The Key to MKE’s Tech Startups: Torque

For anyone who has never taken a physics or mechanics class (which I have not, by the way), torque is the rotational equivalent of linear force. It represents the capability of a force to produce change in the rotational motion of the body. In laymen’s terms, using an object with which most of us have familiarity, torque is what propels an automobile forward upon shifting the gear into Drive.

Now, for those of you still with me and not lost to scientific drivel, imagine MKE’s tech startup sector as the automobile, with its various players and stakeholders at the wheel, all doing their respective parts to provide fuel, direction and control. Yet, as unfortunate as it is, no amount of preparedness can produce the force necessary to get the automobile rolling. What is needed is the torque of finance.

Okay, okay, I get it: tech is the shiny object whose newness never fades. “Who wants to broach a subject as boring as finance?”. “Aren’t they just stiffs in suits and ties?”, or so the thinking goes (for the record, I am no stiff—I can bust a move!). Tech is glittery, it is flamboyant, it is exciting, it is the future, it can bridge the disparities-in-wealth gap…etc. It is certainly all justified, as most of the promise and attention of tech is well-deserved. This is not debatable. I understand the importance of tech very well. In fact, I have promoted and/or sponsored several tech events, including several Founders/Fest events. Thus, I do not have to be convinced of its significance.

I also understand, however, that absent a strong finance apparatus (i.e., venture capital, private and public equity), our tech startup sector will continue to stall, with its diverse collection of phenomenal talent, exceptional ideas, and supportive incubators. We need look no further than the latest edition of Wisconsin INNO to see that we are not suffering from a lack of talent or ideas. Taken together, with its reasonable cost of living, MKE could easily be the perfect locale for tech startups.

Instead, our game-changing ideas are met with a lack of funding which, in turn, encourages flight or gripes of flight contemplation among our savvy tech stars. And the funding issues are exponentially worse for Black founders. Consequently, building up a strong finance apparatus must be paramount.

Not surprisingly, the evidence suggests that most venture capital funding is largely a local affair. According to TechCrunch’s Where Venture Capitalists Invest and Why, nearly two-thirds of venture capital firms’ dealmaking is done with startups in-state. This is not difficult to fathom. Venture capital firms are made up of people like you and I and, like you and I, they tend to operate in networking silos. Why? Because venturing out (pun always intended…as I learned from a missionary at my church) is uncomfortable, it is hard work, it means extending yourself for the high-hanging fruit. Despite their massive resources and due diligence capabilities, you are delusional if you think VC firms spend most of their time engaged in proactive outreach.

Unfortunately, venture capital funding is also largely a racial affair. A Crunchbase study found that Black/Hispanic founders received just 3.5% of the $311 billion of U.S. venture funding in 2021. Like other areas of finance, the venture capital industry is overwhelmingly dominated by white males. And, as one former executive director of American Underground wrote, “Heterosexual white males tend to invest in heterosexual white males.”

Scott Galloway’s Post Corona reveals a more problematic, though not-so-surprising, statistic: while white males make up 58% of the venture capital industry, they control a whopping 93% of venture capital dollars through concentration of general partner (GP) positions. This suggests that most diversity at VC firms can be found in back-office departments or other non-influential positions.

The Crunchbase study also suggests the most frequent backers of black founders are likely to be VC firms run by African Americans. Translation: Black tech needs Black finance. Corporate and government venture capital, to be sure, are vital necessities, particularly where gaping holes in funding exists. But a $100 million fund owned and operated by a corporate behemoth like Northwestern Mutual, for example, does nothing to create a pipeline of Black finance talent— talent capable of underwriting, constructing and owning its own portfolio of startup companies.

In conclusion, to be clear, all sources of venture capital have been necessary to get us where we are today. And, though occasionally we allow the smallness of our politics or the narrow thinking of the MKE Establishment, to limit our conception of what is possible here, our progress as a city and state has been noteworthy. Getting us to the next stage, however, will require a different approach, a different investment framework, one that calls for a simultaneous emphasis on tech and finance. The great economic revolutions of the past all succeeded because of finance, not despite finance. So too will MKE’s tech startup revolution.

The sooner we come to this realization, the sooner we can put our startup community in Drive.