A Start-Up Ecosystem Forms in Chicago

Inspired by Local Stars Like Groupon as Well as More Venture-Capital Funding, Entrepreneurs Nurture Local Connections

Dan Salcedo left Chicago last year for Silicon Valley to take a three-month course in launching a technology business, but the entrepreneur plans to return to Chicago this spring as a member of a growing group of tech founders drawn to the city’s brewing start-up scene.

Mr. Salcedo, 26 years old, aims to launch a social-network-based online shopping business. He and other local founders are inspired by Chicago-based stars like Groupon Inc.,GRPN -0.65% the daily deals site launched in 2008 that now has a market capitalization of roughly $10 billion, and GrubHub Inc., an online restaurant delivery service started in 2004 that has raised $84.1 million in investor capital.

“Good things can happen in Chicago,” Mr. Salcedo says.

Overall, Chicago-area start-ups raised $654 million in venture capital funding in 70 deals last year, a 40% increase in deals from 2010, according to VentureSource, a unit of News Corp.‘s NWSA -0.68% Dow Jones. (News Corp. also owns The Wall Street Journal.) Thirty-six Chicago-area start-ups, mostly tech, closed on initial rounds of venture capital last year, more than double the 14 that did so in 2009, it says.

Investments by angels, or wealthy investors, in Chicago digital-technology companies increased 54% last year to $16.2 million from 2010, according to BuiltInChicago.org, a tech community website.

Also growing is the number of collaborative work spaces and support programs to help entrepreneurs build businesses in Chicago. Recent additions include nonprofits Catapult Chicago and soon-to-open 1871.

“When you see your peers gaining success at being an entrepreneur, it is inspirational,” says Amish Tolia, co-founder of Apparel Media Group Inc., a Chicago-based online provider of brand sponsorships that has raised $1.8 million.

Brad Weisberg, founder of year-old online auto-repair estimation service BodyShopBids Inc., wants to emulate Groupon’s success. “I always had the idea for BodyShopBids, but I didn’t have the confidence,” he says. “I finally thought, if they can do it, so can I.”

Mr. Weisberg, 31, has raised $1.3 million from venture-capital firms including Lightbank LLC, a two-year-old Chicago firm whose managing partners include Groupon founders Eric Lefkofsky and Brad Keywell. BodyShopBids shares office space in Chicago’s River North area and receives hands-on operational support from Lightbank’s investment team.

“What used to be a flyover stop is becoming a spot for finding really good scalable technology businesses,” says Paul Lee, a Lightbank partner.

Of course, Chicago’s level of investor activity is dwarfed by the Silicon Valley area, where start-ups raised $12.6 billion last year, or the New York-area, where companies raised $3 billion last year, according to data from VentureSource.

What’s more, being based in Chicago comes with a few significant trade-offs, founders here say.

One trade-off is a relative shortage of qualified engineers. At a time when engineers are in high demand nationally, attracting candidates to Chicago start-ups can be especially difficult.

“We struggle sometimes finding talent,” says Jake Nickell, the 31-year-old founder of SkinnyCorp LLC’s Threadless.com, an online T-shirt design company and online community of graphic-artists since 2000. The profitable company has about 100 employees.

As Groupon has grown from a small website to a 10,000-person organization, it has had to supplement its Chicago employee base. In late 2010, Groupon opened an office in Palo Alto, Calif. It has also added engineering talent by acquiring other start-ups. “We’ve creatively looked for ways to fill in any talent gaps,” says Julie Mossler, a spokeswoman for Groupon, whose technology center is in the River North area.

Another drawback: Chicago’s distance from Silicon Valley may hinder the ability to cultivate key relationships.

“Partnerships would be easier if we had more social connections,” says Matt Maloney, co-founder of GrubHub.

“If half of our engineering staff worked at Facebook in the past and the other half at Zynga, you’d have more connections to similar organizations,” Mr. Maloney says. Both Facebook Inc. and social games maker Zynga Inc. ZNGA -4.03% are based in the San Francisco area.

New co-working and collaborative spaces for tech start-ups in Chicago are intended to help overcome those hurdles, by creating breeding grounds for the next Groupon. Catapult Chicago, which opened March 5, for instance, occupies 12,000 square feet, donated by a law firm, on the 25th floor of a skyscraper in the River North area.

Catapult’s designated space is limited to about 15 tech start-ups. The project charges $500 to $1,000 a month for office space.

“By building communities and generating more awareness about the growing start-up ecosystem in Chicago, we will be able to attract more development talent from the local universities and other areas throughout the country,” says entrepreneurRyan Leavitt, Catapult’s co-founder and president.

Nonprofit 1871 on May 2 will open its doors to about 100 start-ups seeking affordable office space and a collaborative work environment in a new 50,000-square-foot center, which is now under construction in the city’s Merchandise Mart. The space allows participants to reserve desks and extras like conference rooms and rentable lockers, for $400 a month or less.

Since January, 1871 has hosted groups of around 100 people for “hard hat” tours of the area under renovation about once a week, according to Matt Moog, chair of the project to launch 1871. It is run by the Chicagoland Entrepreneurial Center, an organization dedicated to promoting and growing the start-up community in Chicago.

Mr. Moog, who is also the founder of the FireStarter Fund—a $5.7 million fund backed by more than 40 heads of Chicago-area companies that invests mainly in local start-ups, says he believes such initiatives like 1871 will provide tech entrepreneurs with a strong incentive to stay in—or in some cases, return to—Chicago.

Mr. Salcedo’s start-up, Mobcart Inc., was one of the 300 companies that applied to get into 1871. This week, he got a notice that his start-up was accepted.

The collaborative space will help create “an ecosystem of high-level, experienced entrepreneurs” in Chicago, says Mr. Salcedo. “It’s going to help.”

A Look at Five Hot Chicago Start-Ups

Braintree Payment Solutions LLC

Helps businesses process credit-card payments

Bryan Johnson, 34

$34 million

Its new tools for app developers allow merchants to securely accept payments via mobile devices.


Trunk Club Inc.

Technology-enabled apparel service for men

Brian Spaly, 34

$15 million

Guys hate shopping, but they love looking good.


BrightTag Inc.

Technology platform provider for the digital marketing industry

Marc Kiven, 47; Mike Sands, 45; Eric Lunt, 41

$8 million

Launching software that allows individuals to choose to not have data about their online behavior shared with marketers.


Belly Inc.

Provider of custom digital loyalty programs for small and midsize businesses

Logan LaHive, 29

$2.9 million

Wants to replace the punch cards provided by local merchants.



Online shift trading for everyone.

Sean Corbett, 29; Randy Janzen, 29; Drew Gilliam 28

TechStars provided seed capital.

Employees need flexibility that companies are not often willing to invest in.


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