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Can Chicago be the Next Silicon Valley?

Can Chicago be the Next Silicon Valley?

Jan 17, 2013

Chicago startup stars, such as Groupon, Orbitz, The Onion, GrubHub and 37signals, have helped make the city a new breeding ground for entrepreneurship.  These successful companies are charting the way for a new economy and an environment where high-growth entrepreneurship and innovation can thrive. Already, the city has over a thousand digital tech companies, and investors increasingly consider it an entrepreneurial hotbed.  Chicago is becoming an increasingly attractive place to launch new ventures, and it is fast transforming itself into a global hub for new ideas.  Look out, Silicon Valley– Chicago is catching up.

Allure

The Windy City is haunted by big ideas that got away, but that is changing.  The founders of Netscape, PayPal, Yelp and YouTube all studied at the University of Illinois, one of the best schools in the country for computer science and engineering, but upon graduation, they quickly decamped for Silicon Valley.  This is not surprising, given that Silicon Valley is the national hub for high-tech talent, having the highest concentration of engineers, programmers and designers of any US metropolitan area and offering the highest average high-tech salary at $145,000.

Midwesterners often embrace the traditional path of working for an established company as opposed to a high-risk venture. Many established companies have roots or headquarters in Chicago, including major corporations such as Accenture, Boeing, MillerCoors, and McDonald’s. While these corporations compete with startups for talent, they also serve as a rich source of customers for new products and technologies.

Ilene Gordon, CEO of Corn Products International, competes against startups for talent.  “We have global people in Chicago and we move people in and out.  That type of diversity excites the workforce.  We want to put people in jobs that stretch them.”

Chicago native Patrick Ryan started an insurance business in his 20s, after graduating from Northwestern, and grew it into Aon Corporation, a company with annual revenues in excess of $7 billion.  He ran Aon for over 40 years and is now starting a new company.  Ryan described the change in Chicago’s startup culture. “In 1964, entrepreneurs were looked down upon as people who couldn’t get a job at a big company.  When I graduated from Northwestern, a family friend tried to talk me out of starting an insurance company.  There weren’t many entrepreneurs then and there was limited capital.  Nowadays, you can attract great talent to a new venture.  People like the excitement of building, growing, and being a part of an enterprise.”

Finances

According to VentureSource, startups in the Windy City have raised $654 million in venture capital funding in 70 deals last year, whereas Silicon Valley firms have raised a whopping $12.6 billion.  41% of all US venture investments in 2011 went to Silicon Valley companies.  The region has investors with expertise crucial to building and scaling a company.  There is also an abundance of “recycled capital”— money from angel investors and serial entrepreneurs reinvested into startups. Several generations of successful Silicon Valley entrepreneurs have put their knowledge and capital back into the ecosystem repeatedly after they exited their ventures.

Networks

For decades, Chicago networks have seeded Silicon Valley with breakthrough ideas and ventures. Brad Keywell, co-founder of Groupon (and three other startups that also went public) and venture fund Lightbank, said:  “There are gaps between different constituencies in Chicago, including academics and the government.  Silicon Valley, on the other hand, has day-to-day connectivity and technology transfer.  The structure of those connections doesn’t exist in Chicago, or, if it does, it is very weak.”

Chicago tends to have pockets of innovation and entrepreneurship.  Northwestern and University of Chicago, for example, churn out a large pool of technological, legal and business talent.  These world-class institutions receive significant amounts of federal research dollars, create new technological knowledge, and attract many skilled engineers and scientists.  However, the key difference with Silicon Valley is that they are not concentrated and the city has yet to establish a communication platform for entrepreneurship.

Chicago is leading the charge on innovation by being especially hospitable to companies seeking the mix of talent, curiosity and audacity that leads to disruptive products and services.  The city is actively creating a burgeoning entrepreneurial ecosystem that creates network connectivity between investors, entrepreneurs, and mentors.  Policymakers, government leaders and civic officials are creating programs (such as Excelerate and Hyde Park Angels) and investing public dollars to help entrepreneurs gain access to capital.  Incubator growth, incentives for angel investing, and pre-seed and seed funds are all on the rise.

Based on the belief in the power of the environment on startup success, Chicago is investing in ecosystems to generate extraordinary creativity and output and encourage the combination and recombination of ideas, talent and capital.  New co-working and collaborative spaces for tech startups in Chicago, such as 1871 (occupying 50,000 square feet in the Merchandise Mart and housing about 100 startups), aim to create breeding grounds for the next Groupon.  Venture capitalist J.B. Pritzker, Comcast, Cisco Systems, and the state of Illinois are among the backers of 1871, created with the intent of fostering serendipity and a community of trust that is necessary for the creation of meaningful and enduring companies.  The idea is to foster an environment in which entrepreneurs help one another, investors meet rising stars, and large companies keep tabs on potential acquisition targets.  According to scientific research, innovation is an inherently social act, owing as much to tightknit networks as the garage tinkering of individual entrepreneurs.  1871 brings together young entrepreneurs and local industry, creating a powerful and ambitious high-tech community to rival the one in the West Coast.

Culture for Failure

There are many theories for Chicago’s perceived lack of entrepreneurial savvy and spark, including an aversion to risk and fear of failure.  Brad Keywell teaches a class at the University of Chicago Booth School of Business.  “I spend 3 hours on the topic of failure,” says Brad.  “What amazes me is that most students in the class have not spent a minute talking about failure in their MBA careers.  Assuming you are doing something new or innovative, the advice I always give is that with risk comes possible failure, but the journey is worth it.  So many young people have historically been afraid of risk.  Our media doesn’t help.  In the Midwest, if you fail, it is just horrible.”

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Challenges for Chicago, or any rival to Silicon Valley, include access to capital and conservative attitudes. But these are becoming less and less of a challenge for Chicago, where there’s been a rise in capital funding and transfer of technology ideas. Chicago as the next Silicon Valley might still just be a pipe dream, but may yet become a reality. Cultural characteristics, such as individualism and a society’s acceptance of business failure, exist there and create the innate entrepreneurial spirit essential for entrepreneurship. The rise of high-growth entrepreneurship and supportive eco-systems will continue to create radically disruptive innovations, and Chicago just may become the next Silicon Valley.

Hua Wang

About

Hua Wang is a member of the Private Investment Funds Group at Proskauer, resident in the Boston office. Prior to joining Proskauer, Hua was a Global Scholar at the Kauffman Foundation and founder of a clean energy startup based in Chicago's 1871. She also worked in-house at Cisco Systems and focused on intellectual property strategy. Hua graduated from Northwestern University School of Law and Duke University. Prior to attending law school, Hua was an investment banking analyst at Lehman Brothers and a strategy consultant at Accenture.

5 comments

  1. Flowers /

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    balanced economy in the US.It’s very interesting ,thanks for post.

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