The past year has been a difficult one for startups marked by declines in venture capital funding and layoffs — but it was not all doom and gloom in the Midwest.
That's according to Chicago VC firm M25, which released its annual list of the region's top startup cities this week.
From the 64 cities on the list, Milwaukee ranked No. 15. Bloomington, Indiana, took 14th, and Lafayette, Indiana, took 16th place. Chicago was the out-and-out winner.
According to the Wisconsin Technology Council's Wisconsin Portfolio, Wisconsin's overall angel and VC funding was $649 million, which was 26% lower than 2021's raises.
M25 managing partner Victor Gutwein had one word to describe the Midwest startup scene over the past year: resilience.
"From my peer firms on the coast, the thing we're hearing about consistently is strong down rounds, and companies that raised $100 million or a billion [dollars], [their valuation is] down 90% when they raise money the next time," Gutwein told Wisconsin Inno's Chicago affiliate.
While the Midwest has experienced a funding slide as well, it has been less dramatic, according to Gutwein.
"I'm not saying that we are completely immune, but we are seeing a lot less of it," Gutwein said. "Some companies that might have had $10 million in revenue would get investments valuing the company at $200 million or 20x revenue multiples."
Meanwhile, Gutwein had heard of some companies in Silicon Valley raising at 50x or even 100x revenue multiples.
"That means you're at a billion dollar valuation on just $10 million in revenue," he said.
Valuations have come back to earth in the past year, however, and as a result, fundraising has dried up.
While there have been some Silicon Valley-type busts in the Midwest, there have been a lot fewer, Gutwein said.
"The other main piece is that we don't have crazy high burn rates for our companies that have raised," he said. "Because they didn't raise a ridiculous amount of money, they didn't spend a ridiculous amount."
Moving forward, he said a healthy reset could be good for a lot of companies and investors.
The high valuations are also hurting companies trying to raise now, causing some to go for a bridge round instead of going for a full funding round.
"If you raise a Series A, to get to a Series B historically you had to double or triple your revenue — so for example, to go from $3 million to $10 million in revenue. The problem is, if you raised a Series B at $3 million at a $100 million valuation, that's a flat round," Gutwein said.
He said more companies are raising slightly smaller bridge rounds rather than taking a massive round of capital while still at the same valuation.
With a half-dozen $100 million-plus funding rounds, including Kin insurance's $109 million Series D, Chicago had more triple-digit funding rounds than the rest of the Midwest combined, according to M25.
