Why Top VCs Are Betting Big On Chicago
In the last few days, Chicago has popped up in the news around venture capital, startups, and technology. Not only has it been garnering attention for the $70M raise by Tempus and as a likely site for the new Amazon headquarters, but earlier this month hundreds of top-tier coastal venture capitalists came to the city for the Chicago Venture Summit. Their goal was to understand the Midwest market opportunity so they could find their own record-busting unicorns like the Chicago-based companies Uptake and Raise, the latter of which raised $60M led by Accel last week.
Why is this happening – why are tech giants and VCs betting on Chicago?
The answer is simple: Talented entrepreneurs starting great companies in hot industries, and higher investor returns.
Chicago is a major player when it comes to investing in both dollars and deals nationally. Since 2014, venture capitalists have been investing more dollars in fewer deals, starting with $50B in 8,000 deals in 2014 and moving to nearly $80B at the same number of deals in 2015, and $70B in just under 7,000 deals in 2016 across the U.S. This indicates a flight to quality, one that Illinois has matched across its own cycle, with approximately $1.5B in 225 deals in 2014, $2B in 200 deals in 2015, and just under $1.5B in 125 deals in 2016.
However, this year is projected to change the trend both nationally and locally, with more dollars invested in more deals. By the end of the year, my firm Hyde Park Angels (HPA) estimates $90B will be invested in 9,000 deals nationally and over $2B will be invested in 200 deals in Illinois.
Earlier this year, Pitchbook released an analysis that showed Chicago is the number one location for investor returns. A deeper dive shows that Chicago is 1.5x more likely to return capital greater than 10x to investors than any other city in the U.S.
Head to head against cities other than San Francisco – what we call “Tier 2” cities – Chicago is the leader in top exits over the last 5 years. This can be attributed to major unicorns like Grubhub, Gogo, ExteNet Systems, Cleversafe, and Fieldglass.
Specifically, while San Francisco remains dominant in dollars returned by exits over the last five years, Chicago’s $10.7B returned in that same period outpaces Seattle’s $8.4B, Boston’s $8.5B, LA’s $9.3B, and closely matches New York City’s $10.8B.
Chicago’s ability to return capital is so consistent because our valuations are more affordable. It costs 2.2x more capital to retain 10% ownership from seed to Series C in the Bay Area as it does in the Midwest. Why? Because costs are lower.
In Chicago, low rent and low living costs make for reasonable wages and lower operational costs. Plus, Chicago companies see less employee turnover, reducing the costs associated with talent churn. Despite having a more loyal workforce, Chicago companies still have access to some of the best technology talent in the country, thanks to universities like the University of Chicago, Northwestern University, and the University of Illinois at Urbana-Champaign.
While this data has remained somewhat consistent over time, recently, VCs are paying closer attention. Major coastal firms Goldman Sachs Ventures and Google Ventures invested in Outcome Health’s $500M round at a $5B valuation.
Other top VCs from the Coasts are also spotting opportunities in healthcare, both in Chicago and the Midwest, leading to investments from NEA, Bessemer Venture Partners, Bain Capital Ventures, and others in companies like PatientPoint in Cincinnati.
This trend at looking at industry-specific verticals as a means of finding the next best investment has brought VCs further into the Chicago ecosystem. Illinois is home to 36 Fortune 500 companies and several more titans of industry across sectors, making it a highly acquisitive environment.
The Internet of Things (IOT) boom in the city, largely due to the influence of Uptake, has created buzz around the entire industry. Uptake’s partnership with Caterpillar has become the promise and the goal for emerging companies forming nearby. It’s no surprise then that the Illinois Technology Association is hosting the Internet of Things Summit next month, and the state CIO is transitioning into a role heading up Amazon’s Smart Cities IOT and Transportation verticals.
Chicago is also building a strong presence in the hot data science and AI spaces, no doubt attracting VC attention. Legacy data analytics companies like IRI, Nielsen, and MarketTrack (recently acquired by Vista Equity) laid the foundation for emerging players like Catalytic (which my VC group Hyde Park Angels has a stake in), Civis Analytics, and Narrative Science.
Another area of strength for Chicago is the logistics industry, which has given rise to major startup players like ShipBob(HPA investment) and FourKites (HPA investment) that raised rounds from Bain Capital Ventures, and Project44 from Emergence Capital. These companies are buoyed by other Chicago companies like Coyote Logistics, Echo Global Logistics, and C.H. Robinson.
All in all, the city’s unique blend of low valuations, access to major customers and acquirers, and entrenchment in high-demand industry verticals is making those betting odds look good for investors everywhere. And that’s why they keep coming.
Originally featured on Forbes.