Where Is the Innovation Capital? Midwest Investors Must Catch Up to Their Founders

An investor once famously asked, “Where are the flying cars?”

The question wasn’t really about transportation. It was about ambition. After decades of technological progress, why did so much of our innovation feel incremental instead of transformative?

I find myself asking a similar question about capital.

Where is the innovation in how we fund businesses?

As an entrepreneur, investor, and Kauffman Fellow who has worked with thousands of founders across stages, from grants to Series A financings, I’ve seen firsthand how powerful the right capital can be, and how distorting the wrong capital can become.

Over the last 50 years, we have radically transformed computing, communications, logistics, and artificial intelligence. Entire industries have been rebuilt. Yet when it comes to financing startups and small businesses, we are still largely recycling a handful of structures developed in the mid‑20th century: venture equity, traditional bank debt, and a narrow band of hybrid instruments.

We expect founders to invent the future.

But investors? We’ve mostly been refining yesterday’s term sheets and conducting business as usual.

In the Midwest especially, this gap is becoming more visible. Founders are more diverse in what they are building: SaaS, services, advanced manufacturing, climate tech, consumer products, community businesses, yet the menu of capital we present to them often looks strikingly uniform.

If an innovation ecosystem is supposed to evolve, why hasn’t capital evolved at the same pace?

That’s not a criticism of founders. It’s a challenge to us, the people who design the financial tools they rely on.

The Part of Silicon Valley We Rarely Talk About

Silicon Valley did not begin with garages. It began with war.

During World War II, the United States mobilized its economy at unprecedented scale. Total federal wartime spending exceeded $300 billion in 1940s dollars — roughly $5–6 trillion in today’s terms. A meaningful portion flowed into electronics, radar systems, signal processing, and weapons guidance technologies.

After the war, that funding did not disappear. It evolved.

In the early Cold War years, defense and aerospace spending intensified. By the early 1960s, more than 60% of all U.S. research and development spending was federally funded, much of it through the Department of Defense. Annual federal R&D expenditures reached roughly $15–20 billion in 1960s dollars.

California became one of the largest recipients of defense contracts in the country.

Stanford University, under Frederick Terman’s leadership, positioned itself at the intersection of government research, engineering talent, and private enterprise. Military contracts flowed into university labs. Companies like Hewlett‑Packard, Varian Associates, Fairchild Semiconductor, and Intel emerged from this ecosystem.

Only after decades of federally subsidized research, defense‑driven demand, and university‑industry integration did venture capital become the dominant financing engine.

Venture capital did not create Silicon Valley.

It scaled an innovation base that had already been heavily built and subsidized.

That distinction matters.

The Midwest Was Building Something Else

While California was compounding federal R&D into semiconductor clusters, the Midwest was the backbone of American heavy industry.

Manufacturing, logistics, agriculture, and durable goods drove our regional economy. Companies scaled through retained earnings, bank financing, family capital, and steady reinvestment, not through venture hypergrowth.

When manufacturing declined in the 1970s, 80s, and 90s, we did not have decades of defense‑funded semiconductor infrastructure waiting to be commercialized.

At the same time, the technology economy on the coasts was accelerating, and venture capital was accelerating with it.

By the 1990s and early 2000s, the most visible companies in the world were venture‑backed technology firms. 

The narrative crystallized:
Innovation equals tech.
Tech equals venture capital.
Venture capital equals legitimacy.

That narrative spread internationally, including here in the Midwest, and it stuck.

This Is Not a Founder Failure

If founders in the Midwest sometimes chase venture capital when it doesn’t fit their business, it isn’t necessarily because they misunderstand finance. It’s because we reinforced that narrative.

Investors amplified it. Media celebrated it. Universities modeled programs around it. Economic development organizations were benchmarked against it.

When that’s the scoreboard we publish, founders will try to play that game.

The issue is not founder sophistication.

It is capital design.

And that responsibility sits with investors.

The Capital Design Gap

Venture capital is a remarkable instrument, for companies capable of generating asymmetric returns at national or global scale. But most startups and small businesses do not operate under venture economics.

Many are capital‑efficient, regionally anchored, moderately scaling, and focused on profitability. 

These companies are not less ambitious. They are differently structured.

Yet too often, they face a binary choice:
Raise venture equity, with dilution and growth expectations that may not fit.
Or bootstrap indefinitely,  limiting speed and optionality.

Meanwhile, traditional bank debt often sits outside the startup and early small business conversation entirely, treated as conservative, outdated, or inaccessible.

In reality, the Midwest’s dense banking infrastructure is one of its greatest underleveraged assets. Relationship banking, structured credit, and working capital facilities can be powerful growth tools when integrated thoughtfully into startup and small business pathways.

Examples are revenue‑based finance, profit‑sharing instruments, and hybrid equity‑debt structures.  While they exist, they remain niche instead of normalized.

That is not a founder gap.

It is an innovation gap in capital.

A Positive Note for Founders

If you are building in the Midwest and feel pressure to pursue venture capital because that’s what gets celebrated, that is understandable given the narrative you’ve been fed for decades.

Venture capital may be right for your company. Or it may not.

VCs invest in portfolios expecting a small number of companies to generate outsized returns. That model requires scale, exit, and liquidity. Your business deserves capital that fits your strategy.

The real maturity moment for our region will come when we stop asking, “How much did you raise?” and start asking, “Does your capital structure support your strategy?”

The Call to Investors

If founders need more diverse capital tools, who builds them?

Investors do.

If we believe the Midwest’s next chapter includes advanced manufacturing, climate innovation, SaaS, services, consumer brands, and community‑anchored businesses, then we must design capital structures for those realities.

That means:
- Designing funding instruments for companies with $250K–$10M in revenue.
- Building underwriting models that understand recurring revenue.
- Partnering intentionally with regional and national banks.
- Structuring hybrid vehicles that combine equity, credit, and revenue participation.
- Creating evergreen funds that prioritize durability over forced exits.
- Encouraging experimentation in financial design and portfolio construction.

Bank debt should not sit outside the startup and small business conversation. It should be integrated into it.

Revenue‑based finance should not be niche. It should be normalized.

Community and hybrid capital should not be an afterthought. It should be part of the design.

If we expect founders to innovate products, markets, and technologies, we must innovate capital with equal seriousness.

Silicon Valley is optimized for venture equity. The Midwest does not need to imitate that model.

We can diversify it.

If we do that, we won’t just be asking where the flying cars are.

We’ll be building new runways.

‍John McIntyre is a Kauffman Fellow and Managing Partner of the Founders Community Fund. Through more than three decades in Silicon Valley as both an entrepreneur and investor, he has managed multiple venture capital funds, launched accelerator programs, and invested in more than 100 startups from pre-seed through growth stages. He now focuses on designing capital structures that better serve Midwest founders and small businesses.