Chicago's startup scene: The one that got away

December 15, 2010

You’ve heard of Groupon. How about Bump Technologies? For Chicago, Bump is an example of the one that got away.

David Lieb and his friend Jake Mintz hatched the company at the University of Chicago Booth School of Business when they discovered in that flurry of the first few weeks of school that they really, really hated manually typing all their new friends’ contact information into their phones.

So, along with their friend Andy Huibers, they figured out a way to “bump” two phones together to transmit that contact info. And their new smartphone application was born on March 27th, 2009. Things moved fast from there - they won the school’s New Venture Challenge business plan competition and in the summer of 2009, just like Gold Rush era miners of yore, they packed up and headed to California.

They didn’t go with the intention of staying. After all, Lieb and Mintz still had another year of B-School ahead of them. But like lots of good tech companies, the train barreled down the tracks at breakneck speed.

They took part in a summer business incubator program run by Y Combinator. By the end, they got a big, fat $3 million check from the venture-capital firm Sequoia Capital and some Valley angel investors.

But just because they got the money there didn’t mean they had to stay. They could have come back to Chicago. But they didn’t. They opened their headquarters in Mountain View, California, and now have 15 employees there and are “aggressively hiring.”

Lieb says the main reason was because Huibers lived in California already. But there was another reason that speaks to Silicon Valley’s dominance.

“We knew we needed to hire a bunch of people, and being here in the Valley is really where all that technical talent is,” Lieb said in an interview.

And even though they did talk with venture capitalists in Chicago, there aren’t as many of them and they’re more cautious, Lieb says.

“Here in the Valley, firms are okay with putting in $3 million to $5 million to $7 million in a Series A deal for a completely unproven company with some idea they want to build,” he said. “Whereas in Chicago, you have to convince people a bit more about what’s your business model, how are you going to make money. Those things aren’t as big a deal here in the Valley.”

These are the things that have perennially kept Chicago as an also-ran instead of a tech heavyweight. But big changes are afoot.

All of a sudden, business incubator programs are popping up here. This year, Excelerate Labs launched in Chicago, mentoring 10 startups over the summer and providing them seed money in exchange for an equity stake.

Mad-dash weekend-long incubator programs like Startup Weekend, Lean Startup Machine and SocialDevCamp have also arrived. They throw developers together with the hope of hatching viable business ideas by the end. And in September, 1,500 people attended the first-ever midVentures Launch conference, at which 35 startups presented their ideas to investors.

“We don’t have a lot of places where startups can go to get information on raising funds and developing their technology,” says Jon Pasky, senior vice president at MidVentures.

But increasingly, there are more places like that. This summer, a space in the West Loop called the Syncubator opened up. It provides desk space and advice to budding entrepreneurs.  And its founder, Mike Rhodes, is launching a $5 million early-stage investment fund.

Groupon, of course, though, is the big kahuna. Groupon founders and serial entrepreneurs Eric Lefkofsky and Brad Keywell started a $100 million investment fund called LightBank earlier this year and have invested in eight startups so far. They’ve become evangelists for Chicago as a rival to Silicon Valley.

“Eric and I are outspoken about the awesomeness of Chicago and of the ability to do great things right here and continue the heritage of our city, which is make no small plans,” Keywell said in an interview.

Lots of people are paying attention to this activity – including startup entrepreneurs who are weighing whether to stay here or tread down the well-worn path to California. Chiara Piccinotti cofounded her company, Apply in the Sky, with a friend last year when they were both applying to business school. They created software that manages that process for you – keeping track of deadlines and application requirements. Piccinotti now goes to business school at the University of Chicago and is running her company at the same time.

Their office is in San Francisco, where Piccinotti’s cofounder, Emily Chiu, lives. So will they stay in California? Is there any chance they’d move the company here?

“What we’ve found so far is the resources at this point are much greater in the Valley, especially for a web venture of this sort,” Piccinotti says.

But she acknowledges the environment in Chicago is abuzz.

“Chicago’s an exciting place to be in right now because it does feel like there’s this excitement around Groupon,” Piccinotti says. “Things are changing. But to say that it’s the same as the Valley now – it’s a bit premature. When you move out to San Francisco, you see friends around you starting companies and you just feel it everywhere. You want to go out on your own and start something innovative. Here, it’s great, but it doesn’t sweep you like the Valley.”