Key Takeaways
- • The Great Lakes/Midwest region produces 25-33% of U.S. research and development, patents, and top talent but receives only a tiny fraction of venture capital deals, representing a structural capital allocation mismatch.
- • Venture capital market consolidation—characterized by fewer firms receiving larger exits and bigger funding rounds—has disadvantaged Midwest VC funds, which are perceived as too small or unknown to compete for institutional investor capital.
- • A Brookings Institution and University of Michigan analysis recommends establishing a regional venture capital fund-of-funds as a remedy to recapitalize the Midwest ecosystem and enable competitive participation in larger, later-stage funding rounds.
- • The Midwest currently captures approximately 4% of total VC funding, despite the region's demonstrated innovation capacity and emerging positive funding trends with increasing deal sizes.
- • Frank Samuel's 2010 "Great Lakes" regional venture capital fund proposal—developed as part of Ohio's "Third Frontier" initiative—provides a precedent for the fund-of-funds model now being advocated as a solution to stem capital export to coastal economies.
Summary
The Midwest venture capital ecosystem faces a persistent capital allocation disadvantage despite significant innovation output. According to analysis sponsored by the Brookings Institution and the Chicago Council of Global Affairs, the Great Lakes region continues to export wealth to coastal economies while producing between one-quarter and one-third of the nation's research and development, patents, and top talent. This structural imbalance reflects a fundamental mismatch: the region receives only a fractional share of venture capital deals relative to its innovation capacity and human capital contribution.
The consolidation of the venture capital industry has accelerated this disparity. As the VC market funds fewer firms with larger exits, traditional Midwest venture capital funds have become disadvantaged competitors. These regional funds are increasingly perceived by investors as too small or insufficiently established to participate in the larger funding rounds and later-stage investments that now dominate the institutional capital allocation landscape. This creates a self-reinforcing cycle: constrained fund sizes limit investment capacity, which reduces visibility and competitive positioning for future capital raises.
A University of Michigan Executive MBA team, working with Brookings and the Chicago Council on Global Affairs, has proposed a regional venture capital fund-of-funds as a structural solution. This vehicle would aggregate in-region and out-of-region investor capital into a network of state and local venture capital funds, enabling co-investment in promising companies and scaled participation in larger funding rounds. The fund-of-funds model would address the size and scale limitations that currently prevent Great Lakes firms from competing in contemporary VC markets while facilitating the conversion of regional innovation into locally retained economic value and employment.
The proposal builds on precedent. Frank Samuel, architect of Ohio's "Third Frontier" state investment fund, advanced a similar "Great Lakes" regional venture capital fund concept in a 2010 Brookings paper. Contemporary market data indicates modest positive movement: the Midwest represents approximately 4% of total VC funding, with emerging trends showing increased deal sizes and a widening exit window for regional companies. However, without structural intervention to scale and consolidate regional capital deployment, the wealth-export dynamic is likely to persist as the venture capital industry continues its consolidation trajectory.
The consolidation of the venture capital industry has accelerated this disparity. As the VC market funds fewer firms with larger exits, traditional Midwest venture capital funds have become disadvantaged competitors. These regional funds are increasingly perceived by investors as too small or insufficiently established to participate in the larger funding rounds and later-stage investments that now dominate the institutional capital allocation landscape. This creates a self-reinforcing cycle: constrained fund sizes limit investment capacity, which reduces visibility and competitive positioning for future capital raises.
A University of Michigan Executive MBA team, working with Brookings and the Chicago Council on Global Affairs, has proposed a regional venture capital fund-of-funds as a structural solution. This vehicle would aggregate in-region and out-of-region investor capital into a network of state and local venture capital funds, enabling co-investment in promising companies and scaled participation in larger funding rounds. The fund-of-funds model would address the size and scale limitations that currently prevent Great Lakes firms from competing in contemporary VC markets while facilitating the conversion of regional innovation into locally retained economic value and employment.
The proposal builds on precedent. Frank Samuel, architect of Ohio's "Third Frontier" state investment fund, advanced a similar "Great Lakes" regional venture capital fund concept in a 2010 Brookings paper. Contemporary market data indicates modest positive movement: the Midwest represents approximately 4% of total VC funding, with emerging trends showing increased deal sizes and a widening exit window for regional companies. However, without structural intervention to scale and consolidate regional capital deployment, the wealth-export dynamic is likely to persist as the venture capital industry continues its consolidation trajectory.
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