Chicago is Not the Next Silicon Valley, But at These Prices, What a Shame

With so much attention paid this year to Groupon and it’s reported valuation of north of $1 billion, numerous stories (including right here) have asked the question: is it Chicago’s time to shine?

With regard to most startups, I don’t think so, but given real estate prices in the Windy City, I wish it were. Consider this 4,700-square-foot penthouse apartment whose 360-degree views, gourmet kitchen, steam room and more will be shown to prospective buyers on Saturday. Starting bids for the property? $600,000. Try finding that much real estate for less than a few million dollars in Northern California.

In March, Eric Lefkofsky, one of the entrepreneur-investors behind the popular group-buying site Groupon, told me that the “social graph” was changing the way that entrepreneurs see Chicago. “There’s not as much emphasis around that explosive high growth that you see on the coasts,” he said, but mediums like blogs, social networks and Twitter are democratizing the process of accessing great tools and advice. Chicago entrepreneurs “are being exposed to many more ideas and businesses, and that’s fostering a new wave of innovation.”

Other local investors have also observed that more entrepreneurs are choosing to stay in Chicago, rather than move to either coast to set up shop. Chicago-based venture capitalist Lon Chow recently told me that his firm, 23-year-old Apex Partners, didn’t do a single tech deal in Chicago until 2002, but since that time it has made a dozen investments in local tech companies.

Still, 1.5 tech deals per year isn’t an encouraging statistic. Indeed, relative to Silicon Valley, Chicago’s startup community has a lot of room to grow. According to Crunchbase, there are roughly 270 tech startups or investing outfits located within a 25-mile radius of Chicago, including venture-backed Web startups Threadless, TicketsNow, and GrubHub. In contrast, about 1,900 startups and tech investors are based within a 25-mile radius of Palo Alto.

What’s the problem? Chow assigns much of the disparity to the foundational makeup of the two places. Unlike in the Bay Area, where tech is dominant, “In Chicago, there are lots of ways for smart, talented people to make money,” he told me. “You can go into trading, you can work for a hedge fund, you can run your family’s small business.” Whether it’s a blessing or a curse, he said, “the reason tech hasn’t developed here as much as in other areas is largely the historic development of other industries.”

There’s also still a serious mismatch between the supply and demand of capital, said Chow. “There’s much more demand for capital than supply.”
 
It’s too bad for entrepreneurs, as well, ahem, as the reporters who write about them. Northern California is stunning, as is the weather. But the cost of living in Chicago (another of my favorite regions), would make it very alluring if it were fundamentally as early-stage focused as Silicon Valley. Alas it isn’t, and Groupon or no Groupon, I really don’t see that changing anytime soon.