Oct 9, 2012 · 7 minutes

On September 30, fresh from attending Union Square Ventures’ CEO Summit, DuckDuckGo founder Gabriel Weinberg Tweeted: “Of the 7 @USV startups in their new fund: 2 NYC, 2 PA, 1 Iowa, 1 Kansas, 1 UK. This is the future.”

The future, Weinberg was suggesting, is not Silicon Valley. Maybe not even in New York City or Los Angeles. It might just be in Middle America.

USV co-founder Fred Wilson wouldn’t agree to an interview but said in an email that the firm has a thesis about “large networks of engaged users” and will go anywhere within a seven-hour flight to invest in those networks. He was at pains, however, to stress that USV is “most certainly not and never [has] been a regionally focused firm.”

From scouring the list of portfolio companies on USV’s website, it seems that the regional startups in the new fund to which Weinberg was referring are Duolingo and DuckDuckGo (Pennsylvania), Dwolla (Iowa), and Pollenware (Kansas City, Missouri). Of the 43 startups listed on the site, 24 are from New York City, nine are from the Bay Area, four are from the UK, two from Pennsylvania, two from Ontario, and one from each Missouri and Iowa.

Perhaps the regional spread in USV’s new fund has something to do with Wilson’s contrarian approach to investing. In a September 2010 blog post, he wrote: “My favorite investor is the contrarian. I know a lot of momentum investors that do well and I respect their approach to investing. But it is not an approach I can wrap my head around.” In a follow-up interview with Sarah Lacy, then at TechCrunch, he said the post reflected a desire to come up with ideas that aren’t on everyone’s list.

“What I liked the most in the comment thread,” he said, “was this whole notion of the anti-New York, anti-Apple, anti-Silicon Valley, focus on the middle class, focus on Middle America, focus on the people who have economic crises in their lives, focus on the average person, and build something for them that can help them make their lives better, make their finances better, make their job situation better, things like that. I thought that was an interesting contrarian investment [philosophy] and I’ve been thinking a lot about that since that post.”

Folks in America’s second-tier tech cities have long expressed optimism about their communities, and often speak excitedly about new opportunities. We at PandoDaily have seen that in our reporting in Austin, Seattle, and Chicago, and I’ve noticed it a lot in my conversations with people here in Baltimore and in Washington DC. But it’s also true that the “We don’t need Silicon Valley” meme is more than a decade old. Can it be truer this time round?

Lesa Mitchel, vice president for advancing innovation at the Kauffman Foundation, which is based in Kansas City and dedicated to promoting entrepreneurship, says yes. “The opportunity is ripe in Middle America for the same reason that it's been ripe in Israel,” she says. “We don't have any other choice in the middle of America. We’re losing big companies and lots of jobs.” Startups are thus the flavor of the day in struggling American cities. Most new jobs are created by companies that are less than five years old, Mitchel says, citing Kauffman Foundation research. “In all desperation comes good things.”

It used to be the case that entrepreneurial activity – startup competitions at universities, startup weekends, other entrepreneurial events – and the bulk of investment money was concentrated only in the major tech centers: California, Boston, New York, and Texas (whose score is boosted by an abundance of philanthropic money and deep-pocketed individuals). But that “has changed, and investors are more than ever looking outside the Valley for investment opportunities. “When Dave McClure is flying all over the goddamn world and nobody is any longer very much investing only in their backyard, that stick has been broken,” she says.

The proliferation of accelerators has also proven the willingness of both investors and advisors to travel to wherever startups are. And they’re all over the place, she says. Last night, the Kauffman Foundation hosted the Reddit Internet Bus and 200 entrepreneurs attended the event. Among the speakers were entrepreneurs from Arizona and Kansas City. She also cites Zappos CEO Tony Hsieh, who is attempting to rebuild downtown Las Vegas, as evidence that companies can build outside the valley. The Lean Startup movement, too, is helping to spread the network effects throughout Middle America. “There’s a lot more of this than people realize, and until you start wrapping those networks together, it's invisible," says Mitchel.

She also points out, however, that most “experienced capital” – which comes from investors with deep experience and expertise and can be crucial to building and scaling a company – remains in the major centers, and will do so for a while. For that reason, Silicon Valley remains important.

DuckDuckGo founder Weinberg, who’s based in Pennsylvania, has injected himself into Philadelphia’s startup community and heads up an angel investment group. He sees a bright future for Middle America, because it’s cheaper than ever to start companies, and they’re now starting to see an inflow of what Fred Wilson calls “recycled capital,” which is money from angel investors and serial entrepreneurs that is reinvested into startups. Such recycled capital has long been one Silicon Valley’s great advantages, Weinberg says.

It’s difficult to back up those claims. The Kauffman Foundation’s Mitchel says there’s no hard data on recycled capital for the second-tier tech cities. But statistics from the Foundation’s latest “Inc 500” report show some surprising performers among cities with the highest concentration of high-growth companies, including Salt Lake City (2nd), Indianapolis (6th), and Buffalo (11th). Meanwhile, Washington DC topped the list for number of founders, and Atlanta was fourth, behind Los Angeles, New York, and Boston.

Figures provided by the National Venture Capital Association show that Californian cities, Boston, and New York fill the top eight spots for venture capital investment in 2011–2012, but Austin, Chicago, Seattle, Washington DC, Dallas, Philadelphia, Atlanta, and Boulder all registered a respectable number of deals, ranging from 68 to 121. By contrast, however, San Francisco alone saw 932 deals, totalling $8.6 billion in value.

"The top venture regions in the US have developed such powerful ecosystems over the last 40 years that it is highly unlikely they will be unseated anytime soon," says Emily Mendell, vice president of communications for NVCA. “Silicon Valley will always be Silicon Valley,” she says. "There won’t be a next Silicon Valley.” She also says, however, that many regions around the country have a very viable VC presence that helps support and grow startups and they are extremely important.

Weinberg, meanwhile, sees hope in angel investing as a path to helping grow Philadelphia’s startup community. Angel investing has become sexy again, reckons Weinberg, and big cities have plenty of rich people now willing to move into tech investing. He’s not sure why, but something has changed in the last few years to give it more social cachet. Or maybe it’s just desperation, because all other American industries seem to be tanking right now.

Defenders of Silicon Valley’s centrality to the tech future will point out that no other cluster can help companies scale as well as the valley can. But Weinberg rejects that argument. “A decent amount of the high-flying tech IPOs have not been in Silicon Valley in the last few years,” he says, pointing to Groupon out of Chicago and Zillow out of Seattle. Washington DC’s Living Social, while not public, is another example of a company that can reach critical mass while staying far away from California, Weinberg notes. “All these big cities have a lot of people that you can scale companies with.”

Weinberg suffers no delusions that Middle America is suddenly going to rise up and make the Valley obsolete overnight, but he says the distributive trend is real. We saw how quickly New York City rose to prominence as a tech center, he says. Because of decreasing costs, increasing investment interest, and a touch of self-belief, the time limits for non-valley locales to rise up and become important clusters in their own rights are becoming compressed.

For now, it might still be contrarian to look outside Silicon Valley for big investments, but it’s likely that Union Square Ventures won't seem like such an outlier for long. Those “large networks” that Fred Wilson speaks of might no longer require a California or New York zip code

[Image courtesy of stillframe]