You’re Not In The Valley Anymore

My friend and fellow investor Jon Lehr of Work-Bench recently wrote a piece entitled “7 Lessons Learned in My First 2 Years as a VC.” Jon and I have known each other since before either of us were VCs, and I’ve tried to carry a bit of his legacy to Chicago in launching the Chicago Enterprise Tech Meetup (Jon launched the NY version several years back and it has become a must-attend event for those in the enterprise startup circuit).

Reading through Jon’s piece made me realize how much I’ve learned in my nine months here in Chicago. As an East-Coaster my whole life, it’s fair to say that I was a stranger to the Midwest when I moved here. Truth be told, my wife hadn’t even been to Chicago before we came out here to look for apartments. New York is a tough city to leave, but the chance to help build a firm at the center of an emerging ecosystem was just too much to pass up, so we packed our bags and made the journey.

In the nine months since, I’m becoming more of a native every day, but am still astounded by some of the stark differences I see between Chicago and startup ecosystems in NYC and SF. Living through the rise of NYC’s tech scene, I’d hear pundits refer to NYC as “The Next Silicon Valley” every day. It always left me scratching my head, wondering how anyone could ever compare the two, given their differences. They were both amazing cities and ecosystems in their own right, so why try to lump them together?

As I look to Chicago, I see the same pigeonholing as folks try to peg the city to the Valley’s archetypes. The truth is, Chicago will never be Silicon Valley and, for me, I find that exciting. It’s an immense, fast-growing ecosystem that has its own strengths, and provides great opportunities for founders and investors alike. For those not familiar with Chicago and its startup scene, I thought I’d share an outsider’s perspective on why Chicago is NOT the next Silicon Valley — and why that’s so exciting.

Sales Efficiency Creates Opportunity To Sell To A Broader Base Of Customers

While Chicago is known as the city of wide-shoulders, it’s also a city of smooth talkers. The city is home to large sales organizations in tech, transportation and healthcare, with many of Chicago’s most prominent startups revolving around large and insanely efficient sales teams. It’s not uncommon to see sales reps with 3-5x in year ROI, and there is a large, ample pool of reps to tap into for founders looking to build their companies. Because these sales reps are so efficient (both in speed and cost), enterprise founders can attack lower ACVs than those in NYC or SF.

Whale hunters are a rare find in Chicago.

I’ve typically found it difficult for enterprise tech companies to sustain ACVs lower than $50K in NYC and SF without experiencing CAC:LTV pressure, but I’m frequently finding companies demonstrating immense scale, growth and sustainability with ACVs below $25K. Chicago’s local cost structure (for both base compensation and real estate) provides an interesting arbitrage opportunity for founders looking to attack the SMB layer. It has long been a thesis of mine to bring leading enterprise capabilities further downstream to the masses, and these conditions enable Chicago to realize that mission.

High ACV Sales Is Still A Challenge

While there are a plethora of high-volume sales professionals, whale hunters are a rarer find in Chicago. The city simply hasn’t had the same density of major enterprise companies that breed these type of professionals, and I find startups building enterprise-grade solutions often struggling to find sales professionals that can help them scale. It’s not to say that these professionals don’t exist and can’t be trained, but they are certainly more prevalent in the Bay Area.

Tech Talent Is WIDELY Available

Perhaps one of the biggest challenges to scaling the NYC ecosystem over the last decade, availability of tech talent has yet to be a major inhibitor for any of my companies. Finding experienced top-flight CTOs is always challenging (and arguably may be more prevalent in SF and NYC), but the dearth of quality engineering programs in the surrounding area provides an astoundingly wide base of junior engineering talent to recruit, groom and scale your company.

Three of the nation’s top 10 engineering programs (No. 5 Illinois, No. 6 Michigan and No. 9 Purdue [tie]) are in the Midwest. For comparison sake, California has three in the top 10 as well (albeit ranked a bit higher, with No.1 Stanford, No. 3 Berkeley and No. 4 Caltech) and New York has one (No. 9 Cornell [tie]). Both California and New York have done a tremendous job of enticing quality engineers to their cities, but there is a definitive base of talent here. Similarly, while engineers are well compensated, the city doesn’t quite have the cut-throat recruiting mentality that I’ve seen in other hubs.

Employees Generally Prefer Compensation Over Equity

Perhaps the most perplexing difference between Chicago and other ecosystems is a stark preference for salary over equity across startup employees. Startup salaries are higher than I would expect, and equity arrangements are generally lower. This could be a result of the sales-based culture, where employees receive high commission-based bonuses instead of equity or salary. This also means that startups are forced to compete against traditional corporations for top talent, which inherently drives salaries higher than what they might otherwise be. This naturally makes it hard to attract great talent for an early startup on a hamstringed budget.

Equity can lead to meaningful wealth for founders, investors and employees alike.

I personally feel that equity better aligns incentives of employees, founders and investors to maximize shareholder value, while preserving the burn of the company. Equity (and its corresponding vesting schedules) ties employees to the company to help prevent attrition and promote better continuity and culture. I’m fortunate to be involved with companies who have miraculous retention, but I know this isn’t the case for others. My hope is that this condition will dissipate as the city produces additional big exits that demonstrate that equity can lead to meaningful wealth for founders, investors and employees alike.

Solutions For The Rest

One of my major gripes with the overall startup ecosystem of late has been its focus on developing solutions targeted at like-minded wealthy early tech adopters. My belief continues to be that big companies should have influence beyond the Valley. I joined Lightbank just as Uptake (a recently incubated company that leverages IoT and data science capabilities for companies like Caterpillar) was being founded, and it was certainly a deciding factor in joining the firm. I felt that the company brought Silicon Valley/Alley capabilities to an immensely underserved market that had critical importance to not only our economy, but to our environment and future well-being as a society.

As I look around Chicago, I see companies solving many of the major challenges occurring between the coasts (particularly transportation, healthcare, agriculture and other industry-based applications) and I’m excited to take part in further extending the base of technology’s influence.

Executives Are More Approachable

Perhaps this is a byproduct of the solutions just discussed, but I’ve found executive technology buyers to be immensely receptive to speaking with VCs and meeting early stage startups. I’d like to think that it’s my innate ability, but organizations like Sandbox and TechNexus have long demonstrated the city’s ability to partner with the early stage tech community. I often find that members of the C-suite are happy to respond to my cold emails, grab a cup of coffee and meet with startups that I believe have the ability to address some of their pain points.

As an enterprise-focused investor, I couldn’t ask for anything more. I love the ability to validate companies with executives who provide uncanny voice-of-customer perspectives and recognize that these startups are equally grateful for the customer introductions I’m providing.


VC Is Still Nascent

As I speak on panels and attend local events, I recognize how small the VC scene is in the Midwest by the familiarity of faces. In many ways, it must feel like what NYC felt like a decade ago, and what the Valley felt like 20 years ago. There are a handful of firms with meaningful capital, and most of us are still fairly new, evolving out of successful angel investment groups and family offices. In some cities, there may be a single meaningful fund, which naturally limits competition for deals and the supply of capital.

The region has long been visited by institutions like NEA (Groupon, Echo Global, InnerWorkings, MediaBank, Belly, Sprout Social and BenchPrep) and Battery Ventures (Narrative Science, SpotHero, SingleHop, ExactTarget, Groupon and Angie’s List) with outside investors showing increasing interest, but the lack of local capital provided adverse dynamics in the ecosystem’s earliest days. I hear horror stories about angels taking majority stakes in companies at ludicrously low valuations, which naturally inhibited the ecosystem. The market is far more transparent now, however, and today’s ecosystem now demonstrates many of the founder-friendly dynamics I’ve grown to expect in other markets.

Founders Are Still Hesitant To Take Capital

Given some of the horror stories cited above, there is a natural skepticism for venture funding in the city. I often find great companies with well over a $1 million ARR with no interest in ever taking outside money (despite my best efforts). I often hear folks heavily focused on generating profitability and hitting short-term milestones rather than thinking about how to most effectively scale their business into a disruptive company. That’s unfortunate.

This isn’t too say that you can’t build a huge company without venture capital (see Context Media for a prime example that you can), but a focus on near-term profitability can often lose sight of the long-term mission. This is further exasperated by today’s market, where capital-hungry companies on the coasts can achieve massive scale and defensibility through venture funding (otherwise known as “blitzscaling,” a term coined by LinkedIn co-founder Reid Hoffman).

There will be dozens of billion-dollar companies generated from Chicago over the coming years.

To be clear, not every company should be venture-backed. Venture money raises the stakes for a company and narrows the pathways to a limited gateway of potential outcomes — generally an M&A or IPO event within 10 years of founding. That said, venture funding CAN help founders scale more aggressively than they may otherwise, which is why so many of today’s disruptive businesses are venture financed.

I know that game-changing founders exist here, and my hope is that VCs can increasingly be seen as valuable partners for achieving hyper growth and scale. That requires time, trust and a whole lot of effort on our part, but I think that my cohort of VCs is making fantastic headway given some of the strong investment professionals here today.

The Startup Scene Isn’t Sexy — YET

When I’m in NYC and SF, every night of the week is devoted to a different (and at times, several) startup event. Events like Jon’s Enterprise Tech Meetup are drawing hundreds of attendees from all walks of life (founders, startup employees, corporations, consultants, bankers, lawyers, students, etc.), all of whom are willing to fork over $15 to attend. Why? Because startups are sexy in places like NYC.

My friends working at hedge funds in NYC frequently joke that it’s tough to get a date on a Friday night if you don’t have your own startup. Chicago doesn’t quite have that dynamic yet. When I speak to students from the top universities in the area, they want to work at consulting firms and investment banks, not startups. You can certainly feel the tide starting to turn, however, and my hope is that some of the events/initiatives I’m working on at Lightbank can help further accelerate excitement for the ecosystem.

Through these lessons, one thing is very clear — Chicago is not Silicon Valley. All too often startup enthusiasts try to peg their own ecosystem to that of the Bay Area, but it seems forced. While NYC stole the euphemism “Silicon Alley,” it operates incredibly differently than its cross-coastal cousin.

Similarly, Chicago will find its own way to emerge as a burgeoning center of tech innovation, while remaining honest to some of the unique cultural elements and core competencies listed above. More exciting than contending with the Valley is the realization that distinct tech hubs are developing all over the country (and world), and that each of these centers can produce multiple billion-dollar companies (as we’ve already seen in Chicago).

Companies don’t try to “out Facebook” Facebook, they recognize competitive strengths and build from there. Chicago and its comparable ecosystems should do the same. There will be dozens of billion-dollar companies generated from Chicago over the coming years and I, for one, am very much looking forward to seeing those companies and this ecosystem grow.