In the early 2010s, Brad Flora was part of a collective of about a dozen Chicago entrepreneurs, dubbed the Midnight Doers, who would meet at night to swap ideas, experiences, and challenges. Within five years, the group had spawned several success stories, including Flora’s sale of his social media and online advertising company, Perfect Audience, to San Francisco’s Marin Software for a reported $25.5 million.
But here’s the wrinkle: This startup success story was no longer a local one.
Like most of his fellow Midnight Doers, Flora had left Chicago while getting his company off the ground to find financing and other support. Flora, who also founded the crowdsourcing news site Windy Citizen after getting his master’s from Northwestern’s Medill School of Journalism, headed west in 2011 when Perfect Audience (then called NowSpots) was accepted at the Silicon Valley startup accelerator Y Combinator. “Chicago is a terrific place to work and a terrific place to build, but it’s a hard place to raise money,” says Flora, who is now a general partner at Y Combinator and still lives in the Bay Area.
Landon Campbell calls it “Chicago’s first-check problem.” In his newsletter, Landon’s Loop, he and fellow investor Christopher Deutsch recently wrote that the city boasts enough robust financiers and deep-pocketed individuals to compete with Silicon Valley and New York City in launching and retaining successful startups, but its conservative investment culture holds it back. “It’s not a money problem,” says Campbell, a 28-year-old transplant from the Bay Area and 2020 DePaul grad who runs the Chicago office of the Ohio-based venture capital firm Drive Capital. “Chicago has plenty of wealth. What’s missing are people willing to write the first $10,000 or $25,000 check.”
As a consequence, entrepreneurs pack up their ideas and head to where the investment waters are warmer. “There’s a culture of angel investing around here,” Flora says of the Bay Area, where investors are more likely to “take a bet on you” if you’re in the ballpark of a good idea. Chicago investors, on the other hand, are “looking for things that are a little further along.” So the city loses out not only on new companies that would otherwise set up shop here but also on a group of founders who might have channeled their profits into the next generation of startups.
For all of the incubators and accelerators that have been pushed here in recent years, including the JB Pritzker–backed 1871, is there something in the city’s DNA that keeps Chicago from becoming a dominant Midwestern tech startup hub? After all, Campbell points out, “anyone can build anything here — tech is not confined to a single ZIP code.”
As much as Chicago likes to think of itself as tough, it’s risk averse when it comes to going all in on fledgling businesses. Deutsch notes that the city’s financial system is built around tools to enable hedging one’s bets, such as the derivatives, futures, and options traded at the Chicago Mercantile Exchange. “Being gritty is very different from being risk loving, and we have a massive history of being gritty and not risk loving,” Deutsch says. “And when you think about early-stage investing, it is, I would argue, literally the most risky asset class on planet Earth.”
“Being gritty is very different from being risk loving.” — Christopher Deutsch, angel investor
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With angel investing, there’s no guarantee the company you’re backing will make it out of the incubation stage, and even if it does, you may not see a return on your investment for 10 to 15 years. Chicagoans, Deutsch says, are more inclined to invest in tangible assets, like real estate, which is his family’s business. “It’s just a different mentality.”
Venture capitalists are plentiful in Chicago, but unlike angel investors, they represent other people’s money, which brings a particular mindset. A VC investment often comes with all sorts of strings and financial expectations attached. “Angel investing,” Deutsch says, “is like poetry. There are no rules.”
In that sense, Deutsch, 51, wants to be the bard of Chicago, in part by leading by example. A self-described “full-time, first-check angel investor,” he grew up in Old Town and worked for a number of companies, including his family’s Loft Development Corporation, before striking out on his own. He has since invested more than $3 million in startups, he says.
To help foster a stronger early-funding community here, Deutsch in 2014 created Lofty Ventures, a collective of local investors and startup founders who share advice and seed money. (Deutsch touts that 30 members have written first checks for companies within the Lofty ecosystem.) In August, the group hosted its second annual Lofty Angels Summit in the Bank of America Tower for both those wanting to learn more about early-stage investing and startup founders seeking such funds. It was Deutsch’s opportunity to evangelize on the benefits of becoming a founder-turned-angel — or FTA, as he calls it — to more than 200 entrepreneurs and students.
One notable FTA on hand was Arnav Dalmia, who helped found Cubii, a prominent Chicago startup success. The Kickstarter-launched maker of under-desk elliptical machines took off during the pandemic and was sold for a reported $100 million in 2020. Dalmia has since cofounded Tovie, a kids’ fitness goods company. He has also been an angel investor in more than a dozen startups. He told the crowd he wished he had begun writing first checks sooner because the perspective of “being in an investor’s shoes” has helped him as an entrepreneur. “You are investing in people, not the company,” he said — a mantra echoed by several speakers.
Tom Sosnoff, another speaker and a self-described “trader junkie,” makes a point of keeping the money he invests in new companies local, citing the lack of boom-or-bust economic cycles here. “This is where I live, and this is where I want to see entrepreneurs succeed,” says Sosnoff, cofounder of Lossdog, a North Center–based website that helps professionals calculate what salary they should demand during negotiations.
Brittany Martin arrived at the summit seeking funding for her Chicago-based startup, SwimClean, which aims to provide skin- and hair-care products tailored to swimmers. But by the end of the day, she was planning to invest in someone else’s nascent business. She had met an entrepreneur who intends to sell Brazilian cheese breads here. “I fully believe she’s going to be huge, and she believes in me, so we could invest in each other,” says Martin. “It’s a beautiful way to work and diversify our outcomes.” It was just the kind of interaction that Deutsch had in mind when he conceived the summit.
Mark Caro is a freelance writer for Chicago magazine.