state schools.

Excellent article on the issue:
[https://www.theatlantic.com/business/archive/2017/10/midwest...](https://www.theatlantic.com/business/archive/2017/10/midwestern-
public-research-universities-funding/542889/)

~~~
rayiner
Anti-intellectual is an odd criticism to level at the Midwest. The Midwest has
some of the highest performing (by NAEP math scores) education systems in the
country (Iowa, Wisconsin, Minnesota, the Dakotas). Some of the strongest
growing states, like California, have among the worst.

The article doesn’t support your statement either. It’s basically a comparison
of funding at Midwestern public schools versus expensive coastal private
schools. E.g. they compare the endowments of midwestern publics to Harvard,
etc., while leaving out U Chicago and Northwestern. Your last point is also
wrong. Out of the handful of 5 states that spent more on universities in 2017
than 2008, 3 are in the Midwest. Most states cut funding, with no noticible
pattern of the Midwest cutting more than the costs. MN cut about the same as
MA and CT, IA and MO cut about the same as NJ.

~~~
lotsofpulp
The anti-intellectual image is due to the voters of those states. They
consistently vote against personal freedoms due to their religiousness, vote
against spending money for fellow citizen’s healthcare and education and
infrastructure, but are for spending on military, subsidizing stadiums for
sports, and tax cuts for corporations. All while claiming they’re fiscally
conservative, but actually adding to the deficit.

They are anti net neutrality, anti efforts to combat climate change, and anti
marijuana, but pro spending on police and pro asset forfeiture. Also, their
legislators have had problems with teaching evolution and/or have wanted to
introduce religion into public schools.

It's really an urban vs rural/suburban divide though, but enough to paint
basically the states that vote Republican as backwards, because almost every
time there a political issue coming up, they seem to be on the opposite side
of where most young professionals, especially in science related fields are.

~~~
1787
You've shown that many midwesterners are anti-progressive, but that is not the
same thing as anti-intellectual. Furthermore, the optics of where they stand
relative to young professionals in the sciences are just that - optics that
don't necessarily reflect anything. Consider student movements in the past
that haven't gone anywhere or were really misguided in hindsight (there are
enough).

~~~
H1Supreme
I'd argue that it's both anti-progressive and anti-intellectual. I live in a
stereotypical flyover area, and the sentiment is spot on. People vote against
things that would clearly help them, because that's what everyone at church is
doing.

This isn't an overstatement either. I know these people. Their opinions are
what someone told them to think. Almost completely void of logic. Fox news
said some shit, so it must be true! This sounds exaggerated. It isn't.

Some guy was running for office and totally did the "Jesus, show me the way"
campaign. Crosses on his election signs, the whole nine yards. He was neck in
neck with the incumbent (who was well liked, I might add) just based on this
crap. Until he got arrested for nearly beating a guy to death. Not very Jesus
of him, is it?

~~~
Helmet
_I live in a stereotypical flyover area, and the sentiment is spot on._

As have I, and the sentiment is a silly caricature.

 _People vote against things that would clearly help them, because that 's
what everyone at church is doing._

Can you list some of these things?

As far as I can tell, the progressive legislative agenda has done nil to help
anyone in the flyover country. Obamacare is a disaster, factories have been
shuttered because they can't compete in a globalized economy (neither the left
or right are at fault here), and progressive cultural values do not align with
the moral and ethical stances of these people.

Not to mention, they are continually mocked, condescended too, and made fun of
by coastal elites.

 _This isn 't an overstatement either. I know these people._

I know them too, and you've painted a caricature.

 _Their opinions are what someone told them to think. Almost completely void
of logic. Fox news said some shit, so it must be true! This sounds
exaggerated. It isn 't._

Oh, like almost every mainstream liberal that I know? CNN, ABC or MSNBC told
them some shit, so it must be true.

 _Some guy was running for office and totally did the "Jesus, show me the way"
campaign. Crosses on his election signs, the whole nine yards. He was neck in
neck with the incumbent (who was well liked, I might add) just based on this
crap. Until he got arrested for nearly beating a guy to death. Not very Jesus
of him, is it?_

So some crazy guy ran for office and lost. What's your point?

------
iambateman
To me, this feels like a pretty normal market process, more than a giant leap
of human goodness.

These investors are seeking returns. For the past 6 decades, a tiny area of
the country provided great returns. The compacted nature of the “Valley”
helped concentrate resources and grow companies.

But at some point there is less incremental benefit to stuffing one more tech
startup into SF than there is looking “afield” to further reaches of the
country.

This is a fantastic sign for people like me who live in lowly (but lovable)
Columbia SC. For too long, the investment pool has been a drip, even while the
talent pool grows.

Good job investors. We can’t wait to see you. And if I may, please don’t imply
that you’re doing this for any reason other than maximized returns. We’re all
adults here.

~~~
saturdaysaint
These are fair points, yet the most prominent names attached to this fund are
also pretty active participants in the national political conversation (J.D.
Vance, Bezos, Buffet). Vance, who is leading this, is famous for moving back
to his home region, beleaguered Appalachia, on mostly altruistic terms. Bezos
has been targeted with tweets from the president suggesting a thirst for brute
force regulations on Amazon and WaPo for nakedly political reasons. I don't
think it's naive to posit that altruism and a concern for the political order
are at play here.

This group of people suggests to me that they're realizing that having so much
of our economy concentrated in a few states is a political vulnerability that
can be easily exploited by a demagogue.

------
thisisit
I don't doubt that this is a good thing for the flyover states. But I am
little skeptical of the whole goody two shoes and "impact investing" angle.

With the amount of money sloshing around it is becoming increasing difficult
to find places to generate alpha on investments. While people can be like
Softbank and bet money on a unicorn becoming a super-unicorn but the risk
reward is skewed.

Then there is this:

> In other words, if they discover a nascent but promising e-commerce company
> in Allentown, Pa., they will not only invest in it, but they might also help
> it establish a relationship with one of the fund’s investors — Mr. Bezos,
> for example — who might invest even more.

~~~
seltzered_
Yeah. Worth noting Amazon fulfillment already has a presence in Allentown.

~~~
longerthoughts
Presence of a fulfillment center doesn't mean much, though. I've been on site
at an Amazon fulfillment center and they primarily provide unskilled labor
opportunities with a handful of shipped in corporate roles to oversee
operations, manage supply chain, etc. Doesn't quite resemble the vision of the
fund.

------
bsder
Except that when any of these companies starts getting successful, they always
find that they need to move to a more startup-friendly area in order to get to
the next level. (see ModCloth, for example).

The other problem is that venture money wants "lottery tickets" rather than
"sustainable businesses". This is a real problem because there are lots of
businesses that cannot access startup capital because they don't have a "10x"
story. Causing a large funding increase for "sustainable businesses" would
employ far more people than generating one or two new unicorns.

~~~
replicatorblog
MailChimp has built a huge business in Atlanta, likely closing in on a billion
a year in revenue.

Tableau is a billion-dollar business in Provo, Utah, and is not the only big
winner there.

Dyn built a half billion dollar business in Manchester, NH.

Nothing can compete with San Francisco—three of the biggest five tech co's are
HQ'd there. But there's really very little keeping entrepreneurs from building
a billion-dollar business anywhere, provided there's a decent university
nearby.

It is MUCH, MUCH, MUCH harder to get funding, but if you can bootstrap, the
world is your oyster.

~~~
zjaffee
The big thing is having access to a big university, where students who attend
that university want to stay local. BYU students are attracted to Utah,
Georgia has enough universities that produce graduates who want to stay in
state.

However, we aren't seeing the same happen with UIUC and the state of illinois
or University of Michigan with detroit.

------
jstewartmobile
I'm in flyover country, and I'm pretty skeptical of this.

Seems to me that China, Russia, and Europe are focused on "rolling their own"
so to speak--especially after the Snowden leaks. China has already made a lot
of progress on that front. India will probably join the party if the
visa/offshoring pipeline dries up.

If the big 4/5/6 _finally_ end up with some viable international competition,
I don't think minting more tech startups is a particularly good long-term
plan.

------
dmode
If flyover states didn't produce these startups during the last decade of easy
capital, I am struggling to see how there would be a new breed of startups
when capital eventually tightens in the next few years.

Another problem with investing in "flyover" states is that you are spreading
your investment across many states and cities, individually any one of them
lack the capital and talent concentration to compete with coastal cities. A
much better strategy is probably to focus the entire investment portfolio in
Chicago or Detroit.

Finally, when you scale your startup to 10s of billions, you will need to
attract immigrant talent. Which is much easier to do in the coasts.

~~~
deadmetheny
>If flyover states didn't produce these startups during the last decade of
easy capital, I am struggling to see how there would be a new breed of
startups when capital eventually tightens in the next few years.

The cost of living is lower here (the Midwest) and outside the coasts in
general. It's easier to bootstrap. There's plenty of successful startups that
started in the Midwest, they're just not the Big 3.

>individually any one of them lack the capital and talent concentration to
compete with coastal cities. A much better strategy is probably to focus the
entire investment portfolio in Chicago or Detroit

And create another SV situation where all of the talent is squeezed into one
small geographic area (granted, with less insane building regulations than
SV), in an age where we can effectively work from anywhere in the world that
we want to? Hard pass.

>Finally, when you scale your startup to 10s of billions, you will need to
attract immigrant talent. Which is much easier to do in the coasts.

I'm not convinced that we actually lack Americans capable of doing the jobs we
need to do. Immigration has been increasing in the past 10 years or so in the
Midwest though, despite still lagging behind the coasts, for whatever that's
worth.

------
Balgair
Does Texas count as 'flyover'?

How about weapons based start-ups?

There are a fair few micro-armories that do firearm based products out of TX.
Investors would be mindful to watch out for them. Remember that gun with the
gyrometers that would turn you into a sniper? Or the 3-D printed guns? Or the
'smart' guns? You may/not be making the world a better place, but you will
change it.

~~~
longerthoughts
Energy is the more likely candidate for large-scale startup growth in TX than
weapons based start-ups. The energy industry has obviously been important to
TX for a long time, but the state of the oil industry creates a gap for new
players to fill, either by 1) further automation in the oil industry to
improve margins in the face of low oil prices, or 2) embracing the rise of
renewable energy tech in a state that has incredibly high renewable potential
(solar, wind) and demonstrated investment.

------
purplezooey
Wish this would accelerate. The Bay Area seems incapable of fixing its
problems. Just read an article like this one, and you know we're hosed for a
long time to come.

[https://nyti.ms/2kfuPVl](https://nyti.ms/2kfuPVl)

------
cjbenedikt
If you ever attended one of its ("Rise of the Rest") events you'd know it's
nothing but a Case vanity project. He even describes himself in a fireside
chat as a mix of Steve Jobs and Bill Gates....

------
QML
Imagine if Big Capital started investing in cities instead of companies. That
would be a nice thought.

Property would be the new stock; hostile takeovers would be fights over the
city-government board.

Investors would profit when they managed to increase the value of the
properties they own. So they start building better public schools, improve the
local infrastructure, make the downtown a bit more appealing, etc. -- Hell,
why not build a community college, an actual communal one where anyone can
freely attend, and have that as the new "church"?

Of course there's the issue with gentrification -- which I'm not sure is
avoidable given the influx of capital -- but if equal access to these new
resources is guaranteed, an investment in cities may perhaps produce compound
interest not only for the investors but also for the residents long term.

Thoughts?

~~~
eli_gottlieb
This is basically how Big Real Estate already treats most cities.

~~~
ABCLAW
Yes. Developers that obtain approval for neighbourhood plans operate in
exactly this manner, putting in sewage, roads, schools, parks, etc. in order
to improve the value of the commercial/residential units they are selling.

Additionally, some less 'saleable' improvements end up being included as
concessions in negotiation with the local municipal authority to get the
development plan approved.

Public transit financing in greenfield areas works similarly.

------
jpao79
This seems like a really encouraging initiative.

Somewhat tangentially, I also feel like the following ideas would help spread
the Silicon Valley fortunes across the US better:

1.) Mainstream the idea of prefab housing built in flyover states/cities and
transported to the coasts by truck/rail. It seems incredibly promising.
Construction workers can work in a comfortable climate controlled indoor
environment, work regular hours at a steady pace, no fighting traffic, live in
cost appropriate areas. Basically car/airplane building techniques/uniformity
applied to houses with built-in limits on how far it can be outsourced to
foreign companies (at some point transportation costs start to outweigh
outsourcing advantages).

Modular developer working with Google with housing built in East
Bay/Sacramento: Factory_OS at Mare Island
[https://vimeo.com/228412494](https://vimeo.com/228412494)

Utah based builder: [http://www.guerdonmodularbuildings.com/modular-now-
marriotts...](http://www.guerdonmodularbuildings.com/modular-now-marriotts-
modular-initiative/) with a building in San Jose:
[http://www.palisadebuilders.com/projects/domain/](http://www.palisadebuilders.com/projects/domain/)

2.) FAANG and WeWork should invest in always on, life-size, fiber-to-fiber
Telepresence like video conferencing systems that connect dedicated
hallways/open office/meeting spaces Silicon Valley to their corresponding
spaces in remote offices instead of attempting to do Google Fiber residential
installs to a handful of lucky chosen people. Always on means meetings start
immediately without fumbling with the meeting configuration UI. Surreptitious
hallway meetings can occur. This would actually work really well for offices
in the same Pacific Timezone (i.e. Fresno, Gilroy, Bakersfield, Reno, Las
Vegas).

Here's an example connection between MIT and Stanford.
[http://tech.mit.edu/V131/N31/wormhole.html](http://tech.mit.edu/V131/N31/wormhole.html)

------
john_teller02
if you think you can build startup culture without immigrants sweat and hard
work you are kidding yourself. There is a reason for the way things are.

~~~
dboreham
Not sure why this is being downvoted because ime there are typically very many
immigrants in start ups and running them. Myself included. Although, I'm also
in a flyover state these days.

