Chicago: The New B2B Boomtown

HANK OSTHOLTHOFF

CONTRIBUTOR

CEO of Mabbly

As entrepreneurs, we all know that Silicon Valley is the promised land of B2C culture-changing innovation.The Valley's stature draws in the world’s greatest innovators; and as an incubator, this California hot spot fosters growth and nurtures ideas that will one day create life-altering applications.

Yet, maybe the next wave of game-changing ideas won’t spring from Silicon Valley's pattern of building consumer-focused apps, which often gain a billion users and have no revenue model, yet evolve into valued products that solve real problems.

Maybe the next real opportunity for entrepreneurs lies in meeting the needs of other well-capitalized customers: corporations and mature businesses.

This is why I predict that the next boomtown of innovation will be Chicago. It’s a city that has come to terms with the fact that it’s never going to be a B2C superpower, even with Groupon on its roster of incubated consumer game-changers.

Instead, this often-overlooked Midwestern city is now drawing strength from its reserves of highly saturated corporate headquarters, to focus on everyday enterprise problems that desperately need solving. Chicago is going to be the next startup powerhouse for B2B innovation. Here’s how.

No Teamsters: just government and entrepreneurs teaming up

Historically, Chicago hasn’t exactly been known for its ethically sound politics. Its government has been a source of controversy, since, well, forever. But it’s evolving, and by collaborating, Chicago’s business and political spheres are doing something right, together. As a result, the city is embracing startup culture and entrepreneurship with unprecedented enthusiasm.

Two great illustrations of this symbiosis are 1871 and Matter, two of the country’s leading incubators, both of which are supported by both the city and state governments These innovation epicenters are far more than a media opportunity; they are connecting great minds and removing barriers, for entrepreneurs and corporations to think and work creatively, to partner and to flourish.

"Corporations are finding that the best way to bring real innovation into their businesses is to partner with startups which address specific issue areas,” said 1871 CEO Howard Tullman. “Our corporate partners work with 1871 not because it is the right thing to do, but because they recognize that partnering with innovative new businesses gives them the best chance to stay ahead as their industries evolve.”

No matter (no pun intended) what your politics, the results speak for themselves. And with hundreds of new companies teaming up with corporations, building their own community and enjoying government backing -- those results are growing in the right direction. “Entrepreneurs no longer have a reason not to be successful in the Midwest," said Steven Collins, CEO of Matter.

"It used to be difficult to source capital, mentors, and talent," Collins continued. "But that’s not the case today. The Chicago startup community is validating technology, providing tremendous opportunities, and helping acquire customers and funding like never before. And for B2B and healthcare startups, it’s the promised land of giants like Abbott, Walgreens, and other top enterprises [that are] looking for innovation.” 

The talent --  and value --of the Midwestern mindset

Silicon Valley has attracted some of the most brilliant minds and shrewdest entrepreneurs to grace the planet: thinkers whose ideas have completely changed our culture and the way we live. As such, the bar is set high for talent that will thrive and be welcomed to an already-churning innovation boomtown. On the corporate side, Wall Street’s home city of New York values extremes and opulence, and leaders who think big and live big in an incredibly crowded space.

Most of Chicago’s entrepreneurs, on the other hand, are neither flashy nor dashing. They exist in a middle ground between hoodie and Rolex cultures. The typical background includes a degree from a top Midwestern university and a consulting background -- with a tendency to be hardworking, dedicated and disciplined.  Now, incubate that potential in an environment like Chicago, and you have a recipe for success.

Today’s young, up-and-coming Midwest talents have been influenced by the startup culture and have caught that contagious hunger. But their grounded viewpoints and real-world experience support a more practical, problem-solving approach to entrepreneurship that appeals perfectly to the B2B marketplace. They are ideally positioned to take on antiquated industries with game-changing enterprise products -- intuitive solutions that are meaningful and carry value.

“Chicago’s innovation ecosystem is growing exponentially,” said Jeff Malehorn, president and CEO of World Business Chicago. “The combination of the average 273 digital startups launched here per year and our unmatched talent pipeline is propelling Chicago  [into being] one of the top cities for tech and entrepreneurship.”

A big city, but a small town: the perfect hotbed

Chicago may be one of the largest cities in the country, but it’s got the small-town vibe that was once the backbone of American entrepreneurship. Everyone feels one degree of separation, making it a networker’s paradise. That perfect storm of focused, success-driven entrepreneurs in a close-knit community, with a friendly, helpful Midwestern mentality, makes Chicago a hotbed of innovative connections.

It also explains why the city government is transitioning to a new era of cooperative relationships with the corporations and entrepreneurs that call Chicago home. This city may not be the first to value relationships that fuel innovation or fund ground-breaking technology, but it’s a powerful metropolis that sees how a vibrant, healthy business culture can enrich its population; and it's starting to capitalize on that. Both sides bring a lot to the table, putting Chicago on everyone's radar.

The 'Second City' roars back

Chicago’s derogatory nickname, “Second City,” infamously grew out of a declaration by A.J. Liebling in a 1950s article at the peak of Chicago’s rivalry with New York. Originally inspired by the skyscraper boom of the late 19th and early 20th centuries, the pseudonym has new meaning in the city.

Chicago’s “Second City” designation is now embraced as the city takes its place behind another front-running metropolis; but this time it's not New York, but Silicon Valley. A technological and startup boom similar to the Valley's has infected Chicago. But, as Troy Henikoff, managing director of Techstars, says, “The thing about Chicago is that we don't want to be Silicon Valley. You're not going to see the next Facebook come out of Chicago, but that's perfectly fine. It's all about relationships in Chicago, so it's the perfect place for B2B business, and the many Fortune 500 companies to grow here are evidence of this.

"And the simple truth is that B2B companies are booming here. Why fight it? It's pushing Chicago forward faster than ever.”

The right money In Chicago

The Silicon Valley venture capital community is incredibly vibrant and provides entrepreneurs with the resources needed to build, iterate and grow. Chicago capital does not operate in idea-based investing: Chicago prefers to fund evidence-proven ideas and companies that serve a particular established market need.

Let’s draw a comparison between types of investors and the phases of a startup’s evolution: function, go-to-market and scale. In that framework, Midwest investors are definitely the latter. It’s back to the basics of business and finance, profit and loss and the need to prove that an idea has a proper revenue model -- before funding starts to flow. And only when that business stays solid will that capital keep flowing to the next round.

Bill Pescatello, partner at Lightbank, told me, “Chicago being a B2B megapower makes perfect sense. It's full of people who absolutely define the entrepreneurial mindset. They know where their strengths lie, and they're not going to pretend to be something they're not. Startups in Chicago are solving specific problems and shaking up old ways that have desperately needed an overhaul for a long time.”

We hear the term “smart money” all the time, but Chicago investors are plugged into the community and provide not only capital, but something even more valuable: relationships and customers.

To understand this market, remember: Chicago is a big city, but also a small town. City leaders know who’s who at each corporation and will do their homework to vet those sources if there is a true need in the market.

Once they see one, they’ll open all the right doors doors and bring entrepreneurs all the best customers. The reason is that Chicago’s B2B market values the real-world business mentality: To B2B leaders, paying customers are the best fuel to fund a thriving business. It may not be easy to get capital in Chicago -- but if and when you do, you'll have the most powerful combination that capital and its assets can provide: namely, paying customers and dedicated investors.

Chicago’s new B2B focus promotes a community of innovation and relationships between entrepreneurs and corporations that doesn’t mirror the B2C model -- and that's just fine: In fact, I think it’s the next big thing.

Keep watching Chicago, then, because it’s creating a boomtown of B2B startups, fostering enterprise innovation and writing its own business model.