No Pats On the Back

1871 Closes in Chicago

I don’t live in Chicago anymore but I still watch it. Yesterday, 1871, the “tech incubator” closed its doors. It was located in the Merchandise Mart. Illinois left-wing Democratic Governor JB Pritzker bankrolled it.

When it opened, government officials from around the world toured the facility. Kevin Willer, who, along with another person whose name escapes me, opened the first Google office in Chicago, ran it. He is a general partner at Chicago Ventures, a firm JB backs.

The second guy who ran it was Howard Tullman. Howard was a very successful entrepreneur and tried to instill business sense into 1871. The fluff and tours were pretty much gone.

Betsy Ziegler runs it now. I don’t know Betsy at all.

Nothing noteworthy emerged from 1871. It was a glorified co-working space that looked cool in photos. Because it was managed by a bureaucracy that existed prior to 1871 even coming into existence, it was hamstrung.

Sure, Chicago Tech Stars based itself there, but Chicago Tech Stars could have based anywhere. Troy Henikoff and Sam Yagan did it in Greektown initially. Yes, some VC firms and other investors had some offices there. But, having offices together didn’t spur entrepreneurship activity.

When I co-founded Hyde Park Angels with my MBA classmates at Chicago Booth, we didn’t work within the existing Chicago system. It was successful. As soon as the organization mainstreamed and became part of the Chicago system, it doesn’t work as well.

Chicago has some basic ingredients to create a thriving entrepreneurial ecosystem. It has great universities in the city (Northwestern and UChicago) and great universities very close to the city (the Big 10 for example). It has a lot of people. It has a lot of private businesses. But, Chicago is missing key ingredients for the cake so it won’t bake.

Those local businesses are mostly risk averse. They are also leaving the city/state now for other geographic locations. The number one destination for Big 10 engineering grads is not Chicago. It’s the coasts.

One reason Chicago failed was that it went “woke”. It embraced DEI, and all the woke bullshit. Victim classes who were underserved were highlighted. If you were a person that didn’t care about that stuff, you were categorized as a racist. Merit didn’t rule.

Another reason is bureaucracy. There are a lot of “private-public” partnerships overseeing a lot of the stuff. Funny thing, at UChicago’s Polsky Center the guy who leads it has never worked in a startup. He’s from government.

Even though Silicon Valley got some spark from defense, it was private. There was no government puppeteer in the room pulling strings or asking for government grants. Private capital with people acting aggressively on Adam Smith free market principles build ecosystems. Government people, corporate people, or consultants do not.

If you have consultants do it, you get Pete Buttigieg spending billions of dollars on eight charging stations for EVs in four years.

A lot of people hoped 1871 would help pump up the Chicago Tech ecosystem. Even I hoped that it would. But it didn’t. The question is why.

Many people on X weighed in, and I read their comments. Some said that the ecosystem needed more government involvement, and some parroted the Brad Feld maxim that “ecosystems are entrepreneur-led.” 

I agree with Brad, but disagree as well.

Great entrepreneurial ecosystems don’t develop and sustain themselves without two things.

1. Buckets and buckets of capital, which will take very, very early risk on unproven people and ideas.

2. A huge tolerance for failure.

Chicago has and has had neither.

If you look at where the earliest stage funding happens in the United States, the center of gravity is in three places. The Bay Area, NYC, and Boston. LA comes in next.

It has been that way for a long time. NYC is relatively new due to people like Fred Wilson and his firm Union Square Ventures, but NYC is established as a place to start a company. If you look at data going back to the 1980s, the Bay Area and Boston have always been there.

Obviously, the Bay Area is the gorilla in the room. No one comes close. If one looks at the history and the existing structures inside Silicon Valley it helps understand why things the way they are. People that have a propensity to look to government for every solution to every problem will point to defense spending and government labs along with Stanford and Cal. There is some truth to that, but it’s not the whole story. Steve Blank has done an excellent job on his blog showing how Silicon Valley got started. Initially it was during WW2.

But, Hewlett-Packard started there in 1939. Their initial clients were private companies.

The modern day catalyst was the success of Fairchild Republic and the group of angel investors who used to meet for lunch and share deals. Those angel investors went on to form the giants of venture capital like Kleiner Perkins, Sequoia and others.

The next catalyst that one could point to would be the PayPal mafia which propels a lot of Silicon Valley today.

The key is the people who jumpstarted the ecosystem were entrepreneurs. They understood the journey. This is where Brad Feld gets his thesis that “ecosystems are entrepreneur led”. But, it was their monetary investment in unproven people with unproven ideas that brought that process along.

The phrase “money makes the world go around” or “follow the money” ought to be ringing in your ears now.

Since these guys were entrepreneurs and understood the journey, they understood failure and had a very high tolerance for it.

When we were early with Hyde Park Angels, Tom Churchwell and I had lunch. He made an interesting observation about successful venture firms. The most successful firms were comprised of 60% operators and 40% finance guys. Those operators weren’t corporate people but people who had either started in or worked inside startup companies.

Operators think differently than investors and the tension between the two is often productive.

Chicago doesn’t have enough operators. The funds in Chicago are more akin to family office money rather than the broad LP-based funds in both NYC and the Valley. That changes the economic incentives.

As a person who invested as an angel in Chicago and raised a fund in Chicago, I can tell you it’s not easy. It took my partner and I two and a half years to raise just about $11MM. If we had spent our careers in a place like Silicon Valley, we’d have raised $50MM easily. When we pitched people from Silicon Valley on investing in our fund, they didn’t buy the thesis that Chicago was a viable startup hub.

You sort of cannot blame them. If you looked at the opportunity cost of the investment, what’s a better petri dish, Silicon Valley or Chicago?

For big institutional endowments and fund of funds, they put money into brand names. If they lose money on brand names, they can go to their limited partners and say everyone lost money on a brand name. If they took a lot of risk on funds investing in areas of the country where the ecosystem was unproven and so were the fund managers, they’d lose their jobs.

Predictably, everyone is patting everyone else on the back after the announcement. No pats should be given. It was a vanity project at best for JB to burnish credentials. Chicago is still Nowheresville when it comes to early stage venture capital. Entrepreneurs are better off going to the coasts to raise money and build companies.

Chicago’s city budget and the entire culture of the city are not conducive to a person building a startup. San Francisco and New York aren’t better financially or in a quality of life sense, but the cultures of both are very different than Chicago, and the tolerance for failure is very high.

If you want to start with nothing and become a billionaire, what US cities would you have the best shot at accomplishing that goal?

Another cultural difference is what I call the “Paddy Bauler” difference. In SF and NYC, they don’t ask where you are from. They ask what you can do. In Chicago, there is still a sense that we don’t want nobody nobody sent.

Chicago is considered by many to be a “center of finance” with its exchanges. It is not a center of finance. No big banks are based there. No big insurance companies are based there. No big financial startup companies have been started there. Here are examples of the largest financial startups and their funding history.