Chicago's tech talent often grows away
Tired of a Chicago tech networking scene skewed more toward big companies and recruiters than people launching startups, Pek Pongpaet gathered about a dozen like-minded entrepreneurs in a Streeterville building lounge in late 2010 and dubbed them the Midnight Doers.
The name, Pongpaet said, was meant to distinguish these folks from all-talk, no-action "wantrepreneurs." Because Pongpaet and the others had day jobs, the Doers would meet at night, spending hours sharing their work, ideas, experiences and challenges.
"Pek came in and started Midnight Doers before there was an ecosystem (in Chicago)," said Sue Khim, then creating a website called Alltuition to help college students navigate the student-loans landscape. "I did not have anywhere else that I would go and show off what we were working on."
Fast-forward five years, and several of the Midnight Doers have done impressively.
Brad Flora sold his social/online advertising company, Perfect Audience, to San Francisco's Marin Software for a reported $25.5 million in 2014. Dave Wachtendonk and Christopher Lee sold the online daily-deal management platform MobManager to the Boston-based marketing company Constant Contact for an undisclosed sum in late 2011. Khim launched Brilliant, an online math/science community that now boasts more than a million members. Pongpaet founded Impekable, which builds and designs apps for companies.
What do these success stories have in common? None of them take place in Chicago.
Pongpaet, now based in San Jose, Calif., after moving to the Bay Area in late 2011, estimated that two-thirds of the group no longer is in the city.
"It's pretty significant," Pongpaet said, "and I think it's telling of the tech entrepreneurial startup scene of Chicago at the time."
Pongpaet and the others acknowledge that Chicago's tech scene has evolved since then, but their exodus points to a larger issue. Big cities thrive on innovation, creative energy, revenue and jobs, so it's in their best interests to attract and retain those people who will generate big bucks while making the place more appealing to visitors and residents alike.
As the Midwest's largest, most vibrant city — one that sees itself as a global economic and cultural force — Chicago attracts a wealth of talent from surrounding states. But cities like San Francisco, New York, Boston and Los Angeles serve as even more powerful magnets to Chicagoans who conclude that greener pastures await them on the coasts.
"We have a natural talent drain," said Chicago-based entrepreneur and philanthropist J.B. Pritzker, managing partner of the investment firm Pritzker Group. "We develop a lot of talent in Illinois, and the question is how much do you have available to that talent to absorb them into your economy, and how much of that talent needs to get up and leave because opportunity exists elsewhere?"
Pritzker and others say the city historically has lacked sufficient tech-oriented companies, angel investors, experienced entrepreneur mentors and potential customers. "If you want to keep entrepreneurs in Chicago, you have to develop all those things," Pritzker said.
Chicago's venture capital support doesn't compare to the Bay Area's — and it also lags behind that of Boston; Seattle; San Diego; Austin, Texas; and Washington, D.C., as well as New York and Los Angeles. At the same time, Chicago takes a back seat to other cities in terms of finance and media (New York), entertainment (Los Angeles), oil (Houston) and government (Washington).
"Chicago really does not have a calling-card industry," said Aaron Renn, senior fellow at the Manhattan Institute for Policy Research who moved to New York after spending 20 years in Chicago. "Chicago does not have a lot of industries like that where you have to be there."
To be sure, Chicago's broad-based economy has its advantages. The city has avoided the dramatic slumps endured by such manufacturing-heavy Rust Belt cities as Detroit; Cleveland; Buffalo, N.Y.; and Pittsburgh, and it's not lacking in world-class figures.
Chicago is known for its envelope-pushing architects, including Jeanne Gang, who oversaw the city's much-honored, wavy Aqua skyscraper. Grant Achatz, Rick Bayless and the late Charlie Trotter have shown that you don't have to leave Chicago to be among the planet's most celebrated chefs.
R&B singer Jennifer Hudson and polarizing performer-songwriter R. Kelly remain in Chicago, as does Jeff Tweedy's ever-adventurous rock band Wilco — though superstar Kanye West hasn't looked back since leaving. Chicago-based indie filmmaker Joe Swanberg has been on a steady rise, even as the area no longer boasts such commercial filmmakers as the late John Hughes and Harold Ramis.
Such marquee names enrich the city in various ways; food enthusiasts fly in from around the world to dine at Achatz's Alinea, for instance. But, as Renn noted, "those are not the fields that generate massive surplus tax revenue the way finance and the tech industry do."
So Chicago has been playing catch-up, launching the Pritzker-backed 1871 business incubator in 2012 and supporting other programs, such as the Techstars accelerator and UI Labs. Mayor Rahm Emanuel has stressed the importance of luring and developing tech companies; the day after his May second-term inauguration, he spoke of "creating a context where the talent wants to come, the (venture capitalists) want to be here."
Some successful startups have stayed, such as Braintree, an online payment facilitator bought by PayPal for about $800 million in 2013, and GrubHub, the popular web-based food-ordering company.
Chicago's most heralded tech company in recent years is Groupon, founded by a Pittsburgh native (Andrew Mason) and two Detroit-area transplants (Eric Lefkofsky and Brad Keywell). Google unsuccessfully tried to buy that e-commerce site for $6 billion in 2010, and Groupon has struggled since its 2011 initial public offering.
Lefkofsky and Keywell have remained active in Chicago — founding the Lightbank venture capital firm, Chicago Ideas Week and the data-analytics company Uptake — while ousted CEO Mason has relocated to the Bay Area.
A common complaint heard among tech folks is that Groupon didn't ultimately spawn a new pool of millionaires to invest in other startups, as Google and Facebook did. "I actually think having Groupon associated as the Chicago success thing is probably not good for Chicago," said Kurt Mackey, Flora's former business partner who moved to the Bay Area and launched the cloud database service Compose, which IBM bought for an undisclosed sum in July.
So Chicago hasn't become the next Silicon Valley, the nickname for the southern Bay Area nexus of technology, innovation and money. That Northern California hub developed around Stanford University in Palo Alto, and the region is awash in money, as you'd expect from the home to Apple, Google, Facebook, Intel and so many more tech companies.
In Chicago, 'It's hard to find those key tech people ...'Former Chicagoan Brad Flora, a senior director of product management for San Francisco-based Marin Software, talks about how difficult it is to maintain a tech startup in the Midwest. (Jose M. Osorio, Chicago Tribune)The University of Illinois at Urbana-Champaign turns out more engineering graduates than any U.S. school except the Georgia Institute of Technology, yet no tech scene has grown around it — or 140 miles north in Chicago. Fewer than half of these engineers remain in the state while 10 to 15 percent have gone to California in each of the past five years, according to the National Association of Colleges and Employers.
Those westward-bound folks in a sense are following the path blazed by Marc Andreessen, who grew up in Wisconsin, innovated at the University of Illinois (he co-created the browsers Mosaic and, later, Netscape) and left on reportedly not-great terms to become a key Silicon Valley figure and one of Time's 100 most influential people in the world in 2012.
Andreessen, now general partner of the venture capital firm Andreessen Horowitz, declined to be interviewed, but for a New Yorker profile that ran in May, he likened himself to "Peanuts" creator Charles Schulz: "Ninety-six percent of the people who grow up like he and I did, in the Midwest, just stay there, but the ones who leave become intensely interested in the future."
Of course, there are those who travel to Chicago with an eye toward the future as well. Craig Ulliott grew up in Brighton, England, and spent time in Philadelphia and Denver before he "fell in love with Chicago" and became a successful serial entrepreneur. His current company, Belly, is a loyalty-rewards program that has signed on 7-Eleven, among other businesses.
"I'm almost tired of hearing people complain about (Chicago's disadvantages)," Ulliott said at a Near North Side coffee/juice shop. "Just build your (expletive) business. If you want to do something here, just do it."
Then again, several entrepreneurs said they tried to do just that before finding success elsewhere.
Brad Flora, who grew up in southwestern Michigan, attended grad school at Northwestern University's Medill School of Journalism and started the local journalism website Windy Citizen while living in the city. "I was very excited to establish myself in Chicago," said this 33-year-old entrepreneur, who has a friendly, scruffy face and easygoing demeanor.
As his energies shifted to his budding web-advertising business that would become known as Perfect Audience, he said he raised hundreds of thousands of dollars from outside and inside Chicago, including J.B. Pritzker's New World Ventures. But the big leap came when his project was accepted into the Y Combinator business accelerator in Mountain View, Calif.
That three-month program offers guidance and money to fledgling companies and connects them with investors. Flora and Mackey, who eventually split off to pursue his own company, were there over the summer of 2011 before returning to Chicago with close to $1 million in funding. Flora said he soon grew frustrated as he sought local developers to spearhead the technical work.
"Every young startup has this problem of how do you find those first three or four programmers who have all the opportunities in the world at their fingertips right now?" Flora said. "They can go to Google or Facebook and make as much as $300,000 if they're really good, like just crazy salaries. How do you get them to not do that and instead take a below-market-rate salary and join your goofy little thing?"
This is a familiar refrain among companies seeking developing/programming/engineering help in Chicago: Its top tech folks often have good jobs they're not prone to leave, whereas Bay Area engineers and developers are more inclined to jump from opportunity to opportunity. In broad terms it's the clash between Midwestern loyalty and Silicon Valley risk-taking.
"For sure loyalty is a Midwestern (characteristic) — but we would call it a virtue, which is that you hold onto your talented people," 1871 CEO Howard Tullman said. "They don't always have one foot out the door. That's a huge change from what goes on on the West Coast."
At the same time, though, Flora needed some of those skilled risk-takers to push Perfect Audience forward. "Those people are all in the Bay Area," Flora said. "So if those are the people I have to hire, I have to be there and build that part of the business there."
Kurt Mackey, a 35-year-old Oklahoma native who initially moved to Naperville for a tech job, said he also wanted to stay in the Chicago area, but the money he was raising for Compose was coming from the Bay Area. "A lot of the investors just assumed that you wouldn't be able to run a company from Chicago," said Mackey, married with four kids, who runs Compose out of a funky second-floor open space in downtown San Mateo.
This point may seem counterintuitive when everyone is connected via the Internet, but, Mackey said, "the reality of fundraising and investing is it's not a modern activity. It works exactly like it did 30 years ago. You talk to people, and they decide if they like you or not."
Mackey wasn't generating similar interest from Chicago-based investors, who, he said, are rarely seen out west. "We got the comment, 'We're not going to invest in those crazy West Coast valuations,' from multiple people."
Sue Khim, who grew up mostly on the South Side with her family on welfare, started Alltuition while a University of Chicago undergraduate. She described fundraising in Chicago as "very hard," yet she eventually acquired seed money from such sources as Hyde Park Angels and OK Cupid co-founder/Match.com CEO Sam Yagan
After Alltuition won the competition at San Francisco's 2012 Launch Festival and attracted funding, one key investor, Social+Capital's Chamath Palihapitiya, encouraged her team to shift the company's focus from student loans to the larger issue of learning. And he offered resources in the Bay Area to help them do that.
"They're people who have a lot of knowledge and experience, and in order to be the beneficiaries of that good advice, you sort of have to be based here," Khim said from her ground-floor office in San Francisco's SoMa neighborhood.
So Khim and her team relocated to San Francisco to launch Brilliant, which serves up user-generated math and science mind-benders for an ever-growing virtual community of problem solvers. She has no regrets — but she also stressed that aside from consumer-web businesses, Chicago still gains more talent than it loses.
Brilliant is actually one of three education-related, San Francisco web companies run by transplanted Chicagoans. Jeff Scheur created NoRedInk, a site dedicated to improving students' writing and grammar skills, while a Chicago high school English teacher. Niles West High School graduate Brett Kopf was living in a "dinky apartment in Wrigleyville" when his startup, Remind, was accepted in the Palo Alto-based Imagine K12 incubator in 2011.
"We moved out here, and we've been scaling ever since," said the Remind CEO, who founded the company with his brother David. Remind, which connects teachers to students and parents via texts and other tools, now reports being used in about 50 percent of U.S. public schools, by more than 30 million teachers, students and parents, with $59.5 million funding to date.
Pek Pongpaet moved from Chicago to Mountain View in late 2011 with visions of launching "a high-tech, high-growth startup." He tried three ideas, none of which panned out, while he and his wife moved to suburban Sunnyvale and eventually San Jose, a less expensive place to live and to work.
He runs Impekable, his web consulting company, out of the NextSpace co-working office with three employees. While Impekable serves an Internet business clientele that, he said, would be in shorter supply back in Chicago, he still hopes one of his own projects, such as the movie-related app Marquee, will take off.
"If you fail, it's fine," said the 38-year-old Pongpaet, who performed 10 years' worth of motion-capture martial arts for Mortal Kombat video games while in Chicago. "It's a little less forgiving in Chicago."
"The Midwest is not that good at failing," Ulliott said. "It's a rite of passage almost on the coasts. I think people (in Chicago) worry a lot about failure, and I think that can prevent you from starting."
Pretty much all of those Chicago-to-Bay Area transplants acknowledged that Chicago's so-called ecosystem has improved since they left. J.B. Pritzker, who grew up in Silicon Valley, said that around 2005-2009 "there really was a mass outflow of technology talent. If you were an engineer, and you wanted to start a tech company in Chicago, you basically got up and left for Silicon Valley."
Pritzker became chairman — now chairman emeritus — of ChicagoNEXT, a World Business Chicago offshoot dedicated to driving growth for science/technology/innovation companies. He also helped underwrite 1871, which opened in the Merchandise Mart in May 2012 and recently announced its second major expansion to almost 120,000 square feet.
1871 doesn't take a share of the companies, which must apply and pay a fee to be located there. Rather, it provides space and resources while the businesses there have raised about $70 million and created almost 3,000 jobs, Tullman said. With about 11,000 tech jobs now in the Mart, Tullman said the River North tech scene is reaching "critical mass."
Tullman said he's been working with LinkedIn's Chicago office "to help identify those folks who had a series of connections with Chicago and are about ready to come back."
Meanwhile, efforts are underway to convince engineering/tech graduates from the University of Illinois — as well as the region's other schools — to root themselves in the Chicago area. Tullman sees such recruitment as a key step, and he pressed the university to teach a semester's worth of engineering and computer-science courses in Chicago.
"The universities need to do a much better job, especially downstate, of educating their soon-to-graduate students that things have seriously changed in terms of the Chicago tech scene and opportunities and that the standard old stories just don't begin to reflect today's employment opportunities and upsides," Tullman said.
ThinkChicago — a partnership among the U. of I., Chicago Ideas Week, World Business Chicago and the mayor's office — has drawn close to 900 students from around the Midwest since 2011 to experience Chicago during Ideas Week in October and, over the past few years, Lollapalooza in late summer. Joey Mak, the University of Illinois' director of innovation and economic development, said the point is "to shout from the rooftops that this is a place where young people can come to build their futures and their careers." Mak said some participants have relocated to Chicago, though results so far are anecdotal.
Chicago's talent-magnet efforts would appear to have some factors working in its favor. The cost of living in the Bay Area and New York keeps rising relative to Chicago while technology and software improvements have brought down the costs of starting a business.
Basecamp founder/CEO Jason Fried said he built his project-management company in Chicago without turning to venture-capital funding. "I'm pretty much anti-raising money early on," he said.
Fried said technological advances have enabled him to tap into a talent pool without geographical restrictions, so of the close to 50 people working for Basecamp, 14 are in Chicago, and the rest are in 32 other cities around the world, including a woman who recently moved to Portland, Ore.
"She didn't have to lose her job," Fried said. "We didn't have to lose her."
Brian Fitzpatrick, co-founder and chief technology officer of the fledgling restaurant ticketing/booking platform Tock, said that when Google wanted to hire him in 2005, he refused to move from Chicago to Mountain View, Calif., or New York and instead was able to open and oversee that company's office in Chicago. Now Fitzpatrick and two other Google engineers are on the Tock team, and, Fitzpatrick said, "two of the engineers I've hired, they've moved from San Francisco."
Alinea co-owner Nick Kokonas', Tock's CEO, said being in Chicago hasn't proven too big a handicap. "I think it's more challenging to find great designers and engineers here just because they're not gravitating to here," he said. "But like anything else there's a ton of people who are from here that study engineering, computer science, what have you, and then go, 'Oh, cool, I don't have to move.'"
Now the question is whether this financially challenged city can keep its young talent from leaving while it enacts such budgetary fixes as a tax on Internet streaming and cloud services.
"They should be paying cloud companies to come here, not the other way around," Kokonas said. "I understand that there's a giant deficit and all that, but it's just putting yourself at a giant competitive disadvantage when you're already at a competitive disadvantage. It's like you already have winter. You don't need 9 percent tax plus winter."