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Putting Chicago’s Tech Scene in Context

If one were to ask, which American city owes the most to entrepreneurs operating in a free market, many people would answer San Francisco, or Palo Alto, or San Jose, or any of the number of cities in Silicon Valley. They would not necessarily be wrong. There is, of course, the long-held American narrative that the rewards for risk-taking are found by those who take up Horace Greeley’s famous advice, to “Go west, young man.” But just as California hasn’t always been the American West, it is also not the only place where technology-enabled entrepreneurship is changing the local landscape. Chicago and the greater Midwest, the “West” that Greeley was originally referring to, is one such example.

        The history of Chicago is, at its core, a commercial one. The city was founded by land speculators from the East, who identified the area as a potential economic powerhouse, connecting the East to the West through Lake Michigan and the Mississippi River. Chicago’s first mayor was a man named William Ogden, a businessman from New York who would officially serve as mayor for two years. Later in life, he would play venture capitalist, financing Cyrus McCormick’s reaper factory and helping to turn Chicago into the greatest grain port in the world. The mighty industrial city he and people like McCormick helped build would go down in flames during the Great Fire of 1871, but a new generation of capitalists took it upon themselves to restore it.

        After the fire, a young Marshall Field bought out his business partner and changed the way retailers conceived of customer service forever. His State Street store operated according to the motto “Give the lady what she wants.” In 1893 Sears, formed in Minnesota, moved into the city because of its easy access to a comprehensive railroad system. Sears, along with another Chicago company, Ward, would pioneer the mail order catalog, giving consumers a taste of the convenience the members of the Internet generation take for granted. There was also Philip Armour, the architect of Chicago’s infamously efficient stockyards whose refrigerated railroad cars were, for better or worse, correct in claiming: “We Feed the World.”

Since the turn of the 20th century, Chicago’s commercial landscape has always been an impressive combination of industrial production, logistics, marketing, and financial and professional services. Today, no sector accounts for more than 15 percent of economic output. The longstanding diversified nature of its economy has allowed Chicago to avoid the same fate as Rust Belt cities like Detroit and Cleveland, who were more vulnerable to the wave of deindustrialization that first began in the 1970s.

        While the country’s manufacturing base declined in the 1970s, the decade was also a pivotal time in the growth of a different sector of the American economy: information technology. Bill Gates and Paul Allen founded Microsoft in Albuquerque, NM in 1975. A year later, Steve Wozniak and Steve Jobs incorporated a company they would call Apple Computer. Both companies would be at the forefront of the personal computer revolution, and continue to do so today even as the conception of a computer deviates more and more from its original design and perceived capabilities. At the time, though, Microsoft and Apple were upstarts in an industry with a number of companies Wall Street had already identified as blue chips. In 1978, The International Business Machines Corporation (IBM) surpassed AT&T, another telecommunications company, to gain the largest market capitalization of any company traded on the New York Stock Exchange.  Meanwhile Hewlett-Packard (HP), the company that in 1968 produced the world’s first personal computer, the Hewlett-Packard 9100A, traded around $100 per share throughout the 1970s. All of these companies, with the exception of IBM, were headquartered on the West Coast. As their revenues grew, it signaled a dramatic change in the American economic landscape. Economic power was moving from east to west.

        Fast-forward to 2014. “Software is eating the world,” according to venture capitalist and inventor of the first web browser (Netscape) Marc Andreessen. There is plenty of evidence to substantiate his claim, and not just from the traditional enterprises, like music, books, and photography, that we usually associate with software disruption. The 21st century automobile, for example, now uses software to run its engine, control its safety features, and direct its drivers to their ultimate destination. Law, energy, healthcare, and education are likewise experiencing dramatic threats to the way in which the incumbents conduct business. Not a single industry will be unaffected.

        Where are these changes being made? Well, Silicon Valley, the 50 miles of land in between San Francisco and San Jose, is home to, among others: Apple, Google, Facebook, Twitter, eBay, Yahoo, Dropbox, and Uber. Los Angeles, meanwhile, can boast of Snapchat, Tinder, Oculus, and Beats. Seattle still has Microsoft and Amazon. The short and easy answer then would be to say the West Coast, but to make that declaration is to misunderstand the economic phenomenon. Wherever there is industry, there is the inevitability of computer-enabled innovation. In fact, in many industries, the further away from Silicon Valley one is, the better equipped that particular company might be to confronting certain challenges. Again, according to Marc Andreessen, whose observations were relayed in a May 18th New York Times article.

“Mr. Andreessen said new valleys will eventually emerge. But they won’t be Silicon Valley copycats…There is a caveat to his caveat. In Mr. Andreeseen’s view, there shouldn’t be 50 Silicon Valleys. Instead, there should be 50 different kinds of Silicon Valley. For example, there could be a Biotech Valley, a Stem Cell Valley, a 3-D Printing Valley or a Drone Valley.”

        Thus, in order to keep pace with Andreessen’s vision of the country’s economic future, Chicago does not need to reinvent itself; it simply needs local companies to be at the forefront of the technology-enabled disruption to industries that it already does well, like consumer goods and logistics and transportation. There are certainly reasons to be bullish that the city will, if it has not already.

        In retail and consumer goods, Marshall Field and Philip Amour simply laid the foundation. Fortune 500 companies like Walgreens, Sears, McDonald’s, Kraft Foods, Hillshire Brands, and OfficeMax all currently have their headquarters in the greater Chicago area. The same things that make the city attractive to these traditional, brick-and-mortar companies, a well-educated and talent-rich workforce, a central yet urban location, a business-friendly political environment, and a lower cost of living relative to the coasts, promise benefits to Internet-based companies as well. A few major ones have capitalized already. At the center of Chicago’s tech landscape is Groupon, in part because of the company’s early success, but also because of the pervasive influence that its executives, Brad Keywell and Eric Lefkofsky, have on the rest of the city’s entrepreneurial scene. Between 2010 and 2011, Groupon became the fastest growing company of all-time, by a wide margin; those two years saw revenues from $30.47 million to $713.4 million, or 2,241 percent, year-over-year.

        Nevermind the fact that the company experienced a very public comedown and is now considered a business-school case study in growing too quickly and overall mismanagement. During 2014’s first fiscal quarter, the company reported $1.82 billion in revenue, with free cash and cash equivalents at $1 billion. But Groupon is not the only Chicago-based company to be shaking up the retail space. Grubhub received a $2 billion valuation when it completed its IPO last April, while fashion companies like Threadless and Trunk Club have innovative offerings that have allowed them to challenge traditional clothes retailers. Area companies are likewise exploiting the computation-driven change that is happening across the transportation and logistics industry. Echo Logistics and Coyote Logistics, third-party logistics (3PL) providers that use software to optimize outsourced supply chain management, both boast annual revenues of close to $1 billion.

        There is also Belly, a digital rewards platform for small and medium sized businesses facilitated through iPads and smartphones. To date, the company has received $25 million in funding from, among others, Andreessen Horowitz, the Silicon Valley VC firm that Marc Andreessen co-founded. Its first round of funding, however, was raised from Lightbank, the Chicago venture capital firm run by Keywell and Lefkofsky. Venture capital is an essential part of any city’s entrepreneurial ecosystem, and more so than other forms of financial services, it is important that it is sufficiently local. This is because companies dealing with the difficulties associated with charting a new market have increasingly come to count on venture capitalists as consultants and advisors. While Lightbank has quickly gained national respect as an early-stage investor, the Chicago venture capital scene is decidedly one-sided.

        There are no true counterweights to Lightbank as there are in places like Silicon Valley and New York. According to data from CB Insights, a venture capital industry research firm, Chicago lags behind New York significantly in terms of both deal and investment volume. Meanwhile, comparing the current state of Chicago VC to Silicon Valley is, in CB Insights’ opinion, “foolish.” In an industry where entrepreneurs seek out the VCs they would like to work with as much as it is the other way around, this can create problems. In fact, area entrepreneurs frequently complain about the terms of investment that Lightbank is able to set as a result of this monopoly. Lightbank should not be blamed for being selective about who and how it funds—despite being the top dog in Chicago, it is, after all, only the eighty-seventh largest VC fund, according to Entrepreneur.

        The relative lack of venture capital belies the fact that Chicago has identified how important it is to spur entrepreneurship and its growing technology scene. Several initiatives are poised to accelerate the city’s embrace of entrepreneurship. 1871, a joint initiative between area venture capitalist J.B. Pritzker and the state of Illinois, is a 50,000 square foot workspace for early stage start-ups developing Web and mobile applications.  Named in honor of the fire that ignited an economic revival in the city at the turn of the 20th century, the 225 companies that used the space in its first year, 2012, created a reported 800 jobs, attracted investments of $27.6 million (6 percent coming from VC), and generated revenues of $12.7 million. This might be a drop in the bucket compared with similar incubators in Silicon Valley, but the trajectory is certainly positive.

There appears to be no shortage of high-end programming talent either. Top universities like the University of Chicago and Northwestern University have strong ties to the city, while the University of Illinois-Urbana Champaign has an internationally recognized Computer Science Department (Andreessen is an alum). Meanwhile 37Signals, the company behind the open source web application framework Ruby on Rails, that currently powers Twitter, Bloomberg, and Github, among others, has operated in Chicago since its founding in 1999. There is also the Starter League, a school founded by two former Northwestern University student body presidents to teach the programming and web development skills that are necessary for Chicago’s technology renaissance to take place. In just two full years, the school has grown substantially, allowing it to offer a much wider range of classes at varying lengths and levels of sophistication.

If Chicago continues to establish a demand for venture capital, through the people who funnel into its local universities and places like 1871 and the Starter League, investors will provide the necessary supply. There is thus no reason to think that Chicago will do anything other than continue to write its own history as a respected commercial engine well into the Digital Age.

 Photo via Pixabay

Robert Galliani

About Rob Galliani

Rob Galliani, a junior from Menlo Park, CA, took over as NBR's Editor-in-Chief last Spring. He's still trying to figure out how the Internet is possible.

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