If you read our newsletter and weekly update, you’ll quickly learn that we like data, and we like ranking things. Given our approach to middle market portfolio tracking, we set out to rank the top 10 areas to invest in middle market businesses. We’ll call these “high-growth, low-hype” markets, a phrase first coined by the co-founders of Frontier Capital, Richard Maclean and Andrew Lindner. But before we get to ranking, let’s talk briefly about high-growth, low-hype, and the middle market.

A wide range

Frontier's portfolio is comprised of middle market companies from cities like Atlanta, Salt Lake City, Dallas, Chicago, Denver, Phoenix, and Charlotte. These areas, while nowhere near the hype of a "New York City" or an "LA," have booming tech communities and higher growth rates than bigger cities due to their thriving middle markets.

As it is, the term “middle market” can refer to a variety of firms. The National Center for the Middle Market defines middle market firms as those that generate anywhere from $10 million to $1 billion in revenue annually. That’s a big range. Investopedia notes that barely anyone agrees on the range of revenue, but also says that the upper limit is typically around $500 million in revenue - clearly, very different from the NCMM. Despite these discrepancies, the idea behind the numbers is the same: middle market firms are bigger than start-ups and smaller than big businesses. Yet another relatively vague definition.  

To nail down what the middle market truly is, we look back at Maclean and Linder. Compared to the attention that novel start-ups and big businesses get from the media, middle market firms seem to fly under the radar - they aren't new and exciting, and they don't have the media presence or following that big businesses do. That’s what Maclean and Lindner call “low-hype.” And, just like Maclean and Lindner say, middle market firms are often considered “high-growth” because they are past the start-up phase and actively scaling to become big businesses. In recent years, middle market growth rates have skyrocketed, consistently outperforming the S&P 500. For example, in Q1 of 2017, middle market revenue grew 9.2% whereas the S&P 500 revenue only grew 5.8%. Check out this infographic from the National Center for the Middle Market to learn some fascinating middle market stats.

Finding a niche is key to success

This growth is the reason investment firms like Frontier Capital have been targeting middle market firms. Huge firms like The Carlyle Group and TPG Capital have moved resources to invest in the middle market after recognizing the opportunities and potential of such high-growth firms. The way for smaller funds like Frontier Capital to continue investing in the middle market is to fill a niche, like SaaS B2B companies, and to stress their experience with the middle market specifically, being entrepreneurs themselves.  

So, if the middle market is a great place to invest, where can we find the best, fastest-growing, most-successful middle market firms to invest in?

How we did it

For our ranking we turned to data gathered by Forbes and Brookings. Here’s how we did it:

According to Investopedia, middle market firms not only have the highest growth rates, but they also tend to decrease the unemployment rate of an area. A thriving middle market, in other words, contributes to a thriving metro. Taking this information into account, we can assume that the fastest-growing metros with decreasing unemployment rates will indicate the most successful middle markets.

Data from Forbes

In February of this year, Forbes predicted 2017’s top 25 fastest growing metros based on "a holistic picture of places on the upswing." They considered data on population, GMP, wage, home value, and job growth to determine which of the 100 largest metros in the U.S.A. would make the list. All considered, 9 out of the top 25 were from Florida, a majority by a long run for any single state. The rest of the spots were filled mostly by metros from the Southeast and the West Coast.

What does this list mean to us? This list is predicting the most productive cities of 2017 considering GMP and job growth, the unemployment rate, and more. So, while successful middle markets most certainly cannot be the cause of every good thing going on in each metro, a growing metro is certainly a good sign of a growing and successful middle market.

Data from Brookings

For comparison, Brookings did similar research and also ranked the 100 largest metros against each other. Unlike Forbes, Brookings does not estimate the future success of a metro, but analyzes the past success of a metro. The data that we used for this article came from 2010-2015.

Brookings separated the success of a metro into three categories: “Growth,” “Prosperity,” and “Inclusion.” "Growth" rankings came from data on job growth, GMP growth, and job growth at young firms (start-ups and middle market firms). "Prosperity" rankings came from data on worker productivity, standards of living, and the average annual wage. Finally, "Inclusion" rankings considered the unemployment rate, the median wage, and the relative poverty of each of the metros. Thriving middle markets tend to most notably 1) increase the average GMP and 2) decrease the unemployment rate of a metro. So, while the “Prosperity” rankings provide insight into an individual’s prosperity in a metro, the “Growth” and “Inclusion” categories directly address our indicators for thriving middle markets.  

Brookings concluded that Florida, California, and the Carolinas were the states with the fastest growing job markets from 2010-2015. Brookings also concluded that the research and technology industry has significantly grown in recent years and have positively affected tech hubs like San Jose, Austin, Houston, Seattle, and Nashville.

Is it surprising that New York City, Los Angeles, or Chicago didn’t make any of these lists? Not really. The fact is, the majority of the companies headquartered in massive metros in the U.S. are big businesses that can afford the high capital costs of these areas. The high-potential middle market firms that we’re looking for don’t have cash to spare on renting a high-cost office in a big metro where there’s tons of competition. These firms are putting all of their resources toward growing the business in a metro that is conducive and responsive to their product or service.

The Analysis

Now, getting down to the analysis. The data Brookings considers is data collected over time. That means that the Brookings ranking is a composite ranking whereas the Forbes ranking represents only the predicted progress of one year based on the previous year’s numbers. It is important to keep both of these values in mind when deciding where to invest because a) you want to invest in an area that has a history of positive growth (therefore an infrastructure to support growth) and b) you want to invest in an area that has a future of positive growth ($$).

When factoring our top 10 high-growth, low-hype areas we considered the data from the Forbes’ top 25 growing metros and the Brookings’ “Growth” and “Inclusion” top 25 rankings to draw our conclusion. We know that these middle markets are the best-performing ones because in analyzing the Forbes’ top 25 along with the Brookings’ top 25’s we found the metros that not only thrived in the past (solid infrastructure) but will also thrive in the future (high potential).

The Results

Without further ado, here are our findings

Conclusion

5 out of the top 10 best-performing middle markets are in Florida, with Cape Coral-Fort Myers taking the top spot. Despite its position at the top, there are less funds focused here than in other areas on the list like Salt Lake City and Denver. Compared to Florida cities that are more well-known like Miami and Orlando, Cape Coral-Fort Myers seems to have less competition and more opportunity, we expect to see more action there in the next few years.

In other interesting results, 2 out of our 10 top best-performing middle markets come from Utah - another state that does not usually make the headlines. Many of the metros on our list appear to be great places for tech investments in addition to the other sectors we have listed, furthering the trend that all companies, including those in high-growth, low-hype markets, must incorporate a technical aspect.

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Thanks for reading! Got any questions? Comments? Want to know exactly how we got our rankings? Email Audrey at audrey@malartu.co for more info.