Silicon Prairie Redux: Will Chicago’s Tech Boom Last?

After years of hype and hope, is the city finally building a tech sector to be reckoned with?

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the tech ecosystem
The Tech Ecosystem: No city’s digital economy can thrive without these five crucial elements—all of which Chicago has recently put into place.
 

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Chicago is no stranger to innovation. As far back as the 1880s, Western Electric Company, headquartered in the West Loop, pioneered advancements such as the operator-assisted telephone switchboard. A few blocks away, an Illinois Institute of Technology grad named Paul Galvin founded a company—eventually called Motorola—that developed the first successful car radio in 1930 and the first two-way walkie-talkie in 1940.

Two thousand miles west, Indiana-born Fred Terman was just as gripped by the promise of tech. The dean of engineering at Stanford University from 1946 to 1955, Terman was interested in more than just educating students. He also wanted to foster technologies that would benefit the public. So he helped the school open a research institute to draw a community of tech pioneers and an industrial park to provide space for the companies they later founded. The blizzard of innovation that followed—the invention of the silicon-based integrated circuit, the microprocessor, and, in the 1980s, the personal computer—marked the birth of Silicon Valley.

Chicago companies continued to make breakthroughs. In 1983, Motorola introduced the first commercial cellular phone, which may look today like a balky monstrosity but was a considerable achievement at the time. In the 1980s and ’90s, Chicago video game makers developed huge hits like Pac-Man and Mortal Kombat; 1995 saw the launch of CareerBuilder, a pioneering job website. But the city had already been eclipsed by Silicon Valley, and smaller technology hubs were booming in Boston, Seattle, New York City, and Austin, Texas.

Those places had begun to develop what tech industry veterans like to call an ecosystem: a combination of strong educational institutions, determined young entrepreneurs, willing mentors, talented developers and engineers, sharp-eyed investors, and a culture of collaboration and enthusiasm. “The ecosystem has a lot of parts,” says Peter Wendell, founder of Sierra Ventures and an instructor on entrepreneurship and venture capital at Stanford. “You can replicate one or two of those parts in Chicago or Des Moines, but it’s hard to replicate all of them.”

Chicago tried. In 1999, Mayor Daley made his bold “high-tech hub” promise, outlining a $250 million plan to transform part of the former Lakeside Press complex on the Near South Side into the largest Internet and telecom facility in the country. That same year, the ponytailed digital impresario Andrew “Flip” Filipowski raised $400 million from a slew of heavy hitters—among them Michael Jordan, Microsoft, Dell, and the Tribune Company (Chicago’s publisher)—and announced he would develop an eight-acre high-tech campus on Goose Island.

Within two years, of course, the soufflé had collapsed. Filipowski sold the Goose Island site. Small telecoms, Internet firms, and tech consultancies such as Arthur Andersen cratered, laying waste to the Silicon Prairie dream.

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“They say experience is falling on your ass a few times and being able to get back up again,” says Pritzker, who’s been investing in technology in the Chicago area for nearly two decades. “I think this whole community has done that.”

The plainest sign of that new get-up-and-go is the increasing supply of cash. Successful digital startups are typically funded by venture capital firms, which supply the dollars that fuel growth in exchange for an ownership stake in the business. Most of the nation’s biggest VC firms are based in Silicon Valley or Greater New York; because they want to keep a close eye on the companies they fund, they have traditionally been reluctant to invest outside their region.

That is changing. In the past few years, a handful of Chicago-area startups, including Analyte Health, Belly, Braintree, GrubHub, and Trunk Club, have attracted multimillion-dollar commitments from big leaguers like Accel, Andreessen Horowitz, Kleiner Perkins, and Sequoia.

Meanwhile, homegrown VC firms such as Lightbank (run by Groupon founders Eric Lefkofsky and Brad Keywell), Hyde Park Venture Partners (affiliated with the University of Chicago’s Booth School of Business), and Pritzker’s New World Ventures have pumped tens of millions into local startups. Even the State of Illinois has gotten in on the act. Last year, Governor Quinn launched the Advantage Illinois program, which is authorized to offer $78 million in federal funds and loan assistance to an array of local startups with high growth potential.

Chicago entrepreneurs have also been boosted by the rise of the incubator—basically a mash-up of VC firm, office park, and entrepreneurial academy. (1871 is a slightly different breed: A nonprofit, it does not take equity in the companies it houses, though it helps to facilitate deals.)

Among these incubators is Excelerate Labs, founded by Sam Yagan and Troy Henikoff (who made millions from startups OkCupid and SurePayroll, respectively). Each summer, Excelerate gives a group of ten promising entrepreneurs $25,000 in seed money (in exchange for a 6 percent stake) and $50,000 in convertible debt, plus workspace, accounting and tax help, and “more mentorship than you can possibly handle,” says Henikoff.

Three of Excelerate’s first 20 graduates have shut down; the rest have gone on to raise $25 million and create 125 jobs. Among the early successes: Food Genius, which delivers trend data to customers in the food industry ($1.2 million in funding in August), and Tap.Me, which embeds advertising within mobile games ($3.2 million in March). Tap.Me cofounder Josh Hernandez, 37, is now a “founder in residence” at Lightbank, where he is preparing to launch his fifth business, a photo-based mobile commerce platform. “I came over here because these guys are the best entrepreneurs in the Midwest and probably in the top 20 in the world,” Hernandez says of Keywell and Lefkofsky.

Just as notable as improved access to funding: the formation, in River North, of the sort of buzzing tech cluster that helped make Silicon Valley an innovation machine. “There’s an incredibly fast-growing community here, and it’s a genuinely helpful community,” says Logan LaHive, a San Francisco native who moved to Chicago in 2006 and went on to found Belly, a digital loyalty rewards firm based in the old Montgomery Ward headquarters at 600 West Chicago Avenue. “There are hubs you can go to and walk around and meet ten people starting companies and working through similar challenges.”

One of those hubs is 600 West Chicago itself: Some 4,000 tech workers are in residence, including 2,700 Groupon employees. The four-million-square-foot Merchandise Mart is another anchor. In addition to 1871, it houses the digital marketing firm Razorfish (more than 360 employees) and the health care tech firm Allscripts (160); if all goes as planned, it will be home to 2,300 Motorola Mobility employees next year. In fact, according to Built in Chicago, more than 70 of the area’s 100 largest tech companies are headquartered within a mile of the Mart.

Across the neighborhood, a steady stream of industry events—including regular happy hours organized by 1871, Lightbank, Built in Chicago, and Technori (an online publication for tech entrepreneurs)—offer networking and cement relationships.

“The community is so damn collaborative,” says Raman Chadha, a professor of entrepreneurship at DePaul University. “That didn’t exist ten years ago, when it was a bit more competitive, a bit more siloed. Today, when we hear of a startup thinking about leaving, we rally around them to get them to stay. This would never have happened in the past, to do a sort of intervention. Now there’s a civic pride that wasn’t there before.”

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