It hasn't yet shed its image of smokestacks amid the cornfields, but the Midwest is slowly developing a reputation as an investment alternative to the high-tech centers in California, Massachusetts, Texas, and Colorado.
The Midwest's central location and its pool of experienced production managers are looking better to investors who have watched ''some pretty bad deals being made in the glamour areas like (California's) Silicon Valley,'' according to David A. R. Dullum, vice-chairman of the National Association of Small Business Investment Companies and a general partner in Chicago's Frontenac Venture Group.
''People who think all the venture capital activity is elsewhere have been ignoring the fact that there are companies like ours who've been doing business here for 12 or 14 years,'' Mr. Dullum says. ''We've never had the high-tech base for companies like Hewlett-Packard, Intel, or Data General, but we do have a pool of mid-managers who learned the production process in Midwest manufacturing companies.''
In addition (some would say ''at last''), the State of Illinois has officially invested in the development of some home-grown growth enterprises. With $2 million in state funds, the Illinois Development Finance Authority has established an Illinois Venture Fund, which is expected to grow to $15 million with the addition of capital from institutional investors (likely to include state pension investors). Following a request-for-proposal procedure, Frontenac was named manager of the limited investment partnership with the state.
''We've had three states call us so far - Oklahoma, Iowa, and one of the Eastern states - to learn more about it. They've heard that it's a model for state participation,'' says another Frontenac general partner, Rodney Goldstein.
But Carl Thoma, general partner in the Chicago venture capital firm of Golder , Thoma & Cressy, says a component is still missing in Illinois.
''The universities here are perhaps not as focused for growth companies as they are in some parts of the country. Northwestern is OK, I guess, and the University of Chicago is great for finance, which is fine if you want to teach finance at a major university, but not so good for small business,'' he says.
Not so in areas such as Boston, where the combined presence of Harvard and the Massachusetts Institute of Technology helped capture much of the nation's leading-edge software development. Nor in Silicon Valley, which takes advantage of the talents of a number of nearby universities, especially Stanford, in developing mini and microcomputer hardware and software.
Mr. Goldstein agrees that ''the dialogue between the universities and the private sector still has a long way to go,'' but he maintains that academics from several area schools are now taking part in such a dialogue.
In nearby Michigan, the contribution of University of Michigan in Ann Arbor has become a venture capital force nearly as important as the pool of experienced middle management that stayed in the Detroit area despite the mass exodus after auto industry's downturn, starting five years ago. The UM has helped attract software firm headquarters from as far away as Australia.
''For years there's been an outflow of money from places like Grosse Pointe, Mich., and Winnetka, Ill., to the coasts,'' says Dr. David Brophy, a UM business professor and venture capital expert, who is credited with much of the renaissance that southeastern Michigan seems to be experiencing. ''That imbalance has evened out a bit, but I'd bet the Midwest is still a net exporter of venture capital.''
Brophy says it is a mistake for the states to fight one another for new businesses. ''The war between the states is over. You can't buy growth. If you're an Illinois concern and I entice you to come to Michigan, somebody with the next sweet-looking tax package might come along and you'll go to Indiana. What we're trying to establish is a climate for growth.''
Brophy gets no argument from Stanley Pratt, chairman of Boston's Venture Economics Inc., which publishes of Venture Capital Journal: ''When my clients say they want to compete with some other area of the country, I tell them that's the stupidest thing they can do. Silicon Valley and Massachusetts were successful partly because they worked together, and other parts of the country ought to work with them. We don't need another microelectronics center.''
Mr. Pratt says what the nation does need is industry that complements the microelectronics industry by drawing on the industrial base that is still alive in the corridor between Chicago and Pittsburgh.
''High-tech is an overused word. Is software high-tech? Only to a math freak. Most software is written to satisfy specific demands, the demands of those who drive and understand the production process; the entrepreneurs who come out of what is still the industrial heartland of America.
''You can buy your technology from Silicon Valley or Route 128 (the high-tech manufacturing area west of Boston), but you'll want to build your company near where you live. You can develop your own niche in the marketplace. Take robotics , for instance. The Silicon Valley of robotics has been Detroit, and now it's spread to places like Indianapolis and Cincinnati,'' Pratt says.
One problem with attracting capital to an area the size of Chicago is that not enough of the success stories get told, according to Carl Thoma: ''Our success stories get overshadowed because of the size of the Chicago market.
''Denver-Boulder is one-fifth the size of Chicago. In Dallas, everything is business-driven. . . . Here in Chicago we've got an identification problem and we've got to figure out more incentives.''