Key Takeaways
- • The Midwest generates one-quarter to one-third of U.S. research and development, patents, and top talent, yet receives only a small fraction of venture capital deal activity—a structural mismatch that continues to export regional wealth to coastal hubs.
- • Venture capital market consolidation is accelerating the Midwest's disadvantage: the industry is funding fewer firms with larger exits, making regional VC funds appear too small or undercapitalized to compete for institutional capital.
- • A regional fund-of-funds structure, recently analyzed by Brookings Institution and University of Michigan researchers, is proposed as a remedy to aggregate investor capital into a network of state and local VC firms capable of co-investing in promising Midwest companies at competitive scale.
- • Frank Samuel's "Third Frontier" Ohio state investment fund model from 2010 provides historical precedent for regional VC intervention, though the concept has not yet achieved widespread adoption across the Great Lakes region.
Summary
The Midwest faces a fundamental disconnect between its innovation capacity and access to venture capital. Despite the Great Lakes region producing between one-quarter and one-third of the nation's research and development output, patents, and talent pipeline, it captures only a marginal share of VC investment activity. This structural imbalance results in continuous capital outflows to coastal innovation centers, undermining the region's ability to translate technological advancement into locally-rooted businesses and employment growth.
The problem has intensified as the venture capital industry has consolidated. Fewer firms are receiving funding, but rounds are significantly larger, creating a scale mismatch that disadvantages smaller regional VC funds. Great Lakes venture platforms are increasingly perceived by institutional investors as too small or insufficiently established to participate in the larger, later-stage funding rounds that now dominate the asset class. This perception gap—whether justified or not—has real consequences for capital allocation decisions.
In response, Brookings Institution and the Chicago Council of Global Affairs, working with University of Michigan Executive MBA candidates, have analyzed a regional fund-of-funds as a potential structural solution. Such a vehicle would aggregate capital from both regional and non-regional investors, then allocate these funds into a coordinated network of state and local VC firms while co-investing directly in portfolio companies. The fund-of-funds model would theoretically allow smaller regional managers to achieve the scale and visibility needed to compete effectively in contemporary VC markets, while keeping capital deployment within the Midwest ecosystem.
This approach is not unprecedented. Frank Samuel, architect of Ohio's "Third Frontier" state investment program, first proposed a Great Lakes regional venture capital fund in a 2010 Brookings publication. However, a decade later, such coordinated regional structures remain unrealized at scale. Policymakers and institutional investors considering this remedy face the challenge of converting analytical consensus into capital commitments and operational execution across multiple states and stakeholder groups.
The problem has intensified as the venture capital industry has consolidated. Fewer firms are receiving funding, but rounds are significantly larger, creating a scale mismatch that disadvantages smaller regional VC funds. Great Lakes venture platforms are increasingly perceived by institutional investors as too small or insufficiently established to participate in the larger, later-stage funding rounds that now dominate the asset class. This perception gap—whether justified or not—has real consequences for capital allocation decisions.
In response, Brookings Institution and the Chicago Council of Global Affairs, working with University of Michigan Executive MBA candidates, have analyzed a regional fund-of-funds as a potential structural solution. Such a vehicle would aggregate capital from both regional and non-regional investors, then allocate these funds into a coordinated network of state and local VC firms while co-investing directly in portfolio companies. The fund-of-funds model would theoretically allow smaller regional managers to achieve the scale and visibility needed to compete effectively in contemporary VC markets, while keeping capital deployment within the Midwest ecosystem.
This approach is not unprecedented. Frank Samuel, architect of Ohio's "Third Frontier" state investment program, first proposed a Great Lakes regional venture capital fund in a 2010 Brookings publication. However, a decade later, such coordinated regional structures remain unrealized at scale. Policymakers and institutional investors considering this remedy face the challenge of converting analytical consensus into capital commitments and operational execution across multiple states and stakeholder groups.
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