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Illinois, fretting over paucity of business startups, aims to assist tech entrepreneurs

by Melissa Aparicio
Feb 18, 2010


Melissa Aparicio/MEDILL

Brenden Mulligan, founder of Chicago startup ArtistData. The service is used by more than 20,000 musicians.


Melissa Aparicio/MEDILL

The amount of private investment in Illinois technology startups, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association using data provided by Thomson Reuters.


Melissa Aparicio/MEDILL

The amount of private investment in Illinois startups, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association using data provided by Thomson Reuters. Technology startups represent 6 percent of total investment.

When entrepreneur Brenden Mulligan founded Artists Data Systems LLC in 2006, he did not have a defined goal or clear revenue model.

“It was my first real venture. I made every mistake possible,” said Mulligan, an eight-year music industry veteran.

The Chicago company, which bills itself as ArtistData, provides musicians with an online publishing platform that allows them to reach out to fans across multiple Web sites, including social networks and concert databases. Launched in 2008, the site is now used by more than 20,000 musicians, including Maroon 5, Jewel and Ray LaMontagne, according to Mulligan.

“Chicago is a great town, but there isn’t really a startup culture here.  The majority of people that have done well have left Chicago and found more success elsewhere,” he said.  “It’s a tough community for people trying to learn step one, but I do think people are trying. We’ve lost some great entrepreneurs to other cities.”

To cope with this long-standing deficit in the Chicago and Illinois economies, the state now seeks to step in. 

Legislation in the House Rules Committee, Senate Bill 1522, which passed the Senate 54-0 last year, and House Bill 351, would create a grant matching program, capped at $10 million, for technology companies that are recipients of a federal Small Business and Innovation Research grant. The bills would also establish an investment tax credit, capped at $15 million annually, for qualified, state-registered venture capitalists and early stage investors.

“I think [the legislation] will pass this year, but if it doesn’t, we’ll certainly keep continuing with our efforts next year,” said Ed Longanecker, executive director for TechAmerica Midwest. TechAmerica, a national organization, is the largest technology trade advocacy association in the U.S.

Although the state is facing a budget crisis, Longanecker said these measures are critical for economic development. “The financial challenges that we are facing right now should not be a deterrent when we’re looking at the potential payoff and the return that programs like this have shown in other states and could result in more growth for Illinois.”

Gov. Pat Quinn’s Economic Recovery Plan, announced in December, calls for an angel investment tax credit and a fund to provide matching grants for technology research companies. The governor also proposed the creation of a new state venture capital fund that will invest in early stage companies.

Last year the governor appointed a committee of industry leaders that will present suggestions by March 31 on how innovation can propel economic growth in Illinois. 

These proposals seek to capitalize better on what have long been recognized as substantial local resources available for startup businesses, especially in technology:  a skilled workforce, major research universities, and capital. But the capital typically is invested elsewhere.

Illinois can be a hard place to launch a company, largely due to a lack of early stage funding opportunities. This has resulted in an exodus of entrepreneurial talent to the coasts, where institutional funding firms have a higher risk tolerance and many private equity investors have technology backgrounds.

“There are not as many venture capital firms in Chicago [as there are in Silicon Valley]. The type of firms predominantely here like revenue,” said Matt Downs, managing director of Sandbox Industries LLC, a company that invests in startups and also nourishes companies through its incubator.

Downs, who four years ago moved from the West Coast to partner with a Chicago investor, said obtaining capital is tough, but not impossible, for entrepreneurs. “It’s painful and a lot of work, but there are investors out there looking for good people to back.  It can be done.” 

Eric Olson, co-founder of TECH Cocktail LLC, said that while Chicago has the talent to build new companies, it doesn’t “have the funding network that really, really early stage companies need.”

Olson has firsthand experience with startups. The Massachusetts native moved to Chicago in 2005 to work on Feedburner, a startup acquired by Google Inc. in 2007, and also worked at DFJ Portage Venture Partners LLC, a venture capital firm that invests in startups and early stage companies.

Longanecker said of the state's missed opportunities, “Illinois has been really at a great disadvantage because of an inability to provide the basic financial resource to help create new jobs in our state. Compared to many other states even in the Midwest, Illinois does much less in the way of government support for startups."

For years, TechAmerica Midwest has been pushing for tax credits for technology investors and new funding sources for startups. According to Longanecker, there are 20 states that have such programs in place.

While Chicago may never be Silicon Valley, entrepreneurs, trade group and industry leaders are confident that a greater partnership between the right people can turn the city into a technology startup hub.

“We have to look at ourselves and anticipate where the money will be in 15 to 20 years,” said Mark Hattas, a Chicago entrepreneur who co-founded software development company Geneca LLC more than 10 years ago and is a member of the board of directors of the Chicagoland Chamber of Commerce.

According to Hattas, a three-prong relationship is necessary to support a healthy incubation state for startups. “Opportunity exists right now for business, government and universities to collaborate to make Chicago a more vibrant tech center.”

Founders of some of the most successful startups, including Siebel CRM Systems Inc., Netscape Communications Corp., PayPal Inc., Yelp Inc. and YouTube, had University of Illinois roots, but set up shop in Silicon Valley.

“It’s crazy,” said Olson, “Giant companies were started by University of Illinois engineers.” 

The TECH Cocktail entrepreneur said Chicago has produced great business-to-business success stories, they’re just not as “sexy” as Twitter or Google. “Chicago does non-sexy companies very well. It could nail them all day long,” he said.

“We shouldn’t even try to be Silicon Valley. We probably won’t hatch the next Twitter.” According to Olson, Chicago startups “are good at solving problems for other businesses. They apply technology and web interface to improve other businesses.”

Illinois Technology Association Chairman Terry Howerton agrees.  “There is an incredibly vibrant tech community in the Chicagoland area connected to the universities in the region. We make technology that makes businesses work.”

Howerton said Chicago-based companies like Archipelago Holdings Inc. and optionsXpress Inc., an online commodities, stocks and mutual funds brokerage, “revolutionized the financial sector.” Archipelago, acquired by the New York Stock Exchange in 2006, gave the Big Board high-tech trading capabilities, and the acquisition created the publicly-owned NYSE Group Inc.

Since founding the Illinois Technology Association four years ago, Howerton has seen Chicago turn into a “more connected, collaborative environment.” 

The ITA built TechNexus, a Chicago “clubhouse” where early-stage companies can collaborate with each other and have office space for a minimal cost. According to Howerton, since 2007 35 companies worth $45 million have been launched at TechNexus.  
Hattas, of Geneca, said Chicago has the potential to become a global business destination for technology.

“I can’t stand the victim mentality. We have the capability.  We have brilliant people, some of the best universities in the world.  If we want to make it happen, we can make it happen,” Hattas said, “We need to overcome our short-term nature and look at long-term opportunities. Takes 30 years?  I don’t care, let’s start today.”