Chicago will host its first Venture Capital Summit this fall, and this is great news for our city. This will be the first organized event to draw in investors from around the country to look at Chicago startups. This is a good first step of many to get the Chicago startup ecosystem on par with our West Coast counterparts. However, what differentiates us from Silicon Valley? How do we add technology as our next major industry? Why should investors invest in our startups vs. others? There are entrepreneurs in Chicago who believe our differentiation comes from embracing bootstrapping
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and forgoing VC investment. I believe this view to be shortsighted and not our true differentiation.Everyone cheers for the underdog — we want to see the little guy win over the establishment, and bootstrappers are the ultimate underdog, shunning outside funding to maintain sole control and responsibility over the company’s creation and execution. It’s true — Chicago has a more conducive environment for bootstrappers (workforce with strong work ethic, pragmatic mindset, lower cost of living, etc.) than Silicon Valley, but bootstrapping often emerges out of necessity rather than preference.
Chicago shouldn’t bet the farm on bootstrapped companies. The core tenets of bootstrapping make it incredibly difficult to build large, disruptive technology companies — bootstrappers lack adequate capital to build sophisticated technology or to quickly gain market share in competitive industries. VC funding allows for startups to move, duplicate and deploy faster with large amounts of capital. I rarely run into a bootstrapped startup that competes toe-to-toe with the elite of VC-backed Silicon Valley (although the rare few do exist). So if Chicago doesn’t differentiate based on funding needs, where and how does Chicago compete?
The differentiation of Chicago’s startups lies in its initial customer ecosystem. Your initial customers shape you as a company. Silicon Valley startups may have the money, but who are always their first customers? Other technology companies. It’s a big nerd party where everyone is buying nerd Kool-Aid from each other (I’ve heard more colorful ways of describing this). Once Silicon Valley releases their new, world-changing product to real customers outside of Silicon Valley, customers wonder “Why doesn’t this product perform like they said it would?” The customers don’t see the results they were promised. They tell Silicon Valley that their product doesn’t work as advertised, and the inevitable response is, “You are using our product incorrectly or you should change how you work.” Additionally, it’s no secret that Silicon Valley has an arrogance problem. Arrogance prevents companies from listening and adapting to customer feedback. Together, these two factors lead to products that miss the target and never course correct. This results in a huge opportunity for startups outside of Silicon Valley.
Herein lies our advantage: Startups in Chicago need to initially sell their products to real companies who aren’t technology people. Their first customers are real estate brokerages, law firms, financial services companies, hospitality companies, manufacturers, etc. In order to succeed in Chicago, tech companies must make their products valuable to “normal” people — traditional businesses and end users who don’t care about the latest buzzwords coming out of Silicon Valley. If Chicago can define itself as a technology hub that creates products and services for non-technology businesses, then Chicago has a serious shot at beating Silicon Valley startups.
Chicago should embrace the benefits of VC. The availability of VC funding is a massive strength of Silicon Valley that encourages innovation, risk-taking and explosive growth. That same VC environment needs to be created here. The investment wealth of Chicago, not just a handful of billionaires trying to create the VC environment, should be funneled towards local VCs. Chicago’s large asset managers, pension funds, financial institutions and even individual investors should invest more in Chicago VCs. Also, the technology companies that have “made it” — companies like Cleversafe, Guaranteed Rate, and Groupon — need to cultivate an environment of investment entities that bring up and nurture the next generation of startups.
VCs aren’t the silver bullet. A multi-pronged approach is required if Chicago wants to win in high tech. Chicago needs to retain engineering talent from the Midwest schools; politicians need to incent major tech brands to build technology offices here (not just sales and marketing offices); institutional investing needs to invest in Chicago VCs and create many more accelerators to attract technology entrepreneurs. It’s a daunting task, but if we succeed, Chicago has a real shot at being the underdog that wins the fight.
Paul Everton is CEO and co-founder of Chicago-based Yapmo, which sells software for use in the real estate, financial services and direct sales industries.