Why You Should Start a Company in… Chicago

It used to be, if you were serious about starting a tech company, you went to Silicon Valley. But emerging entrepreneurial hubs around the country are giving startup aspirants options. In this series, we talk to leading figures in those communities about what makes them tick. Here, part six of our series.

Chicago may lack the crackling energy of other startup hotspots like Seattle, Austin, Boston or Boulder, and its reputation for back-office, white-collar companies such as the former Andersen Consulting firm doesn't help much. But Chicago is where many Internet mainstays were launched, from the jobs site CareerBuilder and travel service Orbitz to RSS technology innovators Feedburner (bought by Google in 2007) and the online audience measurement outfit comScore. One hot startup right now is the coupon site Groupon.

Health-care companies also have realized great potential in the area, led by Abbott Laboratories. And lest one forget, it was at nearby University of Illinois Urbana-Champaign where Marc Andreessen developed Mosaic, the Web browser that paved the way for the commercial Web. So there's that.

These days Chicago's startup culture is aimed at the steady and sure. As Matt McCall, a partner at New World Ventures and managing director at DFJ Portage, notes, Chicago is home to many of the largest companies in the country, including Accenture, Boeing, Integrys Energy, MillerCoors, McDonald's, ACNielsen, Trans Union, and Fortune Brands. The list is long and comprehensive. For startups, it means a rich source of customers for products that fill a need or enhance their businesses.

McCall spoke with FastCompany.com about what makes Chicago's startup scene so strong.

What makes Chicago a great place for startups?

Chicago has a mixture of a lot of very interesting things. I'll start with the first, which is the customers are here. There are more Fortune 500s in this region than anywhere else in the U.S. And I've noticed this when I'm sitting in board meetings in San Francisco or New York or here. If you ever look at the sales pipeline, the Midwest is almost inevitably always the largest sales region because it's a diverse economy and those companies tend to take care of their own here. So if you have a leading technology here, in almost every single situation, the top customers for those companies were all Midwest corporations. That's the first thing I'd say.

The second is you've got more federal research dollars flowing into the universities here than any other region in the U.S. So if you just look at the federal funding--and this is just for Illinois, Michigan, Wisconsin, those three alone receive over $2 billion a year in U.S. federal funding. And it depends on the year, but they're number three, four and five in the U.S. in research funding.

And the third is the connectivity, which is if you'll look at a lot of successful companies in the valley, almost inevitably a huge percentage of them either went to school or grew up in the Midwest. And that's ranging from [Oracle CEO] Larry Ellison growing up on the south side of Chicago to the YouTube guys.

So number four is you now have critical mass of what we call family trees where you've got entrepreneurs that are fourth generation entrepreneurs. They're on their fourth business. As a result, they played at the big leagues. They've got a mafia of people that they can pull in to the companies. So when you go to recruit teams in certain spaces, you have the talent. Now, where are those spaces? I've always said we try to focus on areas where we are able to produce the number one or number two player in the U.S. or world out of our region and those areas would be interactive marketing, B2C, e-commerce, B2B, Internet enabled B2B, some enterprise software, medical devices and a host of other areas, everything from Archipelago to Think or Swim, OptionsXpress. You've got all kinds of talent, from writing the software platforms to actually creating exchanges.

Would you say that Chicago breeds or attracts entrepreneurs?

My phrase is we've inflected. And so, when you inflect, you start to be able to kind of see the family trees or the number of entrepreneurs. That number is growing pretty significantly and I'll give you some examples. On the B2B space, you've got Brad Keywell and those guys who were involved with launching InnerWorkings. It's a classic Midwest play. Go after boring B2B industry with an Internet infrastructure and disrupt it. That company is public. I don't know what it will do--$500 million, $400 million in revenue after four years?

They then went and said, "Hey, this looks like a great idea." For their next company, they did Echo Global Logistics, which goes after the notion of, "I need a truck to go from Chicago to Kansas City. What's available?" Well, there's a lot of dialing for dollars. Why not put an Internet infrastructure in place? They'll do--I don't know what the number is, $300 million in revenue after four years? And they just went public, the same group.

What makes Chicago's entrepreneurial ecosystem sustainable for the long run?

I think ecosystems hit inflection points and I think that what you're seeing in Chicago is this growing amount where there is CareerBuilder and Orbitz. FeedBurner was [founder] Dick Costolo's fourth company.

And now you're seeing the Performics and FeedBurner guys going into next generation startups as well. So I would say that I think we've inflected and as a result, when you start a company, you've got kind of these built-in talent pools that you can reach into that you didn't have say in 2000.

Could you describe a Chicago entrepreneur, a typical Chicago entrepreneur?

My take on the Midwest entrepreneur is the following: incredibly capital efficient because obviously capital is scarce in the Midwest. And so as a result, the way that they run their businesses tends to be very capital efficient, very tight, very focused, number one.

Number two is they tend to be very collaborative and cooperative. And to give you an example, when we were doing our--whenever we talk to anyone about Dick Costello and Eric Lunt in that team, they always use the phrase, "I'm in the Dick Costello fan club."

Why haven't there been more angel funds?

I think we are going to see more of that. My belief is that good angel communities come from successful former technology entrepreneurs. It's the guy that was successful, has a lot of money, and can bring both his domain knowledge and network, as well as his money. And so, as we're getting now into third or fourth-time entrepreneurs, we're starting to see more of that happen. [Performics founder] Jimmy Crouthamel for example has been fairly active supporting the startups in the region. We're starting to see more of that but not nearly enough. It's something that is coming. I think the challenge was a lot of the money in the Midwest comes from traditional industries or it's more conservative pensions or things along those lines, so I would say if there's one thing the region does need to work hard on, it's the institution of family capital supporting the region.

What kind of exits do you see in Chicago? Is Chicago a billion dollar exit playing field?

We actually did a chart. I don't want to misspeak here, but for the last five years, there were I think $23 billion worth of exits out of Chicago and in this region in general. So yeah, there's a lot of it.

For more from this series:

  • Why you Should Start a Company in...Austin
  • Why you Should Start a Company in...Los Angeles
  • Why you Should Start a Company in...Boulder
  • Why you Should Start a Company in...New York
  • Why you Should Start a Company in...Boston

Image: http://www.flickr.com/photos/poisonbabyfood/ / CC BY 2.0

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5 Comments

  • meagan

    Chicago is a great place to start a company. We're trying to get a conversation rolling before the big midVenturesLAUNCH. Can you take a look and give us your thoughts? If Chicago were the new center of the technology world, what would it look like?
    http://chicagotechhub.posterou...

  • Brad Wilson

    If local government was that much of a dealbreaker than Silicon Valley wouldn't exist because California is a failed state. Chicago is by no means the last place in the world you'd want to start a company.

    I do agree that if we could somehow put the Chicago Startup Community, which is broad and thriving, on an island in Lake Michigan just outside the entrenched, entitled grasp of the Chicago, Cook County and Illinois governments, the community would be considerably more enabled.

    Of course, an island is tricky because our local airfield (Miggs) is torn up so someone connected would have to build the bridge and that would mean 12% sales tax and so on and so on...

  • Jason Maxham

    So, you start off with a dig against the Andersen Consulting firm and then use Accenture as an example of a current large company. Y'know they're the same company, right?

  • Donovan Moore

    You have got to be out of your mind! The LAST place in the world you would want to start a company is in Chicago. Let's start with the sales tax, which is THE HIGHEST IN THE US!!!!

    Or how about the most corrupt government you can buy. Or, wait there's more. Have you heard about the parking meter problem- I mean RIP OFF!

    Whoever wrote this article is the biggest moron on the face of the earth. Chicago, a good place for business, LOL, LMAO, LOL INFINITY!!!