Chicago's technology sector
Start-up city
Dec 19th 2013, 15:35 by N.L. |
CHICAGO
LESS than two years ago a new centre for digital start-ups,
called 1871, opened up shop in Chicago. At first its 50,000 square feet of
jazzy furniture, polished concrete and shiny glass were largely empty of
people. Today things couldn't be more different as it thrums with
entrepreneurs, laptops and lattes. Whiskery coders sit hunched on beanbags,
tapping on Macbooks. In one spot a geek is on a video call. In another, two men
are testing a circuit board while drinking coffee.
This co-working space is the most visible manifestation of a
noticeable uptick in technology activity in the city. In 2012, a start-up
company launched every 24 hours. The third quarter
of 2013 was the digital-technology sector’s second best ever, with $265m
raised. (Actual funding is probably far higher thanks to a non-disclosed
investment in GrubHub, an online takeaway ordering service.) Three companies,
Braintree, Train Signal, and Power2Switch, were acquired for a total of
$845m according to Built in Chicago, a start-up website.
Many other co-working spaces are springing up, too. The latest is called The Warehouse, and is being built by the founders
of Groupon, a home-grown technology behemoth.
All this start-up activity is fascinating because venture
funds used to refer to Chicago as the "flyover city". According
to Patrick Spain, a local entrepreneur whose start-ups include Hoover's Inc, a
research firm, among others, much has changed in recent years. He thinks 1871
has been critical as it has given the technology sector traction. The centre is
a dynamic place where people with ideas can find out what is happening and get
financial help and mentoring, he says: "All of a sudden you can get
smarter, faster at no cost." Many years ago, when Mr Spain was
starting out, he needed to hire everyone he needed and it took millions of
dollars to get to scale. "Today you can prove out a concept at under
$1m and find the funding."
A greater availability of venture capital has also probably
helped the city's start-ups. As has a rich seam of local talent coming from
Northwestern University, the University of Chicago, the University of Illinois
and other institutions across the Midwest. (The problem has always been
persuading the graduates to stay. The founders of Netscape, PayPal, Yelp and
YouTube all studied at the University of Illinois but then left after graduation.) All of which means
that Chicago is now ranked as one of the top ten cities in the world for
starting a company, according to Startup Genome, which provides analysis on
start-ups around the world.
There has also been a general change of tone. Bjoern Lasse
Herman, the founder of Compass, which produces the Startup Genome report, says
that in the past any Chicago start-up wanting venture capital would have
been told to move to Silicon Valley. Now they are being encouraged to stay put.
Yet his report also suggests that the city has some
weaknesses, most notably a conservative culture. Chuck Templeton, a local
entrepreneur who founded Open Table, a restaurant-reservation site, is
unfazed. Chicago, he explains, is not trying to be Silicon Valley or
Boston. The city is good at being pragmatic. When Mr Templeton started Open
Table he recalls that restaurants in New York and San Francisco would
ask "who has this product?", while in Chicago they would ask "is
this going to save and make me money?" Moreover, he says, companies
in the city do not have the silly valuations sometimes seen on the west and
east coasts, which means they do not feel obliged to pay more for talent than
they need to.
Being windy is good
Chicago’s reputation for being technologically conservative
might be the flip side of having a large and diverse economy, with traditional
industries such as manufacturing, retail, finance and agriculture. These are
conservative businesses by heart, but all need to incorporate digital
technologies. Jason Fried, an influential voice in the start-up scene whose
company 37signals produces
project-management software, says he does not think Chicago should try to be
anything other than it is: "This should be the place where people build
without funding, are scrappy and start up on their own." He also questions
the way in which cities are ranked in terms of innovation. "In our
industry we focus on a lot of the wrong things as success, such as rounds of
funding raised," he says. "I see this mostly as failure. It means you
need more and more money to survive, your customers are not paying, and you are
not building a sustainable business." Mr Fried says he
likes 1871, but reserves judgement for now on whether it is going to create
many success stories.
Pragmatism and conservatism are its strengths, then, if not
viewed through the myopic lens that compares every city with a strong
technology sector to Silicon Valley. Indeed, another new report on the world's most competitive cities, points out that
Chicago is an excellent alternative for companies currently looking for a
world-class location for their software development activities. San Francisco
and New York top the world's quality rankings, but are costly.
Chicago’s technology sector also has the backing of its
mayor, Rahm Emanuel. Mr Emanuel has overseen the city's first comprehensive
technology plan, and he will go on the road in 2014 to recruit new technology
graduates. He will also host a venture capital summit next summer right
before the city's cool music festival, the Lollapalooza. Mr Emanuel says
technology has been the fastest growing sector of the economy by far since he
arrived in 2011, and he will double its size in the next decade. Statewide,
technology jobs have been growing at 1.6%, faster than the national average of 1.1%. Even Purdue
University, in Indiana, now offers a weekend MBA degree in town to
turn science and technology workers into entrepreneurs. Chicago will never
be Silicon Valley. That is a good thing.
