“Tonight is a victory for courageous conservatives,” he declared, to great applause, as he railed against Washington, lobbyists and the media.
He took 28% of the Republican vote, beating his rival, the once frontrunner Donald Trump, and Marco Rubio.
Votes in the Democratic race are still being counted, and suggest a tight race between the two leading candidates.
With 85% of results in, frontrunner Hillary Clinton and self-proclaimed Democratic socialist Bernie Sanders are less than 1% apart.
As country music blared across the loud speaker, Mr Cruz, relishing his victory, took his time coming to the stage hugging supporters, family and staff.
“Iowa has sent notice that the republican nominee and the next president of the United States will not be chosen by the media, will not be chosen by the Washington establishment,” he said. “Tonight is a victory for courageous conservatives across Iowa and all across this great nation”.
Mr Trump congratulated the Texas senator and said he was “honoured” by the second-place finish.
Mr Rubio, who has struggled to gain traction in recent months, has performed far better than expected, and finished in third place – just one percentage point off of Mr Trump.
Marco Rubio on stageImage copyrightCBS
Marco Rubio on stage
At least two candidates are dropping out following the results.
Sources close to Democrat Martin O’Malley, former Maryland governor, have told the BBC that he will suspend his campaign – narrowing the field to two competitive candidates.
On the Republican side, Former Arkansas Governor Mike Huckabee tweeted that he too would suspend his campaign.
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