Chicago is growing as a tech hub but industry insiders say the old model of venture capitalists investing in startups needs a reworking. We talk with two major players of the city’s tech scene -- Reverb.com founder David Kalt and venture capitalist Brad Keywell -- who tell us why Chicago needs a new mindset to move forward.
How do you see the Chicago startup scene in 2014?
It’s a good market, and it’s gotten a lot better in the last six years. Chicago’s strength is also its weakness. Silicon Valley, Boston and even Austin have a certain density. That’s the big thing, and sometimes the only thing a big tech city has. Chicago has a really diverse economy. Chicago has everything from manufacturing to professional services - accountants, lawyers - to financial trading, advertising, and aviation.
Chicago is a broad economy, so tech isn’t very big. Although, right now it is helping if you look at the type of startups we currently have; everything from life science and health-related techs to digital and consumer-based, online startups. Then you have companies like CleverSafe - that is raw technology dealing with cutting-edge data storage. Then you have SMS Assist; they applied technology to a very old business of facility maintenance and they have thousands of customers all over.
So the density – or lack thereof - is both good and bad for Chicago tech?
It’s not a concentrated market like semi-conductor business or software was in Silicon Valley. There isn’t the density and the mass to make this sector take off just yet, if ever. But Groupon stumbled badly and it’s still not back on its feet yet. But if that’s the only type of company we had, it would have really hurt the sector. It didn’t because the sector is diffused. It will take it a long time to grow. But the diversity is good and you value that in the long term. The one downside to it is that when you get one or two really big public companies, you get a lot of expertise and talent concentrated. Like startups in Seattle with Microsoft – they are giants and now entering the market is difficult. Here, the diversity gives you more of a fighting chance.
Failure of bigger companies don’t affect the sector?
We had during the dot-com boom two big companies that failed and it shook the sector. The tech sector now keeps growing and moving on, and it will take it longer to expand. It’s much healthier now though.
We interviewed David Kalt who’s been a hugely successful tech entrepreneur in Chicago. What are your thoughts on his new music gear venture, Reverb.com?
I would lean heavily on the diversity question for them. He comes out of the financial trading sector which is one of Chicago’s core industries. He is a great example of someone who makes money, then piles it back into something else. That’s how the tech industry grows. You have to have those guys. That was what was missing and why so much attention was paid to Groupon. You need that company that grows big, hires talent, then the talent and money stay around to form new companies. That has to happen at some point. There have been a lot of companies that go public and grow, or get sold.
But when you look at other places, the tech giants: Microsoft, PayPal, YouTube, Amazon, eBay etc, you need a flagship success at some point to change the game. You really need that catalyst at some point, and everyone is waiting for that right now in Chicago. The exits are a good thing but at some point you need the flagship.
What about Chicago’s venture capital scene? Is it also growing?
Yes, just look at the numbers. It’s healthy, but we are small. There are now six or seven venture funds; a couple formed in the last few years or so, and that’s really helpful. It’s a good thing all the way around. What’s necessary, you need the funds and the venture capital. You also have some of the biggest venture capital funds in the U.S. – NEA runs one of the largest – they invested in Chicago as much as anywhere else last year.
In terms of capital, Chicago is way, way healthier. Not as great as entrepreneurs would like it, but a few years ago, there were three in town and that was it.
Are more entrepreneurs staying in Chicago?
Most go from U of I to Silicon Valley. The down side of the tech economy is that if you are in a tech town and not participating in the tech economy, it does nasty things to inflation. It can price people out in terms of real estate. You get that income inequality.
In Chicago right now, it doesn’t take $5 or 10 million just to see if you can start the company. You can fund it at that amount and start it first. The cost is coming down and there are more sources of capital.
Is Chicago the next Silicon Valley?
No. But it doesn’t need to be. We would like to be one of the nation’s big tech centers. We are not there yet, but are so much closer than we were. In the next few years, we need to have companies spring up, get successful, and get recognized as a successful Chicago company; then others will come. Groupon, for all it is worth, definitely got people’s attention in Silicon Valley. They had an impact and it was good for Chicago. So hopefully there will be two or three more behind them.
Interview has been condensed and edited.