Tech startups cluster downtown in Chicago’s River North neighborhood. (Image: needoptic CC by/sa)

By Jonathan Eyler-Werve

Ariel Diamond wants to open a bakery. But despite working the ovens in one of the hottest restaurants in town, her $10-an-hour job at The Girl and the Goat wasn’t going to get her there.

Today Ariel works at Food Genius, a Chicago startup that offers food vendors data on what people like to eat. Ariel isn’t making much more than kitchen wages yet, but she’s okay with that; instead she’s hoping for an equity stake in the growing company. Bakers don’t mind waiting for their work to rise.

Food Genius is one of a growing hive of Chicago startups that have benefited from an ecosystem of mentors, boosters and funders for new ventures. Food Genius is a graduate of Excelerate Labs, a business incubator that has provided seed funding and training to Chicago startups since 2010. Food Genius is now a startup in residence at IDEO, a product design consultancy that traded their services for an equity stake.

“Without Excelerate, Food Genius would likely still be a passion project that we worked on in our spare time,” says Justin Massa, CEO of Food Genius.

Governor Pat Quinn tours construction at the new 1871 digital technology center. (Image: Governor

In a few weeks, Food Genius will move to 1871, a vast shared office located in the historic Merchandise Mart and named for the year of the Chicago Fire. While operated as a nonprofit and funded by a $2.3 million grant from the State of Illinois, 1871 was conceived by J. B. Pritzker, founder of New World Ventures, which invests in dot-coms. Forbes lists Pritzker’s net worth at $2.6 billion.

Not surprisingly, 1871 wants high-growth, Internet-powered companies; no lifestyle businesses here. More than 100 startups have applied for the chance to rent a desk in Mr. Pritzker’s bullpen, which opens May 2012.

A Silicon Valley and a Social Midwest

Chicago’s entrepreneurs are quick to defend Chicago’s history of producing best-in-class tech startups — frequently cited are Groupon ($12 billion IPO), Orbitz ($0.5 billion IPO), or Navteq (acquired by Nokia for $8 billion). But there’s no question that the Chicago startup scene is behind Silicon Valley in the number of companies experiencing mind-numbingly rapid growth.

With company valuations outpacing the dot-bomb bubble of a decade ago, maybe that’s not such a bad thing?

After David Lieb created Bump, a contact sharing app, at the University of Chicago’s Booth School of Business, he moved to Silicon Valley in search of funding. Afterwards he reflected on the different cultures to Chicago’s WBEZ: “In Chicago, you have to convince people a bit more about what’s your business model, how are you going to make money. Those things aren’t as big a deal here in the Valley.”

“We are now seeing incubator and accelerator programs on the coasts seeking teams with no ideas,” says Linda Darragh, director of entrepreneurship programs at Booth. “Entertaining pitches seem to gain more importance than the building of scalable business models. I think the Midwest is focused on businesses that have sustainable, scalable business models with revenue generating capacity from the start.”

In 2010, two Chicago software developers published “Rework,” a book that challenged the Silicon Valley grow-fast gospel. The book, by Jason Fried and David Heinemeier Hansson, became a bestseller by telling entrepreneurs to value customers over investors and commitment over “exit strategy.” In a millennial twist on success, “Rework” suggests that influence, not size, be used to measure a business’s importance.

Perhaps gold-plated Groupon — whose shine has been dimmed by disgruntled merchants and too-creative bookkeeping — is less the poster child of Chicago startups than a cultural misfit in a business scene that values customers, sustainable growth and longevity. But even Groupon started life as a social benefit site called The Point, which helped people plan mass actions — Chicago-style community organizing in Internet drag.

It’s a people-focused attitude that many Chicago Internet startups embrace: Dabble facilitates informal classrooms, SitterCity and Contact Karma connect local vendors with clients, Threadless sells t-shirts by asking customers to help create them. Product-market fit and user communities, more than faster chips or killer software, are the value creators here.

Co-founder Jamie Jones lists social ventures at an Impact Engine event. (Image: Impact Engine).

The double bottom line

The role of social benefit in Chicago entrepreneurship is made explicit at the Impact Engine, a new startup accelerator similar to Excelerate Labs, but requiring a double bottom line: positive social impact as well as financial returns. Linda Darragh is co-founder with Jamie Jones, a colleague from across town at Northwestern’s Kellogg School of Management. Impact Engine’s first class launches this fall.

They won’t be alone. Bootstrapped social ventures like PurpleBinder.com and ZealousGood.com skip both charitable funding and outside investment entirely. Panzanzee, a “continuous community” and accelerator for social entrepreneurs, launched this year, and the Green Exchange opened in 2011, offering 270,000 square feet of shared office space to environmentally themed businesses.

The right time

While Chicago’s history of product design is long, Chicago’s Internet startup ecosystem feels new. Silicon Valley’s rise to greatness started at Stanford in the 1950s, well before most dot-com CEOs were born. But there’s reasons to believe that Chicago will be on a quicker timeline.

The Groupon IPO has unleashed a wave of young, still-ambitious and highly technical investors into the city that are already shaking up old institutions. The Groupon founders were part of a group that bought the historic Wrigley Building for a mere $30 million, and will spend $70 million more to update it. On reopening, it will have 460,000 square feet of office space. One gets the feeling Chicago’s entrepreneurs will have some ideas on how to fill it.

Disclosure: The author has pitched a business to Excelerate (they declined), and served as a mentor for Impact Engine.