Chicago’s tech entrepreneurs have made international headlines with fast-growing customer bases and much-anticipated IPOs. Now Chicago business leaders are working to build the city’s reputation as a tech start-up incubator, hoping to spark the next generation of technological innovations.

The CiTy ThaT WorksBy christine BirKner | STAFF WRiTER cbirkner@ama.org

PhOtOS BY eliSaBeth a. SUllivan

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Flyover country. A few decades ago, that’s how many tech executives referred to Chicago as they traveled from New York to venture-capitalist-filled California. But now some execs are descending from 35,000 feet to take a closer look.

“In the old days, the joke was that Chicago was just a place you would look at from the plane as you’re going from Silicon Valley to New York. But more and more, you’re seeing firms that will

land here in Chicago. There’s too much cool stuff going on here to blow it off,” says Eric Lefkofsky, co-founder of one of the city’s most celebrated start-up success stories, Chicago-based Groupon Inc., and managing partner of Chicago-based Lightbank, a $1.2 billion venture capital firm that invests in start-ups in Chicago and around the country.

Although not yet a hub of technological entrepreneurship, Chicago is positioning itself to become a more start-up-friendly location, with a budding network of educational and funding programs intended to nurture a tech start-up ecosystem. The effort is, in many ways, a massive marketing campaign designed to showcase the city as a tech start-up destination. Compared with its rivals on the coasts, however, Chicago still has a long way to go to build its reputation as an environment in which entrepreneurs, particularly tech start-ups, can thrive.

Connecting the DotsThere are three major ingredients necessary for a tech start-up ecosystem to thrive, according to experts: community, which in this case means a network of start-ups in a concentrated area that can share ideas; talent, or software engineers and computer programmers; and capital, in the form of venture capital funding. Chicago’s start-up marketing push is looking to gain ground in all three areas. “Across the start-up spectrum … we concentrate on making sure we address the core needs of new businesses,” says Michael Sacks, vice chairman of World Business Chicago, a not-for-profit corporation chaired by Mayor Rahm Emanuel that’s designed to raise Chicago’s profile as a premier business destination. “Among the more obvious of these needs is access to both seed and growth-stage capital, ensuring a broad and strong talent base, and creating the infrastructure that can support a vibrant entrepreneurial community.”

Compared with the geographic concentration of tech firms in Silicon Valley, Chicago’s corporate geographic spread has made building a Chicago start-up network more difficult, experts say. “[Chicago’s] biggest challenges have been the ability to convene and our geographic disparity or breadth compared to Silicon Valley. We’re very spread out, physically,” says Michael Krauss, president of Market Strategy Group, a Chicago-based consulting firm with clients such as AT&T, Accenture and Xerox, and a member of the board of advisors for the Chicago Innovation Awards, an annual recognition program for new products, services and ventures launched in the Chicagoland area.

To encourage a more tightly knit start-up community, a local nonprofit business organization joined forces with corporate sponsors and the state of Illinois this May to open 1871, a workspace environment—or so-called “incubator”—for start-ups located just north of Chicago’s Loop in the Merchandise Mart. Named after the year of the infamous Great Chicago Fire, which leveled much of the city and, in the process, spurred on the collaboration of engineers, architects and inventors to rebuild, 1871 is on a mission to get start-ups plugged into a community of fellow entrepreneurs who can become mentors, partners, investors or customers. Tech start-ups that pass 1871’s application process can rent private

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workspaces for $400 a month, shared workspaces for $250 a month, and night and weekend workspaces for $125 a month. The center is run by the Chicagoland Entrepreneurial Center (CEC), a nonprofit founded in 2003 by local business leaders to foster the area’s entrepreneurship. Funding is provided by a $2.3 million state grant and by corporate sponsorships from Cisco, CDW and Comcast.

The idea for 1871 came about in the spring of 2011 when a group of Chicago business leaders identified a need for a space for start-ups to build their companies in their earliest stages. “In the digital age, proximity is more important than ever and it brings people together. It helps accelerate the path to success because you have these people around that are working on similar problems and issues and challenges,” says Kevin Willer, president and CEO of the CEC.

For models, the CEC looked to co-working centers for early-stage digital startups in New York, Boston and Silicon Valley, and closely collaborated with its target audience of start-up entrepreneurs to ensure that the space would meet their needs. “In designing 1871, we had over 200 entrepreneurs coming to sessions every week and giving us feedback on their plans, and telling us what they’d like to see if they were to work out of a place like this. We essentially created a large crowd of marketers for us. When we finally launched the brand [in January 2012], it was embraced immediately by the broader start-up community because it felt like they were part of the process in creating this place,” Willer says. “We had applications for 50 startups in the first 24 hours after the announcement. Since then, we’ve had another 300.” As of 1871’s opening on May 2, 15 start-ups had set up offices, according to Willer.

1871’s marketing strategy includes four target audiences: the Chicago start-up community, the Chicago business community, the broader Chicago

public and a national audience, Willer says. Leading up to its opening, 1871 released periodic updates on the center on its blog and Twitter feed, and conducted media outreach, including a press conference featuring Illinois Governor Pat Quinn in March. Articles in The Wall Street Journal, Crain’s Chicago Business, the Chicago Tribune and the Chicago Sun-Times, and segments on Chicago’s ABC affiliate and WGN-TV followed. The 1871 team also placed signage and ads in and around the Merchandise Mart and in the building’s adjacent “L” train station to boost awareness.

After the opening, 1871 launched marketing efforts with agency partners to target a nationwide audience and began building international awareness by hosting British Prime Minister David Cameron for a tour prior to the NATO Summit held in Chicago in May. It also began hosting speaking events featuring Chicago CEOs and events sponsored by other entrepreneurial organiza-tions such as the Chicago Innovation Awards and Built in Chicago.

“We’ve done a lot of marketing around 1871 and the brand, and what start-ups can get out of it. The next stage is doing more marketing about what is going on at 1871,” Willer says. “[Our] measure of success is really what start-ups came out of the place. Some of these companies won’t be here very long. They’ll be here until they grow out of this place, which is what we’re hoping for because if they’re doing well, they can go get their own office. I [want] to tell the story of start-ups that are working out of 1871 and hopefully there are successes in the future. They know about Groupon, but we’ve got to tell the stories of the next generation of great start-ups.”

1871 isn’t alone on its mission to promote entre-preneurship in Chicago. Entrepreneurs Unpluggd, a speaker series featuring heads of the city’s successful start-ups such as GrubHub, an online restaurant delivery

“ In the digital age, proximity

is more important than ever

and it brings people together.

It helps accelerate the path to

success because you have

these people around that are

working on similar problems

and issues and challenges.”

KevIN WIllerChicagoland Entrepreneurial Center

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menu portal, and SitterCity, an online matching service for babysitters and caregivers, provides networking opportuni-ties and resources for start-ups to grow their businesses. Like 1871, Entrepreneurs Unpluggd was founded to connect the dots in Chicago’s start-up community, says Co-founder Tim Jahn. “If you go to Silicon Valley, there’s a lot of entrepreneurs and tech people in a small amount of space, so they’re all talking to each other because they’re all in the same space together. Chicago traditionally hasn’t been like that. We have a big digital scene; it’s just very scattered. When I first got on the scene three years ago, there were a ton of dots, but they weren’t connected. Today, through events like ours, those dots are being connected.”

To promote its events, Entrepreneurs Unpluggd uses channel partners such as other start-up groups that cater to its audience. “It’s a pretty small niche. We’re friends with all of the different organizations and give them discounts and promote through that. We also do a lot of promoting through social media and our own blog. A lot of it is word of mouth. People have recognized our brand and know that when they come to our events, they’re going to get a lot out of it,” says Co-founder Stella Fayman.

Both 1871 and Entrepreneurs Unpluggd are making the Chicago tech start-up world a little smaller, Jahn says. “People don’t think of Chicago as having a concentrated start-up tech scene. In five years, that won’t be a question anymore. People will know that you’ll have no trouble meeting people in this industry, but we’re still phasing into that.”

Clinging to TalentAnother challenge for Chicago’s burgeoning tech start-up scene is the dearth of software engineering and computer programming talent compared with the East or West Coasts, which can be a burden for larger tech start-ups in particular, Lefkofsky says. “There’s a decent number of

engineers and people with a computer science background that live in Chicago and the broader Midwest. For early start-ups to find some technology talent, it’s actually doable. You can get off the ground, even if you’re not an engineer. The challenge is when you start to have some success and need to scale, when you try to go to 20 people or 50, or 200. That’s when you start to feel the pressure, given that there isn’t the volume of technology talent and engineers that there are, for example, in Silicon Valley,” he says.

“Chicago and Illinois have wonderful academic institutions, but we have to do a better job of keeping the people that graduate from these institutions in the area,” says Ellen Rudnick, clinical professor of entrepreneurship

and executive director of the Polsky Center for Entrepreneurship at the University of Chicago’s Booth School of Business. “Building these strong relationships between these start-up communities and the universities is important, if nothing else, to attract our graduates to stay in the area and work with these small companies so they get exposed to this environment while they’re here and, perhaps, they’ll be less attracted to move elsewhere.”

To help with that goal, Chicago Booth sponsors the New Venture Challenge, a business competition started in 1996, with 60 to 90 student teams submitting ideas for start-up businesses. Teams are coached by Chicago Booth faculty, and judged by venture capital firms and entrepre-neurial leaders like 1871’s Willer, who is a Chicago Booth alum. The competition’s finalists receive cash, legal services, professional consulting and access to the ARCH Venture Partners New Business Incubator, housed within Chicago Booth’s Polsky Center for Entrepreneurship, where they can continue to develop their businesses. The winning team typically receives $25,000 and past winners include successes such as GrubHub Inc.

Teams must only include one University of Chicago student, extending the reach of the New Venture Challenge beyond the school community. Chicago Booth also has a space in 1871 where students and the university can access resources from companies there, and vice versa. The New Venture Challenge is promoted through sponsors, which include Abbott and Microsoft; through its marketing partner, Built in Chicago, an online community targeting the city’s digital entrepreneurs; and through its own blog, where teams chronicle their participation in the challenge.

“We’ve launched over 75 companies from the New Venture Challenge. Some of them have been bought, others closed down after a few years because they couldn’t get traction, but we’ve had a pretty high success rate,” Rudnick says. The New Venture Challenge also is attracting investment from venture capital firms from

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around the country, she says. “We see venture investors outside of Chicago, venture investors from the West Coast and Texas, who have been talking to us because they recognize this has been a good source of deals.”

Finding FundingSpeaking of deals, venture capital funding is another major hurdle in building Chicago’s start-up ecosystem. In 2011, Chicago-area start-ups raised $654 million in venture capital funding, compared with the $12.6 billion raised by start-ups in Silicon Valley, according to Dow Jones VentureSource and The Wall Street Journal. Start-ups also seek funding from wealthy investor groups, or angel investors, such as the Hyde Park Angels and Wildcat Angels in Chicago, which have grown since the economic collapse of 2008 as other investment sources became scarce, according to Rudnick.

Despite the comparatively meager statistics versus Silicon Valley, Chicago has plenty of venture capital funding to foster a start-up ecosystem, Willer argues. “In the last 12 to 18 months, a lot of venture capital firms from Silicon Valley and other places have been investing in Chicago more than ever before,” he says. “We have a smaller footprint than Silicon Valley and New York, but capital is not an issue.”

But like the talent issue, funding gets more difficult as start-ups scale up, Lefkofsky says. “In terms of capital, there’s a decent amount of seed capital or angel funding available for start-ups. Where it starts to get thinner in scale is when it starts to get sizable. Doing Series A [first-round funding] is doable; there’s a lot of doors you can knock on. But raising Series B or C [higher-level funding] gets harder. There isn’t the amount of cash that’s been raised for firms focused on technology in Chicago as opposed to the Valley or New York. Those larger funds are heavily correlated to the coasts.”

Lefkofsky and Co-managing Partner Brad Keywell’s venture capital firm Lightbank has raised more than $1.2 billion for start-ups around the country, but its slogan is “You’re not in the Valley anymore,” so while Lefkofsky says it’s “agnostic” when it comes to invest-ment choices, Lightbank is, in many ways, boosting Chicago’s start-up image. “In terms of the overall VC community, among the top firms, there’s a lot of sharing of good ideas back and forth,” Lefkofsky says. “I can think of 50 interesting technology companies in Chicago that are worth people spending time with. VCs in the Valley and New York have that same list, and they’re here and they’re spending time.”

Doug Pepper, general partner at InterWest Partners, a venture capital firm based in Silicon Valley’s Menlo Park, Calif., who specializes in tech investment, gives Chicago a fighting chance on the funding front. “Austin or Boston or Seattle, they don’t have venture capital on the order of Silicon Valley, but they’ve still been successful at building fairly significant start-up and entrepreneurial communities. The huge amount of venture capital in Silicon Valley does give us an advan-tage in draw[ing] in entrepreneurs … but that’s not to say it’s not possible to build a vibrant entrepreneurial community outside of Silicon Valley, and Chicago has every opportunity to do the same thing that Boston and Austin have done,” he says. “Most venture capitalists are willing to travel for great investment opportunities, especially to a city like Chicago, which is not hard to get to. I think Chicago entrepreneurs could certainly raise money from the coasts.”

Excelerate Labs, an annual start-up incubator contest based in Chicago and launched in 2010, connects fledgling start-ups with local investors. Each year, 10 companies, out of hundreds that apply, are chosen for the program and Excelerate Labs invests $25,000 in each company in exchange for 6% of the

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company’s common stock. Excelerate Labs provides participants with office space, and pro-bono legal and accounting services during a three-month mentorship program led by Chicago’s venture capital and tech start-up leaders, ending with a showcase for 500 potential investors at the House of Blues Chicago.

“We get applications from all over the world. They tend to stay in Chicago. The companies who have come to the program from outside of Chicago all have stayed in Chicago because they build that network here, and there’s no sense in going back home and losing that,” says Troy Henikoff, CEO and co-founder of Excelerate Labs. Excelerate Labs promotes its contest through media outreach, including stories in TechCrunch, The Wall Street Journal, The New York Times and Forbes, and through its own Twitter account, but it mostly relies on word of mouth within the tech start-up community. “Most people in the tech community in Chicago know of Excelerate because they’ve had friends go through it,” Henikoff says.

“When we were raising the money for it, I told potential investors, who are all Chicago entrepreneurs: ‘This is a great way for you to give back to the community and help support the next generation of entrepreneurs. If your goal is to make as much money as you can on your money, don’t invest it here. If your goal is to help the community to do something great, be involved, and get your capital back and then some, it’s an awesome thing to do,’ ” Henikoff says.

Lighting a SparkCompeting with the rest of the country for tech start-up domination isn’t really Chicago’s goal, some experts say. Instead, efforts like 1871, Entrepreneurs Unpluggd, the New Venture Challenge and Excelerate Labs are helping Chicago blaze its own trail in the tech start-up arena. “In the last couple years, the community has been wondering how we compete against Silicon Valley. The answer is that we don’t. Every community has something different going on,” says Entrepreneurs Unpluggd’s Fayman. “I don’t think any other city that’s trying to make movies is trying to compare itself to Hollywood, but that doesn’t mean that great movies don’t come from other places.”

InterWest’s Pepper agrees. “There aren’t any funda-mental challenges or disadvantages in starting a company in Chicago,” he says. “They seem a bit behind. The other tech communities—Seattle, Austin, Boston and Silicon Valley—are certainly ahead of them [and] it may be late, but I don’t think it’s too late and they have all the ingredients of another great tech community.”

There are, of course, those who argue that Chicago’s tech start-up dreams might not spark the kind of business boom that the city is hoping for. Mike Michalowicz, author of The Toilet Paper Entrepreneur and a small-business columnist for The Wall Street Journal, says that Chicago should pick another entrepreneurial specialty to focus on, rather than tech start-ups. “One Groupon is a great success story, but it’s just a story,” he says. “When I hear tech, I think of Silicon Valley or New York City. … Why compete with cities that are so established?”

Lefkofsky still has high hopes for Chicago’s start-up ecosystem overall. “Chicago’s one of the most tech-friendly cities. We have a community where these things are really well-supported. Tons of young people, amazing city, great academic institutions, everybody wanting these things to succeed and thrive, including our mayor and people in politics, and companies like Groupon that serve as a beacon for lots of people. We have Lightbank and people like Lightbank that are investing lots of money in the local community, so I think it’s a really friendly place [for start-ups]. Ten years from now, I see all of these trends continuing in a big way.”

In the future, he says, tech start-ups could thrive anywhere that huge populations exist. “It’s so much easier today to launch an Internet business than it was in 1999. … It’s the idea, or the original execution of the idea, that starts to matter more than the core technology talent needed to get it off the ground. When that starts to happen, Internet companies will move away from the Valley and be more concentrated where the major population centers are. If we fast-forward 50 to 100 years, I could imagine a world where technology and innovation does trend closer to the GDP, or closer to the big cities that can compete. You’ll see New York and Chicago be much more important. We’re the third-largest city in the U.S., so over time, I would imagine us having one of the top three technology hubs.”

For now, though, Lefkofsky sees room for improvement in the marketing of Chicago’s tech start-up prowess. “The stuff that’s related to marketing, both the city and the media could do a better job at focusing on and promoting these success stories. If you want to be innovative and you want to launch a high-risk technology company, it’s not a safe path. We’ve created 15,000 jobs in the past five years, but you can’t create that without taking risk and setting yourself up to have failure. … What people have to do, from the marketing side, is embrace that and say: ‘This is the kind of community where entrepreneurs can have a great amount of success. They can raise capital, they’re going to be supported by the community, they’re going to get the attention of the media, and we’re really going to rally behind these companies that are trying to do cool stuff and change the world.’ ” m

“In the last couple years, the

community has been

wondering how we compete

against Silicon Valley. The

answer is that we don’t. Every

community has something

different going on.”

Stella FaymaNEntrepreneurs Unpluggd

From ‘Second City’ to ‘Start-Up City’?

chicago’s quest for tech start-up status stretches all the way to city hall. mayor rahm emanuel pledged to be a partner for tech start-up entrepreneurs in a keynote address at techweek 2012, a conference showcasing tech talent in chicago and the midwest held at the city’s merchandise mart in June. emanuel pledged, through World Business chicago, to conduct an investor summit

showcasing chicago’s start-ups to global markets. “the city of chicago is known as the Second city. three years from now, it will be known as the ‘Start-Up city,’ ” emanuel said. “We’ve always been known for our corporate Fortune 500 headquarters, whether it’s Boeing or United, and that’s a good thing, it’s a positive thing, but it’s not an either/or choice. … i also want to be known as the Start-Up city.”

emanuel cited city hall’s recent start-up friendly initiatives, such as reducing the number of licenses that companies need to operate, and encouraged tech start-ups to recruit talent from chicago’s educational institutions. “We’ve got the talent, the quality of life, the energy and support that’s built for groupon, Orbitz, grubhub. You guys have the energy. i’m going to be your partner. i’m going to make it easier for you,” he said. “in the past, what was missing was money. in the last 15 years, we’ve had $8 billion in venture funds in the city of chicago. We are going to be the digital mecca of the midwest, and we’re going to do it by being partners with city hall and you, so you can focus on your customers, not on us. … i know it’s an aggressive world between the coasts, and the best thing i can do is to make sure you have the type of environment that invites venture funds to look at you [for] start-up money and help you recruit the talent for your operations.”

PhOtO cOUrteSY OF 1871

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