Chicago, That Toddlin’ Town

Not long ago, the daily deals giant Groupon—called the “fastest growing company ever” by Forbes—was the toast of Chicago.

A Chicago Tribune headline from last December summed up its place in the ecosystem: “Groupon’s Success Adds Luster to Chicago’s Startup Community.”

Things have changed somewhat since then, with Groupon experiencing numerous setbacks since filing for an IPO in June. Among them, the company has been forced to amend its S-1 four times to satisfy regulatory concerns over its accounting practices; it lost a COO who’d joined five months prior; and an email leaked to the press led the company to postpone its IPO road show to late October. In September, a financial analysis firm released a report suggesting that Groupon may now be on a “self-reinforcing path to insolvency.”

Still, if Groupon suddenly looks to leave a mixed legacy in Chicago, the city’s startup community is loath to acknowledge it publicly or privately. Talk with regional entrepreneurs and investors and they say they still believe in Groupon or, at the very least, are reserving judgment.

They have reason to be supportive. Chicago’s evolution into a very real tech hub, if not attributable to Groupon, is traceable in part to Groupon’s earliest backers, Eric Lefkofsky and Brad Keywell. Groupon is their fifth startup. Two of their past companies—Echo Global Logistics and InnerWorkings—have been trading publicly for several years.

Lefkofsky and Keywell remain active in Chicago outside of Groupon. Last year, the pair established a $100 million seed stage fund called Lightbank and acquired Chicago’s storied, 450,000-square-foot Wrigley Building in September to house their startup investments.

Lefkofsky continues to serve as an adjunct professor at the University of Chicago Booth School of Business, where he teaches a course on entrepreneurship. And just last month, Keywell played host to Chicago Ideas Week, a TED-like conference that featured 100 speakers, including former President Bill Clinton and Chicago Mayor Rahm Emanuel.

“I like that these guys are reinvesting in Chicago,” says a longtime Chicago VC who asked not to be named. “They could have hit the beach a long time ago.”

Even if they had, argue other investors, Chicago would be fine. Chicago’s fate as a tech center hardly hinges on them or on Groupon, they say.

“It’s true that Groupon is closely associated with the Chicago tech scene,” says venture capitalist Steve Miller, co-founder of Origin Ventures, located just outside of Chicago. “But as someone who has been closely involved here for the last 12 to 13 years, I can tell you there’s much more to Chicago than Groupon.”

Miller sits on the board of 7-year-old GrubHub, the hot Chicago-based company that allows users to order food for delivery or take out online. In September, the company raised $50 million in Series E funding, including from Benchmark Capital. It has raised $84 million altogether.

“Five or six years ago, it wouldn’t have been the case the companies could stay here,” says Miller. Now, he boasts, “[Benchmark’s] Bill Gurley, a rock-star VC partner, flies to Chicago for [GrubHub] board meetings. It’s because our venture and entrepreneurial communities have matured over time.”

Certainly, much has changed in Chicago over the years. The city now has three formal angel networks; an online social network for Chicago’s 5,000-plus digerati called Built in Chicago; and an accelerator program begun last year called Excelerate Labs.

It’s true that Groupon is closely associated with the Chicago tech scene. … I can tell you there’s much more to Chicago than Groupon.

Steve MillerCo-founderOrigin Ventures

More, it has some impressive results under its belt. Longtime Chicago VC Matt McCall, of New World Ventures, says that Chicago has had “roughly 40 [tech] exits out of Chicago, ranging in price from $100 million to $9 billion, over the last five to six years.”

McCall says he knows because he has funded a number of them, including TicketsNow, a Chicago company that sold to TicketMaster in 2008 for $265 million after raising $34 million, and FeedBurner, the RSS feed management company that sold to Google for $100 million in 2007, after raising just $8 million. (FeedBurner co-founder Dick Costolo has since become the CEO of Twitter.)

Still, say investors, a much bigger concern than Groupon’s stalled IPO is macroeconomics, including an uncertain IPO market that looks likely to have a chilling effect on entrepreneurial centers everywhere.

In fact, McCall says the city is beginning to see signs of a cool-off.

“In Chicago, we’re the last to get liquidity [in an up cycle] and the first to lose it in [a down] cycle,” And Chicago has “seen a lot less activity in the last few months.”

When “people are flying into O’Hare, we know that other markets have become so overheated that investors are looking [for new places to invest].” he says.

For now, at least, they’ve mostly stopped making the trip.

Constance Loizos can be reached at connie.loizos@thomsonreuters.com. She tweets at @cookie.Chicago Startup Scene

• According to the MoneyTree Report, 12 companies received more than $50M of early stage/seed funding in 2010, up from $8M in 2009.

• More than 300 startups—a majority from Chicago—applied to Excelerate Labs for the summer 2011 class.

• Built in Chicago has more than 300 registered CEOs, 4500 members and 20,000 monthly users.

• Among the Chicago startups getting nation attention and the funding they’re raised: BrightTag ($6M); Viewpoints Network ($5M); Fee Fighters ($1.6M); edulender ($1M); and Sprout Social ($11M).

• Groupon has raised $1.1B in capital, but others to attract capital include: Cleversafe ($36M); GrubHub ($84M); Sittercity.com ($31M); SMS Assist ($23M); Centro ($34M).