A Word Of Caution for Chicago’s Tech Community…

It’s still a great time to be working on a startup in Chicago.  Companies are getting funded and new ideas are being presented at events like BIC Launch and Technori pitch. But for how long?

Thoughts on the ‘future’ of the Chicago startup community came from having a conversation with a friend working on his own ecommerce startup in London.  He expressed his surprise that same old me had gone from poring over spreadsheets in a power station in London to being part of a thriving community. We were exchanging notes and came to the conclusion that the London startup scene is where Chicago’s was mid 2011 (starting to bubble, some successes and the recognition of the need for a community). On further analysis of the situation with him I found three holes looming that will hinder the projected growth in the Chicago startup scene.

Potholes ahead

1. Chicago is so enamored with ‘startups’ and not about ‘scaling up’: With the launch of 1871, the growing reputation of Excelerate and amazing resources (Built In Chicago, Seth Kravitz’s emails etc) for connecting with the community the focus is squarely on startups. Not a bad thing but we’ve become so focused on startups that even businesses like Grubhub (raised $84M so far), Braintree ($69M raised so far) and Groupon (IPO last year) are still touted as startups at the expense of the ‘real’ startups. I’m happy to break this news to you all; Grubhub, Braintree and Groupon are no longer startups, they are now full-fledged businesses. Let’s start to pay more attention to scaling up (i.e. the thing these businesses are doing) because we have a lot of resources to help startups (a couple of founders, a little cash, some/no market validation) to keep their eye on the prize; the prize of becoming a successful and sustaining business.

2.  There is a contagion of ‘love’ (entrepreneur edition): My friend asked me if Power2Switch has any competitors and I told him that any business without competition is most likely not a business. He asked if we had competition in Chicago and I paused. We do but our biggest competitor is in Texas and raised $4M from Kleiner Perkins a week ago. I’ve been in conversations where I tell someone what we do and they go ‘I thought of that a few months ago!‘ and I wonder ‘why didn’t you start it?‘ A big reason why is because very few people are willing to risk their regular lives for a crazy venture but another reason might be because we are all so in love with one another in this small and budding community. ‘She’s my friend so I don’t want to piss her off by stealing her idea’. It’s unfortunate that this attitude prevails and it needs to change. Competition is good for the ecosystem. If you feel equally passionate about the idea go for it. You might just out-execute your friend.

3. There is a contagion of shared risk aversion (investor edition): The beauty of the Internet is that you can find almost any information online. So I wasn’t surprised when my friend highlighted that most startups in Chicago show the same list of investors (do your own search on Crunchbase). I did fear something when he shared this information with me. I’ve just read Nassim Nicholas Taleb’s ‘Antifragile’ and an example in it came straight to mind: The safety standards of the airline industry as a whole improves when one airplane crashes (the damage is localized to that one flight but the benefits accrue to the community) but the financial system as a whole suffers when Bear Stearns craches because of the interwoven nature of the financial system (the damage was contagious and not localized to Bear Stearns because the financial system is essentially one ‘organism’). The investment community in Chicago, according to Crunchbase anyway, is one ‘organism’ of co-investment and no real competition. This might not be the best thing; the risks (failure of a startup every one is invested in) are magnified and benefits (exit from one company everyone is invested in) are minimized. Investments in Parkwhiz and Spothero were the only ‘competitive’ investments we could find and trust that I made sure he didn’t downplay that one example of healthy competition…

Since the first step to solving a problem is knowing there is one I challenge us to start to plug these holes.

Or we’ll look back in 5 years and wonder why there was no steak behind the current sizzle in the Chicago tech community…

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