Chicago Embarks on New Venture

Chicago has all the ingredients to cultivate a fertile venture capital community.

However, the city’s robust financial services infrastructure, elite universities and high quality of life have yet to stimulate an entrepreneurial atmosphere that can compete with Silicon Valley and Route 128.

According to a study produced by the Illinois Coalition, 10 Illinois companies received just slightly more than $41 million in venture capital financing in the first quarter of 1999, down from $75 million over the same time period one year earlier. Illinois ranks fourth in the nation in technology exports, yet the state placed 15th nationally in venture backing.

What gives?

“The city has enjoyed a fairly robust economy with manufacturing, financial services and professional services,” says Larry Braskamp, vice president of the Information Management Center at Loyola University. “With such a strong and diverse employment base, there hasn’t been as much of a need to invest in information technologies.”

As the city’s economy reconstitutes itself for the information age, politicians, investors and entrepreneurs are aggressively courting venture capital to further build the city’s entrepreneurial infrastructure.

“I don’t presume to think Chicago has genetic flaws incapable of developing into a strong Internet economy,” says Andrew Filipowski, chief executive of divine interVentures. “It is an untapped and underserved market,”

To prove that, Filipowski – the founder and former CEO of Platinum Technology International, which was sold last month to Computer Associates for $3.5 billion – is raising $1 billion in venture capital to form divine interVentures.

The capital for divine interVentures, which will invest mostly in Chicago-based Internet startups, will come from a combination of sources. Filipowski was able to bring limited partner commitments to Platinum Venture Partners, the venture arm of Platinum Technology, to the new firm. Additional corporate commitments and proceeds from an initial public offering of divine interVentures stock this October will fill out the fund raising. Filipowski is also working with the city to build a site near Chicago’s financial district for a full-service technology incubation center comparable to CMGI and idealab!.

“We all understand that it is important for the collection of [start-up] companies to work together,” he says.

Filipowski’s association with the city goes beyond construction of the site. The city is allocating $10 million from various pension funds for The Chicago Technology Growth Fund. David Weinstein, assistant to Mayor Richard M. Daley, said the city may have Filipowski manage the fund’s seed-stage investments under the divine interVentures umbrella. Weinstein said the Technology Growth Fund is intended to stimulate investments from less venture-oriented private equity shops.

“We need a mechanism to address this niche and catalyze the venture community,” he says. “If they see the mayor doing this, than why shouldn’t they jump on the bandwagon?”

Similar to the city’s fund, the State of Illinois is the lone sponsor of the $10 million Technology Development Bridge. The fund invests between $150,000 and $250,000 in early-stage companies in the software, Internet, biotechnology and manufacturing industries.

“Some people view this as a civic exercise,” says Illinois Coalition President Tom Thornton, who manages the fund. “It is not; we are here to make money.”

Technology Development Bridge will monitor companies conceived at The University of Illinois at Champaign, which hosts the largest computer science department in the country. In 1994, Mark Andreessen, co-founder of Netscape Communications Corp., moved his company to Mountain View, Calif., after creating the company’s revolutionary Mosaic software at the university.

“Companies that started in Champaign are now moving to Chicago instead of Silicon Valley,” Thornton says.

More Deals Mean More Competition

Although the majority of partners at venture firms welcome the growth of venture capital fund raising in the region, some acknowledge they have prospered in what has been only a mildly competitive industry in the region.

“We’ll just have to be a little smarter and work a little harder,” says Byron Denenberg, managing partner of $20 million KB Partners Venture Fund I LP. “It will also provide more opportunities for us as there is much more activity now than there was when we were raising the fund.”

Some entrepreneurs in the region have complained that Chicago venture firms are not as supportive of early-stage companies as their peers in other regions. One co-founder of an Internet start-up that recently raised money from a Chicago venture firm said his company would avoid raising money from Chicago investors in its next round of financing.

“Chicago venture capitalists just don’t get it,” he says. “They are just like investment bankers who only look for good individual deals. California firms ask you how you are going to dominate and create leadership position.”

Thornton says stronger ties between investors and entrepreneurs have begun to develop as more capital has been raised. “There is a higher rate of networking opportunities going on,” he says. “Venture fairs, conferences and high-tech happy hours have all contributed to a more interactive environment.”

Michael Ferro, whose company Click Interactive Inc. recently raised $11 million from InSight Capital Partners of New York, says national investors have begun paying closer attention to Chicago companies since he started raising capital.

“In 1996, only New York bankers would come to Chicago,” he says. “We were overlooked by the West Coast because they did not want to fly into Chicago on their way to New York. That has changed.”

Chicago has responded to several historical shifts in the national economy. Paul Doyle at EOLAS Development Corp., a technology incubator, says the city will once again prosper as information technology seeps into its economic base.

“Chicago has been able to change and become a pivotal city in each era of growth in the country,” he says. “It has been a manufacturing and transportation hub, and as information becomes the next unit of denomination in the economy, Chicago is stepping into its role.”