The secret to Chicago's tech confidence

Why the city's modest startups produce big returns

Mar 30, 2017, 4:33 PM

Chicago continues to trail its peers for high-tech VC funding, both in number of deals and dollars spent. Investors here demand strong business fundamentals, so startups need to operate lean. Fred Wilson, co-founder of New York-based Union Square Ventures, says third-tier markets like Chicago are primed for large, series-A rounds if investors can just get out of their comfort zone in top-tier markets.

For those who do branch out, it certainly pays off: a recent study found Chicago startups offer the greatest investor returns in the country.

The study, conducted by Pitchbook and inspired by Wilson’s blogpost, looked at startup profitability across 12 of the “more prolific startup communities” in the U.S. Looking at return multiples, they found that 45% of Chicago startup investments produced 10 times a return on investment. Raleigh came in second at 26% and New York City in third at 22%.

Pitchbook acknowledges the results are a bit surprising, considering Chicago’s solid-but-not-staggering tech community. Indeed, Chicago’s pool of startups included in the study was smaller (31 vs. New York’s 98 and the Bay Area’s massive 613), but the question lingers:

What makes a third-tier market like Chicago so profitable in spite of lower funding?

Drives value not attention

Chicago startups share a recipe for financial success. To get some perspective on these ingredients, we spoke to JLL’s Chicago Research Manager, Hailey Harrington. She says tech companies in Chicago sacrifice what’s trendy to solve problems.

“A lot of Chicago tech isn’t flashy. We’re not seeing the next social media giant or app in the on-demand economy. They’re creating platforms that help manufacturing and logistics companies; they’re creating health tech and B2B software.”

Their solutions are so value-driven that before these homegrown startups can gain name recognition, the big firms snatch them up.

Recent Chicago-bred acquisitions include Valence Health (Evolent Health), construction software maker Textura (Oracle), Coyote Logistics (UPS), OptionsHouse (E-Trade) and Cleversafe (IBM) which offers hybrid-cloud data storage.

Expanding companies, too, have signed deals to move to Chicago. Motorola Solutions recently relocated its headquarters, and Glassdoor reportedly chose Chicago over a handful of markets last year, and plans to increase headcount to 400 by 2017.

It seems many companies are choosing Chicago, not despite its lower funding but because of everything else.

Checks all the boxes

Chicago tied for sixth in a KPMG survey of executives on which location worldwide they thought would be a leading technology hub (outside San Francisco and Silicon Valley).

Though survey results are based on opinion, they’re backed by Chicago’s strong demographics, affordable prices and diverse culture. Nearly 22% of the population are millennials and 36% hold a bachelor’s degree or higher—from world-class universities and top Great Lakes schools no less.

CBD office rents are just $38.20 per square foot and only a few cents more in the city’s prime tech submarkets of River North and Fulton Market. In Silicon Valley, average CBD rents are $46.19, and $71.54 in New York City. One of Chicago’s biggest perks, though, is its 24-hour city lifestyle and thriving culture at a fraction of the price of big coastal cities.

Some have questioned Chicago tech’s influence in the face of the Austins and Portlands that have been dominated by industry growth. They speculate on when or whether tech in Chicago will really take off. But more than anything, Chicago is a diverse metropolis with a healthy mix of thriving industries, not dependent on one sector for success. While Chicago may not be tech’s favorite locale, tech’s not the city’s obsession either. And that’s okay.

Research: Hailey Harrington | Editor: Lillian Veley