The other day Peter Thiel was in Chicago speaking. I was not at the speech. He’s not popular here since this is Hillary country. But, now, he is less popular in the tech community! He said, “very talented people head to the coasts”.
That comment reverberated through the interwebs of Chicago.
To be clear, I don’t take Mr. Thiel’s comments as a slight or insult. In the process of raising an early stage VC fund, I have spoken with Fund of Funds, Family offices, and wealthy investors from all over the country. My own angel track record is pretty damn good. Stats show that people who invested in Chicago during this last cycle did better than other areas of the country. But, the potential limited partners in venture funds don’t see a compelling reason to have to be in Chicago right now. I have heard this more than once.
At the same time, those same investors will give you good reasons they have to be in places like Silicon Valley, New York City, Boston, Seattle, or Austin. These are not people that are hiding under rocks. They are extremely sharp people. I know Chicago investors that refuse to invest in their hometown-their money goes to the coasts. Ironically, some Silicon Valley VCs are starting to invest in Chicago more actively-so the money goes to the coast and a very small portion of it comes back!
Local money continues to invest in real estate, hedge funds and private equity. They might do one small part in one venture fund. They are haunted by 2001.
Thiel backtracked later, but the damage was done. He later said he thinks Chicago needs to figure out what it needs to be doing-and where it wants to go. That’s interesting to me, because it’s exactly what I talked about at the very first Hyde Park Angels meeting in April of 2007. We said we would invest in what Chicago is good at. What is Chicago good at?
- Financial services
- Consumer products
- Medical equipment
- Medical research
- B2B processes
- Entertainment, Travel, Hotel
Within each of those headline topics there are several subtopics to invest in. Personally, I find the B2B Fin tech space extremely compelling in Chicago. There is a high concentration of engineering talent inside trading firms here and those guys are starting businesses. The problems they are solving are very, very different than the fin tech problems that are being solved in places like Silicon Valley. Other investors can make a case for the segment they invest in.
Certainly the DNA is here. The Big Ten universities, whose alums flock to Chicago, are some of the brightest in the country. See Marc Andreessen, Max Levchin and other innovators for an example.
I posted the Thiel link to my Facebook and got quite a reaction.
Here were some points that were made:
- Taxes. Although startups don’t pay taxes, their personnel do. California and New York also have high tax rates, so it’s not the hurdle you might think it is.
- City Government. This is valid. Chicago passed a cloud tax and yesterday aldermen began talking about banning driverless cars. If your city government uses the power of regulation to curb or stop innovation, startups won’t locate here.
- Network. Silicon Valley has the best network in the world if you are a startup person. Chicago’s is getting a lot better, but it’s not as good as SV or NYC. However, there is a gigantic network of customers within a four hour drive of Chicago. Silicon Valley doesn’t have that.
- Access to Capital. This is where the rubber meets the road. I know that Brad Feld says startup ecosystems are entrepreneur lead-but without the lifeblood of consistent rounds of capital you cannot build one. Chicago has a very small amount of capital compared to places like SV, NYC and Boston. In addition, most venture capitalists from another city don’t want to invest in an early stage or Series A round when the company will be located far away. They don’t want to have to fly that far to monitor them-interact with them, and sit in their board meeting. I know a few firms that have invested in other cities and they say that they cannot afford operationally to add Chicago to their roster given what they have now.
- Attitude. I know startups that have moved to the coast because the aforementioned customer base won’t take the risk of doing business with a startup. Chicago has a cultural issue. “We don’t want nobody nobody sent” still permeates the air in many places. I have seen people discriminate in Chicago over political views. In Silicon Valley the incubators provide capital and expertise in starting starting successful companies to early stage leaders.
- Investment thesis. The investment community in Silicon Valley will get behind an idea and invest until it has traction. In Chicago you better build a business with revenue and margins if you want to seek outside capital. Those are very different kinds of businesses. In the world of constrained capital, having revenue is prized because it can extend runway.
- Investment Competition. There is no rush by VC firms to invest because there isn’t a lot of competition.
- Tolerating failure. Even though we talk a good game about tolerating failure it still makes us uncomfortable. Too much perfectionism.
- Another observation: “There is so much talent in Chicago but the suit and tie culture of big business that previous generations continue to cling toward is not going to make Chicago a startup city. There is a lot going to happen in the next 10 years that will continue to shift things but if you think grey hair and a suit alone make you a leader you spent too much time in corporate.” However, someone else debated that point. So, it’s inconclusive. I think it needs more debate.
I for one would like to see the institutions in the city take one year and accentuate the startup community. The private clubs and the economic and civic clubs. I think it’s time to really concentrate to educate the broader community. That might help startups get customers and funds get investment.
I don’t think there is any clear answer on talent. Certainly, there is a higher concentration of talent in the Valley but that’s because there are more people doing startups there than here. Is it significantly better? I don’t think so based on the people I interact with here. I also don’t think the VCs are any smarter-they just have more money and more swipes at pitches.
I do think culturally, Chicago has to change. There are people working on that, but it’s a long process. Chicago has made leaps and bounds from where it was back in 2007 when I started HPA. It’s got a long way to go. But, it can get there. Right now, I think the only thing it’s really missing is money. Getting money here is a chicken and the egg problem.