Chicago is the most mature startup ecosystem in the Midwest. Just seven months into 2021, Chicago companies have raised over $3 billion in venture funding. This success is thanks to key foundations built by years of hard work and visionary thinking. Other Midwest ecosystems are catching up, but at present, Chicago stands a head above its peers for a few key reasons. First, Chicago is an economic powerhouse. Its metropolitan GDP is $690 billion, the third-largest in the US, and it has a history of attracting talent and tech companies, such as Salesforce and Google, from all over the country. Second, Chicago is stocked with homegrown talent from the University of Chicago and Northwestern University, and top graduates from other nearby universities make their way to the Windy City every year. Lastly, Chicago has a compelling track record of exits--Groupon, GrubHub, Gogo, and Trustwave, to name a few--that have taught the city how to foster entrepreneurship.
In this week’s issue of MidBest, we will dig in on why Chicago’s startup ecosystem is thriving and highlight a few of its fastest-rising startups.
Tech pioneers of the early 2000s accelerated Chicago’s flywheel with significant exits
Groupon’s $12.8 billion IPO in 2011 is one of the most defining exits in Chicago’s startup history. Prior to this, the city was uncomfortable with startups. As Steven Cook (check out his article on emerging ecosystems) of Chicago Ventures put it, “Before the GrubHub and Groupon days, you were insane for founding a tech company in Chicago.” And he was right. In the late 1990s and early 2000s, risk-averse local investors handed out discouraging deal terms that left founders with little to show for their work. From the investor’s perspective, who could blame them? They had not seen a breakout venture exit in their backyard. But, once Groupon and GrubHub succeeded, Chicago exploded. In 2015, Naurex, ExteNet Systems, and Cleversafe were each acquired for more than $1 billion. In 2016, there were 55 exits, highlighted by E-Trade’s acquisition of OptionsHouse for $725 million. In 2017, Kellogg acquired RXBAR for $600 million, and in 2019, Sprout Social IPO’d at $814 million. This is what a thriving entrepreneurial ecosystem looks like.
“Now, Chicago’s flywheel is well established. Here, you can grow a company into something special, and there are enough examples now, so more people are willing to take that risk,” said Cook. Groupon founders Brad Keywells and Erik Lefkosky are prime examples of how major exits create more innovation and investment. After leaving Groupon, Keywells co-founded Uptake, a predictive analytics platform valued at over $2 billion, and Lefkovsky co-founded Tempus, a healthcare data analytics platform valued at over $8 billion.
Chicago’s next generation of founders and investors
Chicago is the Midwest’s poster child startup economy and the most developed ecosystem in the region. Here are a few up-and-coming companies to watch:
NoCD, a self-treatment app for obsessive-compulsive disorder, was valued at $38 million after completing its series A in 2020. FranShares is an early-stage alternative investment platform that democratizes franchise ownership. Thousands are already signed up on its waitlist. The following companies have each raised at least $5 million: CoPilot, a machine learning-aided car shopping application; AeroPay, a consumer-to-business payments platform; Leap Services, a tech-enabled retail-as-a-service platform providing economies of scale to retail brands; HDVI, a trucking insurtech provider; and Forager, a cross-border logistics company. In addition to its early-stage stars, Chicago has already minted ten new unicorns in 2021.
A breakdown of Chicago’s 20+ unicorns by funding and industry
The city has a significant population of venture capital firms funding local startups. Lightbank, which Groupon founders Keywell and Lefkosky founded, Chicago Ventures, and M25 are three leaders with a regional focus. Lightbank has invested in over 50 Chicago area startups, roughly 50% of Chicago Venture’s active portfolio is in Illinois, and M25 invests only in the Midwest. Area investors aren’t just economic development vehicles either--OCA Ventures, Cultivian Sandbox, and NewStack Ventures are building national portfolios from their Chicago headquarters.
Creative entrepreneurs are innovating, generating investor FOMO, and stampeding towards flywheel-spinning outcomes.
After a decade of success, Chicago is proof that the Midwestern ethos can foster a booming startup economy
Chicago’s wins have familiarized local business minds with the startup lifecycle and risk profile, but the city still retains the best attributes of Midwestern culture. As Taylor Woodward of Amount (one of the recently crowned unicorns) put it, “Working at a Chicago startup provides you the best of both worlds--you get to work in a fast-paced environment with top partners, employees, and investors that have friendly, work-life-balance-oriented Midwestern values.”
These values benefit the Chicago ecosystem. They attract founders moving from the coasts, like Kenny Rose, a California native, who migrated to Chicago to start FranShares. They foster deal-sharing among investors like Austin Ju (also a California native) from New Stack Ventures, who cites the collaborative nature of Chicago’s VC community. So it seems that the ecosystem has almost everything except, perhaps, mild winters.
“Chicago has money, schools, and startup success; we just need to brag more and adopt a showman's mentality,” said Dana Sun of OCA Ventures. As the city's ecosystem enters its teenage years, it will get louder, more disruptive, and continue to grow.
Chicago is no longer an emerging startup market. There are more local investors, capital, and startups than ever before, and Bay Area and New York investors are now dedicating time in the Windy City. Chicago is showing other Midwestern cities that it is possible to build a booming startup scene in the region while maintaining Midwestern values. Columbus, a city on the verge of substantial startup growth, is taking note.
