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The Past And Present Of Chicago Tech

tl;dr: This is the first in a four-part series about Chicago. Here, we explore the current state and recent past of Chicago’s tech scene.

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“Fierce as a dog with tongue lapping for action, cunning as a savage pitted against the wilderness, bareheaded, shoveling, wrecking, planning, building, breaking, rebuilding,” is how Carl Sandburg described the constant, incessant grind of activity in his poem, “Chicago,” published in 1914.

For these reasons, Chicago is the spiritual capital of the Silicon Prairie, the central hub of the post-industrial Midwest’s technological innovation and new venture development initiatives. As was true in Sandburg’s Chicago 102 years ago, today, Chicago’s tech ecosystem is in the process of building, breaking, and rebuilding. It seems to be in the latter third of the cycle.

This month, I’m doing something a little different for Mattermark by writing a four-part series about Chicago, my hometown, and the tech ecosystem here. I’ve been involved in the tech and startup community in the city since 2008. A lot has changed in the past eight years, but, frustratingly, much has stayed the same. The tech has changed, but the culture has been slower to mature. It still feels like a startup community that’s in the process of, well, starting up.

That’s the reason I’m writing this series. In future pieces, I plan to explore the state of incubators, accelerators, and investors in this city, not just to take a pulse of what’s going on today, but to also look toward the future. After all, these are the organizations that are building and investing in the future of Chicago’s tech ecosystem.

Let’s start by figuring out the how the history of Chicago’s tech ecosystem informs the present day.

The Current State Of Chicago Tech

It would be generous, but not a stretch, to call Chicago a second-tier startup hub today.

For such a large city, both in terms of population and the sheer amount of space, its startup and tech ecosystem feels smaller than it ought to.

It’s a city that hasn’t seen a home-run success since Groupon was founded in 2008. Sure, there may be as many as six privately-held tech companies with billion-dollar-plus valuations, according to recent reporting in Built In Chicago, but today Chicago’s startup ecosystem feels like it is lacking a flagship startup to hang its hat on.

If you’re from Chicago and have attended enough tech-related events, you’ll notice that speakers tend to use a lot of superlatives when describing the ecosystem here. Contrary to what some community leaders say, Chicago, right now, is not “the best” place to start and grow a company. In many ways, it’s just plain average. Startups from Chicago survive from funding round to funding round at about the same pace as the national average.

Chicago, as a business hub, is a net “importer” of startups and other companies through mergers and acquisitions deals. In other words, more companies move to Chicago as a result of an M&A deal than leave. In that same article, we found that Chicago comes in fourth place behind New York City, the Bay Area, and Los Angeles (in that order) for overall M&A activity.

Despite being the third largest city in the US – by population and overall contribution to the US GDPChicago falls far behind its peers in terms of its share of venture capital and other private investment over the past decade. Chicago comes in eighth place behind the Bay Area, New York City, Boston, Los Angeles, San Diego, Seattle, and Washington, D.C. Remember, that is  Chicago’s ranking in terms of aggregate funding, not per capita. In the decade since 2006, Chicago garners just a few percent of the total amount of capital invested into private companies. For such a large city, one would expect that Chicago would have a greater share of the funding activity.

Chicago might not be the hottest startup market in the US right now, not by a long shot, but that isn’t to say that it doesn’t have its fair share of successes.

Chicago As A Back-End Innovator

In general, Chicago’s tech ecosystem doesn’t produce a lot of consumer-facing success stories (Groupon, Trunk Club, and GrubHub aside).

Where Chicago seems to shine, though, is in building the background back-end technologies that help other businesses run.

A Significant Player In Enterprise IT

Chicago is one of the leading regions in enterprise IT development today, but it has a rich past as well. The city has spawned a number of leading enterprise IT solutions providers, like CDW, and is home to a number of development shops and product consultancies that serve corporate and startup clients from around the country. Even corporations in stodgy old industries have engaged in groundbreaking work on the technology side.

Back in 1981, Walgreens was the first national pharmacy chain to sync prescription and ordering information between all of its locations in a single unified computer system, called Intercom Plus. In a time before the Internet as we know it really existed, Walgreens had to rely on VSAT satellite communication to sync its stores. For a time, the Deerfield, IL-based chain was the largest private user of VSAT satellite bandwidth, second only to the US Government in overall use. Today, it would be difficult to find a corporation, much less a startup, willing to go to such great lengths to push the current state of technology to its limits to achieve a business goal. It would be like CVS or Duane Reade pursuing quantum entanglement as a way to sync data today.

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Look a bit beyond Chicago’s borders, and there’s one other elephant in the room of corporate IT. Bloomington, IL is home to a huge IRS office that featured prominently in the late David Foster Wallace’s last novel, The Pale King. It is also where a staggering 12,000 IT workers go to work at State Farm Insurance’s headquarters, according to TechNexus’s Terry Howerton in a 2012 interview with The Atlantic.

It’s not just mega-corporations driving enterprise IT in Chicago. There are plenty of smaller startups and consultancies serving enterprise needs, ranging from marketing analytics to market research, and even industrial predictive analytics providers like Uptake, founded by Groupon co-founders and Lightbank managing directors Brad Keywell and Eric Lefkofsky.

Where there’s industry, there’s capital. And finance is no strange sector to Chicago’s entrepreneurs and technologists.

Chicago, A Notable Fintech Hub

Chicago has also been a hub of innovation in the finance sector as well. As home to the Chicago Board Options Exchange (CBOE) and the Chicago Board of Trade (CBOT), each leading exchanges in financial derivatives and commodities, respectively, Chicago is a financial hub in its own right.

Apart from the exchanges, there are dozens of high-frequency trading shops, as well as Citadel, the megalithic hedge fund with over $25 billion under management, among other financial institutions that draw finance-savvy talent to the city. It’s no wonder, then, that Chicago has spawned a number of companies that serve the financial sector.

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The wave of “tech meets finance” companies in Chicago arguably got its start in 1984, when a University of Chicago graduate named Joe Mansueto published the “Mutual Fund Sourcebook” out of his Chicago apartment under the banner of Morningstar. Today, Morningstar is a leading source of news and data about the financial sector, generating revenue in the hundreds of millions of dollars every year.

More recently, in 2007, Braintree Payments was founded. It launched its payments gateway in 2010, acquired the popular peer-to-peer payments company Venmo for over $26 million in 2012 and was ultimately acquired by Paypal in 2013 for $800 million in cash.

Today, Chicago’s community of fintech companies is supported and connected through an industry group called FinTEx Chicago. The group has worked to form partnerships with financial technology working groups from other cities and pilot new technologies, like keeping records of property ownership in a blockchain, with public agencies.

Chicago has historically been a financial hub, and there have been plenty of innovative companies that serve the financial system, but, again, most are B2B. Apart from Braintree’s Venmo and a few players on the lending side, there aren’t many consumer-facing financial technology companies here.

The History of Consumer Tech In Chicago?

If Chicago is a hotbed for back-end technologies and services for enterprises, its consumer-facing tech ecosystem is comparatively less vibrant. But this isn’t to say that there have been no consumer-focused successes.

As we mentioned earlier, Chicago is home to the likes of Groupon and GrubHub, but the history of consumer sites, apps, and platforms stretches further back.

In 1989, two brothers, Andrew and Thomas Parkinson, started a grocery shopping and delivery company to serve the community of Evanston, Illinois, a northern suburb of Chicago that’s home to Northwestern University. At the time, Peapod was one of the first companies to provide an e-commerce-only shopping experience. It was so early to the web that, in order to increase business, the company also sold dial-up modems, directly helping thousands of people use the Internet for the first time. The company went public in 1997 and was taken private in a buyout deal by Ahold Delhaize, an international food distributor, in 2001.

During the dot-com boom of the 1990s, Chicago produced a number of consumer-facing companies, including coupon marketplace CoolSavings and Cars.com. In the nadir of the dot-com bust, in 2001, Orbitz was formed in a partnership between major airlines as a response to the rise of independent travel sites like Expedia and Travelocity.

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For consumer tech, it seems like the period between 2004 and 2009 was a kind of “golden age” for launching companies in Chicago. GrubHub, the takeout ordering platform, was founded in 2004 by two web developers, Matt Maloney and Mike Evans, who initially set out to develop a web-based alternative to paper menus. FeedBurner, the RSS feed management platform, was also launched in 2004 by an improv comedian, Dick Costolo, and some associates. Feedburner was acquired by Google in 2007 for $100 million, and Costolo would go on to join Twitter in 2007, eventually becoming the company’s CEO.

But Groupon is the company that put Chicago’s tech ecosystem on the map for a lot of people. Originally founded as a social enterprise called The Point, the company pivoted into the coupon and daily deal market after posting an offer for a half price pizza from the restaurant downstairs, which performed well. Groupon’s model of offering daily deals that “tipped,” going into effect, once a sufficient number of people bought vouchers for the discounted goods and services, helped the company’s service go viral. Although waves of copycat sites have sprung up, Groupon remains the leader.

Its growth was remarkable. By 2011, three years after launch, Groupon served 35 million users in 150 markets in North America and 100 markets in Europe. Its valuation grew too. At the time of its IPO in November 2011, the company was valued at $12.65 billion, and it was the largest tech IPO to hit public markets since Google debuted in 2004. This was a significant pullback from the rumored valuation of $30 billion that were floating around as recently as June 2011, when the company filed its S-1 five months before IPO. That pullback foreshadowed a protracted decline in its stock price as the company struggled financially. Today, Groupon’s market cap hovers at around $2.2 billion.

Groupon’s decline and fall left a vacuum in Chicago’s tech ecosystem. There isn’t really one flagship company to point to as a sign of success for the city’s startup community.

Chicago Tech: Its Present And Future

If Groupon marked the denouement of Chicago’s consumer tech heyday, then in a post-Groupon era, the question begs to be asked, “What, exactly, comes next?”

There’s obviously a future for tech in Chicago. After all, there’s a future for tech everywhere. The question is, what form does that take in the short and long run here? Does Chicago make a clean-ish break with its past and try to mimic Silicon Valley and other hubs’ success with scaling consumer-oriented tech companies, or does the community continue to build upon its long history of solving difficult and (seemingly) boring problems for enterprise and the finance sector? Who are the key players trying to build the future of Chicago’s tech scene?

These are all questions we plan to explore in the coming weeks.

Regardless of whether you are from Chicago or not, the city’s tech ecosystem is an object lesson in the challenges of community building and differences in investing and startup culture. It’s going to be a fun month.

Jason D. Rowley is an independent researcher based in Chicago. His weekly(ish) newsletter on tech, venture capital, and culture is worth reading.

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© Mattermark 2017. Sources: Mattermark Research, Crunchbase, AngelList.
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