Startup Success in Second City

November 3, 2014

This post is the second in a series called “Innovation That Matters,” the result of a unique partnership with 1776, Washington, DC’s startup incubator. Last month, we examined the environment for startups in the District of Columbia. See also our post examining Chicago's involvement in industries such as energy, healthcare and smart cities. 

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“You may be too young for this, but his name was Bob Seger.”

 I nodded vaguely, trusting this Chicago CEO’s classic rock knowledge more than my own.

“When he hit the music scene it felt like he appeared out of nowhere. But he hadn’t. He’d been honing his craft for 20 years before making it big. That is Chicago’s startup economy.”

Every city says it has more going on in its economy than meets the eye. Chicago is no different. That doesn’t mean they’re wrong. While Silicon Valley gets all the attention, a dozen other economies are blooming across the States. Chicago has been hard at work building itself up to be a startup capital for the Midwest. That CEO believes it may be only a matter of time before Chicago claims its spot as a startup leader in the public’s mind. While it’s still unclear if he’s correct, this thought was prevalent as I attended roundtable discussions last week hosted by 1776, a Washington, D.C.-based startup incubator.

Elements in Place for Startup Success

To know why Chicago is blooming, let’s start with some facts. Its economy is larger than Sweden’s. Some of the world’s busiest airports, waterways, and railroads are in its backyard. The city boasts 31 Fortune 500-company headquarters. Startup investment has increased by 169% since 2012, to over $1 billion last year. Two of the top business schools in the country call the city home. And over 40% of the region’s international investment pours into Chicago.

Just 10 years ago, PayPal moved out of Chicago. The city seemed uncompetitive and lacking in innovative spirit. Now the company’s come back and bought Braintree, an online payments company, bringing hundreds of jobs along with it. PayPal’s not feeling alone.

In Chicago, there’s a dense neighborhood west of the downtown core where startup types congregate. Like camps near an oasis, a wellspring of capital and talent are drawing in young firms and spilling over into the formation of more bright ideas. They’re being fed by a pipeline of incubators and funders, such as 1871 and New World Ventures, many of which specialize in industries like healthcare where Chicago has a leg up on the Valley.

Meanwhile, Chicago has a diversified set of large corporations and philanthropies that not only make for a sustainable marketplace, but also increase the city’s connectivity. The enjoys a web of social capital that channels money and mentoring, and then casts that network out to other startup hubs in the rest of the world.

A Strong Sense of Community

If you ask these startups what sets them apart being in Chicago, they’ll say, “We’re not looking to make apps that find cupcakes.” They’re trying to do something different, to be different. They see it as a product of Midwestern community. If a business model works there, it’ll work anywhere. But either way, these startups aim at making real products for well-defined markets.

Chicago’s greatest strength may very well be its community. Throughout the day’s roundtables, what really stuck out was how many of the participants knew each other. One startup CEO noted that “politics never comes into the conversation…it’s always innovation first.” That meant to him that the “ecosystem was working.”

Challenges Remain

Press these startups, though, and they point to other factors driving their business models, such as scarce capital and a tough regulatory environment. “Facebook never would’ve gotten funded in Chicago,” one entrepreneur said. Investors want to see revenue and for startups to “de-risk” before they buy in. Of course, Chicago isn’t alone in this challenge. It’s just that early stage funding, which tends to be highly localized, appears to be particularly scarce in the city.

Assuming you have a source of funding, there remains a lag between the dynamism of the marketplace and the institutional inertia of Chicago. One startup operating in the smart cities space, whose clients are city governments, talked about the difference in getting their product up and running in Dallas versus Chicago. “It took me two hours to go live in Dallas,” he said. Chicago? “Oh, that took weeks.”

Step outside the Loop—the offhand term for Chicago’s one-and-a-half square mile central business district—and the operating environment changes dramatically. While everyone seems to be connected to everyone else downtown, the endless miles of suburbs seem to stretch those links to the breaking point. The role of investors and educators in particular should be on making innovation happen for the whole city.

Still, nearly every roundtable participant noted that the posture of the city towards startups has changed remarkably since Mayor Rahm Emanuel took office. They felt heard, yes, but also applauded. Simply getting the message out about Chicago’s startup economy helps these young companies gain legitimacy and connections. Groups like the Chicagoland Chamber and World Business Chicago are echoing these words.

Surpassing Silicon Valley?

Chicago has all of the raw materials for crafting an innovation hub. In many ways, the city has already has achieved this goal. It has talent, capital, good worth ethic, excellent market access, diverse industry, and, perhaps just as important, a business community that is united in making the Second City first in innovation. From the mayor on down, Chicago’s leaders say see their city surpassing Silicon Valley in the next 10 years as an innovation hub.

Time will tell how this prediction plays out. Chicago’s public finances may yet emerge as a significant drag on the city’s growth. Yet for a city that was once burned to the ground in the span of a day only to re-emerge less than a decade later as the world’s leading example of a modern metropolis, Chicago can never be counted out.