Read an article by John Pletz about how Chicago’s tech community is on the rise. John is a good person to follow on Twitter if you want to keep tabs on Chicago tech. Remember those old Benson Hedges cigarette ads targeted at women? Same slogan holds for Chicago, “You’ve come a long way baby.” No doubt, the state is confronting huge financial issues caused by the Chicago Machine, but the tech community hums along. Chicago rates 7th as a global tech hub.
There are a lot of confluences of trends that are driving it.
Places continue to open up that give people an opportunity to innovate. MHub, a super charged maker lab, just opened up on Chicago Avenue. One of the founders of Kickstarter, Charles Adler, opened up a super cool space called “Lost Arts”. We already had U+I Labs.
If we look at the state of the different buckets of assets these days, it’s tough to find return. But, if you are trying to catch big fish, you have to wet a line in the right pond.
Real Estate is either overpriced, or has experienced a big run up. Corporate bonds are cheap because of the Federal Reserve’s almost constant 0% interest rate policy combined with QE. It’s stopped QE, and has recently started to raise rates but things are not close to normal. Stocks are at their highs. The Trump rally added a bunch to an already high index. Private Equity is one place to put money, but again, if and when interest rates go up the returns on PE will feel it.
That leaves venture.
Mark Suster put out a slide deck surveying limited partners. It’s pretty interesting. They are positive on VC in ways they haven’t been before. The Snap IPO certainly didn’t hurt. There is a lot of pent up demand in the venture world for IPOs. If corporate tax policy changes the way it’s been telegraphed, that will also help returns because it should drive M+A activity. However, there were two interesting points that I think really help Chicago.
- Many of the best performing funds were outside of Silicon Valley.
- LP opinions regarding seed funds have changed. Seed fund investing is here to stay.
I have written a lot about Chicago before. In the last five years, Chicago has had $23.5B in tech exits. NYC had $10.8B. There is not a lot of venture capital money here and from experience, I can tell you that fundraising is hard. But, when is fundraising easy?
If you are an LP and you don’t have money on the ground at seed in Chicago, you are missing out on a lot of opportunity.
Because the risk appetite of most Midwestern investors trends conservative, companies here have adapted. They don’t use the traditional venture model to build a company. They focus on creating revenue, and finding ways to reduce burn rates. They also target industries where there is a clear pain point, and customers will pay for their solution. That means it can be longer to exit since growing from cash flow versus expensive VC money is harder. Cleversafe is a good example. Launched in 2004, it exited in 2015 and didn’t take on a lot of venture money. Cleverbridge started in Chicago and has never taken VC money-yet bootstrapped and built a good business. Braintree bootstrapped from 2007 to 2011 before it took a VC round. Trustwave raised very little VC money on it’s way to exit.
Midwestern entrepreneurs also don’t create companies like Snapchat. They create meat and potatoes companies. They build businesses that last. They create value, which in turn makes them attractive acquisition targets. Look at companies like OptionsMonster, OptionsExpress, ThinkorSwim and Liquid Markets. None of them raised a ton of VC money but had outsize exits.
There are some things that have limited Chicago when it comes to making an imprint on the minds of investors that aren’t from here. One is that Chicago doesn’t have a centralized industry that really marks it. It’s a hybrid of lots of industries. Agriculture, Logistics, Health Care, and of course the industry that put it on the map in the first place, Finance.
Venture investing is hard here because you have to get into the scrum. You can’t limit yourself geographically to the city. If you want to invest, you have to travel throughout the Midwest. Most seed investors in places like Boston, NYC, or Silicon Valley shudder when they have to get in their car and drive an hour to a board meeting. In Chicago, we think nothing of driving three hours to a Big 10 college campus to interact with entrepreneur programs-and driving back the same day.
The other piece that limits Chicago for now is what I wrote about yesterday. Chicago is a “strong tie” town. Culturally, that comes from the politics. Chicago Machine politician Paddy Bauler is famous for saying “We don’t want nobody nobody sent”. It’s changing, but change is slow. Download and watch this movie and you will get a flavor of it. Marc Andreessen has said Midwesterners need to follow in Charles Schultz footsteps if they want to do big ideas. Midwesterners don’t like flash. They don’t like being out front. They fear failure. Getting comfortable with non-conformers is hard for Midwesterners. Great startup ecosystems are totally comfortable with non-conformity. Logan LaHive, the new Chicago TechStars CEO has said he wants to change some of that and I think that’s a good thing. Chicago is getting more “weak ties”, and many are coming from Universities. The University of Illinois has a huge non-native population. Both the University of Chicago and Northwestern import people from all over the country and world.
Chicago has built a great foundation to build off of. Now it’s taking it to the next level. The ecosystem needs time and capital. The biggest risk to it is the Machine politicians.