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Is the Midwest the nation’s hottest venture capital market?

Investing in health is one of the reasons some are predicting the Midwest will be one of 2011’s hottest growth markets for venture capital investing. Through the first three quarters of 2010, the amount of venture money invested in Midwestern startups grew 45 percent to $818 million, according to the National Venture Capital Association. That’s a higher amount than Midwestern venture investment in the full year of recession-plagued 2009.

The Midwest can’t compare to the coasts in volume of venture capital investment, but a strong performance last year has some predicting the region to be 2011’s hottest growth market.

Through the first three quarters of 2010, the amount of venture money invested in Midwestern startups grew 45 percent to $818 million, according to the National Venture Capital Association. That’s a higher amount than Midwestern venture investment in the full year of recession-plagued 2009.

By way of comparison, venture investing in Silicon Valley startups didn’t grow at as quick a pace through the first three quarters of last year. Venture investment in Silicon Valley companies grew 21 percent to $6.4 billion during the period.

The Midwest’s strength in high-growth sectors like biomedical and clean tech should ensure that the region stays an attractive place for investors, industry insiders predict.

Ray Leach, CEO of Cleveland economic development group JumpStart Inc., told peHUB that he believes the Midwest will emerge as the nation’s fastest-growing venture market in 2011. Leach attributed his prediction to the capital efficiency of Midwestern companies and a “thriving pipeline” of early stage companies that are ready for growth capital.

The Midwest’s status as a burgeoning hub of venture investment isn’t news to Baiju Shah, CEO of BioEnterprise, a nonprofit that assists Northeast Ohio healthcare companies with business development. Shah said venture investment in Midwestern companies has risen every year since his organization began tracking the numbers in 2005 — though Shah admits that his visibility is limited to healthcare companies.

Shah pointed to two primary reasons for the Midwest’s strength in recent years. First, thanks to groups like the Kansas Bioscience Authority and Indiana’s BioCrossroads, there’s infrastructure in place to help coastal VCs unfamiliar with the region quickly find the types of companies that they’re looking for. “We’ve lowered the barriers to investment,” Shah said.

Second, thanks to the rise of angel groups and state funding programs like Ohio’s Third Frontier, there are lots of sources of “on-the-ground partners” that will join with VCs in putting money into startups, Shah said.

So is there anything that could disrupt the Midwest’s transformation from Flyover Country to Must-Invest Territory?

The greatest threat lies in anything — like shifting political winds, for example — that could jeopardize sources of funding or reallocate resources to slower-growing industries, according to Shah.

“We’ve grown a lot, but our ecosystem is still in the developmental stage,” he said.

[Photo from flickr user NASA Goddard Photo and Video]