How to Build a Startup, Chicago-Style

26 April 2016 Privacy, Cybersecurity & Technology Law Perspectives Blog

Building a startup in Chicago differs from building one in Silicon Valley. Chicago investors, both individuals and committed venture funds, tend to be more reserved and practical, whereas coastal venture investors are more likely to bet on the next big idea. Not surprisingly, many of the city’s successful startups take on those same practical Midwest attributes.

Whether you’re currently building a business or plotting your path to a launch, here are three lessons you can learn from startups that made it in the city, and from the investors you’ll need to get off the ground.

1. Create a quick path to revenue. This is perhaps the biggest difference between Chicago and the coasts. In Silicon Valley, a startup can attract capital by embracing the next “big thing” or drawing a massive number of eyeballs, with or without necessarily knowing how it will monetize them. Chicago investors would rather see a definite path to paying customers and profitability. Think about some of the most successful Chicago startups to date — Braintree, GrubHub and Cleversafe — they all had a model focused immediately on building revenue. While investors here certainly will take the big exits, they’re first looking to bet on steady top- and bottom-line growth. They’ll want to see your business plan, not just your marketing deck.

2. Build what you know. One of the most common ways to create a business with real revenue and profit potential quickly is to do it in a market that you understand intimately. If you’ve spent a few years working in an industry, you’re far more likely to know the inefficiencies and unmet needs. Chicago investors value that experience.

Before trying to disrupt an industry, would-be entrepreneurs are often best served to work in that business. Chicago is home to more Fortune 500 companies than any other U.S. city, and experience at a major company can provide invaluable insights that investors would recognize.

Similarly, highly regulated industries are full of opportunities for startups to improve inefficiencies, yet the complex nature of those businesses tends to scare away entrepreneurs. As an example, Nathan Popkins advised financial services companies for eight years before founding Cumulus Funding, a Chicago startup that offers innovative financial products to consumers.   His experience gave him not only the idea for his startup, but a deep understanding of the consumer finance industry’s economics and challenges. Cumulus has raised $30 million to date.

3. Be Practical. Even in conservative Chicago, there’s a lot of capital ready to be invested. The most successful local startups—the ones that grow into mature, profitable companies—resist temptation and take only the funding they need to get to profitability or the next ladder in their growth model. Often in Silicon Valley, companies will raise as much funding as they can, as often as they can. A more prudent, deliberate path to equity raises can help you build discipline around scaling strategically, help you retain control of your business and help position you to raise money outside of the city, if you eventually need it.

Chicago isn’t known for producing a lot of “unicorns” yet, but the city is full of entrepreneurs who created businesses that are solving genuine and immediate problems—and generating revenue and actual profits. That’s a pretty good description of success.

To learn more about the current state of Chicago’s technology market, register for FoleyTECH Chicago, taking place on May 3, 2016. The half-day event will provide a wealth of insights and best practices from leading technology executives, entrepreneurs and investors. To attend, simply RSVP here.

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