A Word Of Caution for Chicago’s Tech Community…

Seyi Fabode

It's still a great time to be working on a startup in Chicago.  Companies are getting funded and new ideas are being presented at events like BIC Launch and Technori pitch. But for how long?

Thoughts on the 'future' of the Chicago startup community came from having a conversation with a friend working on his own ecommerce startup in London.  He expressed his surprise that same old me had gone from poring over spreadsheets in a power station in London to being part of a thriving community. We were exchanging notes and came to the conclusion that the London startup scene is where Chicago's was mid 2011 (starting to bubble, some successes and the recognition of the need for a community). On further analysis of the situation with him I found three holes looming that will hinder the projected growth in the Chicago startup scene.

1. Chicago is so enamored with 'startups' and not about 'scaling up': With the launch of 1871, the growing reputation of Excelerate and amazing resources (Built In Chicago, Seth Kravitz's emails etc) for connecting with the community the focus is squarely on startups. Not a bad thing but we've become so focused on startups that even businesses like Grubhub (raised $84M so far), Braintree ($69M raised so far) and Groupon (IPO last year) are still touted as startups at the expense of the 'real' startups. I'm happy to break this news to you all; Grubhub, Braintree and Groupon are no longer startups, they are now full-fledged businesses. Let's start to pay more attention to scaling up (i.e. the thing these businesses are doing) because we have a lot of resources to help startups (a couple of founders, a little cash, some/no market validation) to keep their eye on the prize; the prize of becoming a successful and sustaining business.

2.  There is a contagion of 'love' (entrepreneur edition): My friend asked me if Power2Switch has any competitors and I told him that any business without competition is most likely not a business. He asked if we had competition in Chicago and I paused. We do but our biggest competitor is in Texas and raised $4M from Kleiner Perkins a week ago. I've been in conversations where I tell someone what we do and they go 'I thought of that a few months ago!' and I wonder 'why didn't you start it?' A big reason why is because very few people are willing to risk their regular lives for a crazy venture but another reason might be because we are all so in love with one another in this small and budding community. 'She's my friend so I don't want to piss her off by stealing her idea'. It's unfortunate that this attitude prevails and it needs to change. Competition is good for the ecosystem. If you feel equally passionate about the idea go for it. You might just out-execute your friend.

3. There is a contagion of shared risk aversion (investor edition): The beauty of the Internet is that you can find almost any information online. So I wasn't surprised when my friend highlighted that most startups in Chicago show the same list of investors (do your own search on Crunchbase). I did fear something when he shared this information with me. I've just read Nassim Nicholas Taleb's 'Antifragile' and an example in it came straight to mind: The safety standards of the airline industry as a whole improves when one airplane crashes (the damage is localized to that one flight but the benefits accrue to the community) but the financial system as a whole suffers when Bear Stearns crashes because of the interwoven nature of the financial system (the damage was contagious and not localized to Bear Stearns because the financial system is essentially one 'organism'). The investment community in Chicago, according to Crunchbase anyway, is one 'organism' of co-investment and no real competition. This might not be the best thing; the risks (failure of a startup every one is invested in) are magnified and benefits (exit from one company everyone is invested in) are severely minimized. Investments in Parkwhiz and Spothero were the only 'competitive' investments we could find and trust that I made sure he didn't downplay that one example of healthy competition...

Since the first step to solving a problem is knowing there is one I challenge us to start to plug these holes. Or we'll look back in 5 years and wonder why there was no steak behind the current sizzle in the Chicago tech community...

Originally posted on the Power2Switch blog

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Fred Hoch
Nice post, Seyi. Scaling up just isn’t as sexy as being a startup... but the need to scale productively has never been more important to the local and national economies. The Kauffman Foundation found that young firms are leading the recovery in job creation with new positions accounting for four out of every 10 hires at startups (firms that are two years old or less) compared with 1/3 or fewer hires at established firms (Forbes, Nov 2012). To successfully scale a startup to a growth-stage company, expertise is needed in three key areas: Growth Strategy, Talent Attraction and Retainment, and Visibility. Locally, ITA sees hundreds of companies tackling these challenges in efforts to make their business visions a reality. On the plus side, we have a great community of experienced entrepreneurs who willingly share their expertise to support the folks further down on the growth ladder. We are thrilled to be part of this amazing community of companies, entrepreneurs, and economic leaders. Congrats to you on your business, too!
Tony Adkins
Seyi Nice one; your point about scaling is well taken. Not so sure about the friendship issue though; seems to me that the best entrepreneurs have a very healthy schizophrenia about pals and competitors (and the old rule about "Don't compete with your customers" went out the window about 1985!!) And while Bear Stearns was the ignition point, doesn't the financial meltdown have a lot to do with Master-Of-The-Universe bankers who could not see real risk if it bit them in a private place (which of course it did)?
Seyi Fabode
I see your points but I don't totally agree Tony. Especially since I'd personally not use healthy and schizophrenia in the same sentence :) I used Bear Stearns as a single example in the vast number of related/unrelated things that might have led to the collapse. Thanks for reading and sharing!
Gint Rudis
Coincidentally, I just finished "Antifragile," as well. I've been a big Taleb fan since "The Black Swan" and he is a great thinker that all entrepreneurs should know. I hadn't considered the concentration of the seemingly "diversified" VC scene here in Chicago, but I think it's a great point. Well said!
Seyi Fabode
Thanks Gint! It's a pretty good book. I'm a Taleb fan so, despite the sometimes disjointed 'flow', I thoroughly enjoyed the book. Expanded my thinking as he always seems to do..
Matt Moog
Seyi - great post. You make some really salient observations. Your point about growth stage vs start up stage is interesting. I think what happens is that when a startup nails the product/market fit and starts to scale their attention (rightly so) turns from the Chicago community to focus on their national or global target customer. And then when they really start to grow and need to hire they turn their attention back to the community because they need to raise their profile to attract more talent and build out their team. And then when they get big enough their attention turns inward to building out their culture. So I agree with you we could all afford to learn more from the successful growth companies in our market but lets not make it an either/or proposition. And in fact, let's talk more about the milestones and challenges that are in between raw startup and scaling growth company. Getting to your first million in revenue, and then $5 million, $10 and then $100 million are all very different sets of challenges and priorities. It would make for an interesting post or panel to talk to entrepreneurs about what is important at each phase and what they personally focus on differently at each stage. On your point about the local investors being a closed system, I was thinking just the opposite. So many of our break out companies have raised money from outside Chicago from blue chip venture investors that it seems like a very open and competitive market in this respect. Think about GoHealth, Narrative, MuSigma, GrubHub, Groupon, TrunkClub, Retrofit and a slew of others. The Built In Chicago data in this regard is more comprehensive than Crunchbase. Take a look - http://www.builtinchicago.org/companies/recently-funded Anyway, great post. Thanks for continuing to contribute and lead the conversation. With entrepreneurs like you the Chicago digital community will continue to lead the way....
Seyi Fabode
Thanks Matt! Your comments help my understanding too, so thanks for that. Totally agree on the need to 'talk more about the milestones and challenges that are in between raw startup and scaling growth company' because it's lacking in the general discourse right now. Chicago can 'own' that conversation on the national stage. On the funding front you and I agree on the breakout companies getting funding by blue-chip investors (Chicago companies are doing solid on that front) but the desire is to get our community to that point where the blue-chip investing happens right here in Chicago at a much greater clip than it currently does. Thanks for chiming in Matt!
Walid Mohammad
Very insightful post.
Seyi Fabode
Thanks Walid!

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