Yesterday I went to a summit on early stage tech in the state of Illinois. The first answer is that the tech ecosystem in Illinois is in pretty good shape. The fervor around entrepreneurship is high.
The consensus is some pretty great break out companies are being built here right now. They aren’t “unicorns” like the valley but the potential for them to get there is there if they stay on the trajectory they are on.
There are some other good signs as I peruse my notes. Some exits, particularly Cleversafe’s, created 80 millionaires. Many of those people are doing new things or reinvesting into the local ecosystem.
It was late July and virtually all the VCs from Chicago were in one room. We were working. The downside is you can fit all the VCs from Chicago into one room.
One panel featured limited partners. These are people that help to manage pools of capital for retirements, endowments, family offices and the state of Illinois. Not one was interested in allocating capital to funds that invest in Chicago or the broader Midwest. Not one. As a matter of fact, local family offices aren’t interested in venture at all.
Sobering for a room full of small VCs.
It doesn’t matter that the data on the local ecosystem has turned. Returns are significantly better here than in other places. As JB Pritzker relayed, Chicago is the #6 tech ecosystem in the entire world. It doesn’t matter that real estate and private equity along with the stock market are at all time highs. Pools of capital have an utter fear of the risk associated with venture investing.
Part of it rests on the process. When an aircraft carrier sized pool of capital sees a small seed fund sidle up to them, they have no internal processes that can enable them to go beyond talking to them. If they were truly interested they would figure it out but right now it is not worth their time or effort.
As participants in the community, we can talk about “educating them”. That process will be decades long. Time isn’t going to wait. The technological innovations that are happening are going to remake society quickly from the Post-Industrial Age to the Information Age faster than anything we have seen before.
I was at the ACORD Insurance challenge the day before. I listened to CEO William Pieroni’s presentation. I don’t have the actual slide but I will try to describe it to you.
In the past, when big societal changing innovation was introduced, it took 20-30 years for adoption of that innovation to reach 80%-100% penetration. This falls in line with macroeconomic statistics that state you need a generation before something can reach its full potential. Hence, phones, computers, cars, rail, and almost anything else you can think of had a latency period of 20-30 years before total adoption and gains maximization.
The slope of their lines, meaning the rate of growth of adoption, was the same. 4%.
In the old days, companies could sit back and try to figure it out. They could wait until innovation fully blossomed before making a decision. That allowed companies who were risk averse or didn’t like a change to move slowly.
The innovations so far in the 21st Century are following a different path. Ironically, the slope of the lines when you graph the path to percentage adoption mimic older innovation. Their line slope is about 4%.
However, the latency period is significantly shorter by more than three standard deviations. 80% to 100% adoption happens in 3 to 5 years. Think about cell phones. Search engines. Now think about what will happen with artificial intelligence, virtual reality, cryptocurrency and other ground breaking technology we are developing daily.
A company doesn’t have the luxury of time. It gets developed and then it’s on them. In many cases, not integrating it will cause the company’s entire business to be compromised and they might die.
In my area, B2B Fin Tech, we are used to big staid organizations waiting. They are hard to sell into. They are slow to change. They are slow to adopt new technology. They are used to using their existing power and regulatory power to crush the competition.
That game is over. If Chicago companies don’t quickly embrace cutting edge tech, their customers will stop embracing them. Look at Sears.
As Mr. Pieroni said, financial companies have to start making small bets early and learning to tolerate failure. They have to think differently about new technology and try it faster.
This is just one example of things I have been seeing for a number of years now. In Chicago, entrepreneurs are bringing it. In Champaign, they are bringing it.
The broader community isn’t bringing it. Corporates show flashes of innovation adoption but most of that is for show to shareholders. Big pools of Midwestern capital are ignoring it or resting on their laurels content that they invested in one or two funds out in California. Other pools of capital get excited when they get into a west coast fund despite the exponential growth of the Midwestern startup scene.
The Illinois State Treasurer’s office has tried to lead the way with their program. So far it has been largely successful and it is just getting started. It would probably take a concentrated effort by the Treasurer’s office to have meetups with family offices and other pools of capital to educate them and show them their data.
For our state and city, it’s mission critical that it happens. Startups and small businesses are terrific job creators. Policies out of the legislature in Springfield and other legislative bodies have hindered, not helped entrepreneurship. The consistent threat of a financial transaction tax or wealth manager tax coming out of Springfield and Chicago doesn’t help.
Still after all these years, what is the toughest round for a Midwestern startup to raise? Seed or Series A. Sometimes Series B. They can get growth capital anywhere. Yet, the entrepreneurs here have built something pretty great. Imagine what it would be like if there was ready capital.