Tuesday, July 24, 2012

Chicago's Startup Scene on Fire - Startups Relocating from Coasts, Coastal VCs Investing in Record Numbers

When I started iExplore in 1999, Chicago was jokingly referred to as a "flyover city", as the big venture funds in Boston or Silicon Valley would fly back and forth to each other looking at deals, ignoring Midwest startups altogether.  And, even worse, they would insist that any startup that wanted their funds, would need to relocate their business to their city in order to close a financing (which many aspiring entrepreneurs did, having no other choice), in order to leverage their expertise and tap into their local ecosystem. 

But, that was a different time for Chicago, before it started to build a robust startup ecosystem of its own.  Angel investors organized themselves into networks, like Hyde Park Angels, Cornerstone Angels and Wildcat Angels.  Incubators like Sandbox, Lightbank, Tech Nexus, Excelerate Labs, Catapult and 1871 launched to help startups accelerate their growth.  The local universities like U-Chicago, Northwestern, Depaul, Loyola, IIT and UIC have done a better job of formalizing their entrepreneurship programs.  Built In Chicago, the Illinois Technology Association and the Chicagoland Entrepreneurial Center helped to make business networking more accessible for digital tech startups.  Venture firms like MK Capital, New World Ventures, Apex Ventures, OCA Ventures, and i2a Fund started to get more aggressive in their investing, looking at earlier stage deals.  The state of Illinois and the city of Chicago started to embrace startups as a salvation for their economic woes, including the launch of the Illinois Invest Venture Fund and a mayor in Rahm Emanuel that has proven his commitment to helping the startup community succeed.  In addition, this generation of entrepreneurs can now access tons of free mentorship, from successful proven serial entrepreneurs from the past generations, including many of the founders in the FireStarter Fund. 

And, let's not forget about the halo effect Groupon's meteoric rise had, in terms of putting Chicago on the map in a much bigger way and providing inspiration to the hundreds of startups that launched in their wake.  According to Built In Chicago, 128 digital startups launched in 2011, a 53% increase from 2010 and a 5x increase from the 25 startup average per year between 2004 to 2008 (before Groupon).  And, 77 of which successfully raised $1.45BN in capital ($972MM of which was Groupon).  Excluding Groupon, the $480MM raised was a 76% increase over 2010 and a 4x increase from the $109MM average per year between 2004 to 2008 (before Groupon).  With no signs of things slowing down in 2012, year to date.

More importantly, the coastal VC's are starting to take notice.  In the last couple years, we have seen substantial multi-million dollar raises by Activ, Analyte Health, Belly, Braintree, Cleversafe, Groupon, GrubHub, inXpo, Mu Sigma, Narrative Science, Singlehop, Sprout Social, Total Attorneys and Trunk Club, invested by major coastal VC's like Accel, Alsop Louie, Andreessen Horowitz, Bain, Battery, Benchmark, Bessemer, Digital Sky, Draper Fisher, General Atlantic, Greycroft, Greylock, Highland, Kleiner Perkins, Lightspeed, Maveron, NEA, Sequoia and USVP.  Chicago is no longer a "flyover city", it is frankly become a destination city for many of the big funds.

And, interestingly enough, the coastal startups are also starting to take notice of Chicago, with many relocating their businesses here to tap into our exploding ecosystem, talent base and lower cost of living.  Companies like Big Machines, Future Simple, MobCart, StyleSeek, Trunk Club, Vlinks Media and many of the businesses incubated by Excelerate Labs have all relocated from the coasts.  Even big companies, like Discovery Communications, have decided to locate their innovation efforts here in Chicago, given the exploding startup scene here.

To learn more about why this is happening, let's take a look at Trunk Club, the personal shopping site for men's fashion, led by their highly successful CEO, Brian Spaly, as a case study.  Brian has deep connections in both Silicon Valley, as a Stanford MBA graduate, and in New York, as the founder of the highly-successful denim e-commerce startup, Bonobos (which has raised $35MM by Lightspeed, Accel and Nordstrom).  Brian could have stayed in New York, one of the global epicenters for fashion, but made the deliberate decision to locate his business in Chicago, despite the appeal of Trunk Club's investors (USVP, Greycroft and Anthos) to stay in New York.  He told them "if Montgomery Ward and Sears could build successful apparel businesses in Chicago over the years, than so could Trunk Club".

When I asked Brian "Why Chicago?", here is what he had to say.  First, he had some personal reasons, like being closer to his family hometown of Ann Arbor, Michigan (Go Blue!!).  But, there were also some material business reasons, like the huge base of more-affordable, more-loyal, harder-working talent looking to get involved with hot internet startups in a city as large as Chicago.  As compared to locating his business in Silicon Valley, where he was one of many hot internet startups having to compete for talent with a much higher cost of doing business.  And, in addition to moving himself to Chicago, Brian is getting his key executives to relocate from the coasts to come work for him, including his COO who left his venture capital job at Greylock in Silicon Valley to help build Trunk Club in Chicago.  Brian jokingly said, "what other internet startup has raised $11MM in capital and is comprised 80% of Big Ten graduates and 70% women".

Brian also had some altruistic reasons for locating his business in Chicago.  He felt it was his duty, as a native of the Midwest, to do his part to help grow the Chicago startup ecosystem.  He acknowledges that Chicago has historically had its weaknesses in this regard, with a less robust ecosystem than what has been built in Silicon Valley over the decades.  But, he saw no reason, why the same couldn't be built here.  And, even though Chicago's ecosystem may be smaller, it doesn't mean it is any less effective for success, as evidenced by Chicago's Apex Ventures investing in their last round and Chicago's Tom Ryan, the CEO of Threadless, on his board. 

So, to all my startup and venture capital colleagues on the coasts, keep your eyes carefully focused on Chicago, as its startup ecosystem is becoming as world class as our city!!  With companies like TrunkClub, on pace for $15-$20MM in revenues in their third year of business, helping to lead the way.

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